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RBC's Golub: Fed Rate Hike Will Be Positive For Market (Audio) · Bloomberg Intelligence

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  Speaker 1: You're listening to Taking Stock with Kathleen Hayes and Pim
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  Speaker 1: Fox on Bloomberg Radio. A slow but steady rise in
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  Speaker 1: the major market indexes, and our next guest says that
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  Speaker 1: it could even continue. Earnings growth will improve even if
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  Speaker 1: it remains week. We're going to see increases in multiples
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  Speaker 1: over the next uh several years. He also sees some
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  Speaker 1: companies generating loads of cash and returning it to shareholders,
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  Speaker 1: and that is a plus in his mind. John gollob
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  Speaker 1: is back. Jonathan gollub is chief US market strategist at
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  Speaker 1: RBC Capital Markets. So, Jonathan, Uh, earlier today when we
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  Speaker 1: started the show, I said to our stocks that Dave
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  Speaker 1: Wilson the markets on fire, and I said, well, he said,
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  Speaker 1: not really. I mean it's slowly moving up. Maybe looks
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  Speaker 1: like a slow burn, but it seems to me after
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  Speaker 1: some of the ups and downs this year, this is
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  Speaker 1: nice and hot for investors. Yeah. I mean, what's what's
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  Speaker 1: really nice about this is that it's moving up in
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  Speaker 1: little bits and pieces rather than being super volatile. I mean,
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  Speaker 1: you have market volatility at extremely low levels, which is
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  Speaker 1: a much smoother ride for investors. Jonathan tell us about
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  Speaker 1: the idea of capital spending. I mean, it used to
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  Speaker 1: be the companies that did a lot of capital spending,
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  Speaker 1: they were the ones that you thought, yeah, they're going
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  Speaker 1: to do great stuff with that money. It's going to
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  Speaker 1: really end up returning to shareholders. You're saying that may
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  Speaker 1: not be the case these days. No, and I think
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  Speaker 1: that that this is ultimately the challenge that investors are facing,
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  Speaker 1: which is we don't have a robust economy and and
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  Speaker 1: so what businesses they're doing in this environment is hoarding cash,
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  Speaker 1: not spending it on future growth. And they're taking that
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  Speaker 1: money and they're returning it to shareholders. But because we're
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  Speaker 1: in such a low interest rate environment, uh, shareholders are
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  Speaker 1: viewing that as a very positive thing right now. And
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  Speaker 1: the total yield if you add dividends and five backs
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  Speaker 1: together on stocks is somewhere between four and a half
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  Speaker 1: and five percent, which is just wonderful compared to bonds
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  Speaker 1: as an alternative. The problem with this is, Jonathan, it's
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  Speaker 1: sort of like you know, you're you're eating the seed
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  Speaker 1: instead of planting it. So even though this may be good,
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  Speaker 1: if you say, buy the companies that are more services oriented, uh,
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  Speaker 1: they can hire some more workers. They don't have to
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  Speaker 1: invest in new equipment to the same degree that a
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  Speaker 1: manufacturing and construction company might have to do. How long
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  Speaker 1: can you remain like that and still have uh, a
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  Speaker 1: profitable business climate where companies are actually you know, having
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  Speaker 1: the setting the basis for longer term growth or does
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  Speaker 1: that no longer matter? And well, well, first of all,
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  Speaker 1: it probably matters a little bit less if you're more
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  Speaker 1: of a service oriented you know economy. If you were
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  Speaker 1: if you're running you know, big industry, you need to
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  Speaker 1: constantly invest in your infrastructure or you die. If you're
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  Speaker 1: running a software company, you don't necessarily have the same
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  Speaker 1: need for capital. So as the economy shifts over time,
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  Speaker 1: there is probably less of a need for capital. But
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  Speaker 1: you're harder percent right. We have an underlying growth problem,
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  Speaker 1: and what businesses are doing is trying to adapt their
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  Speaker 1: business models as best they can for this environment. I'll
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  Speaker 1: give you one good example. The semiconductor um industry in
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  Speaker 1: the United States used to manufacture semiconductors here and that
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  Speaker 1: was very capital intensive and it created huge swings in
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  Speaker 1: their profitability. Much of that manufacturing has been moved offshore
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  Speaker 1: by others and therefore they're really more design and distribution
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  Speaker 1: and the like, and as a result, they smoothed out
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  Speaker 1: their pattern of returns by changing their business model or
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  Speaker 1: you know, to benefit in a slower economic environment. But
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  Speaker 1: if you're absolutely right, you know, there's a part of
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  Speaker 1: this which is not healthy. But businesses are doing a
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  Speaker 1: great job of adapting. And that's really the key story here, Jonathan.
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  Speaker 1: The idea that people are hunting for yield, is it
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  Speaker 1: going to lead them to false messiahs? You know, I,
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  Speaker 1: you know, I don't think so, Pam. And we were
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  Speaker 1: we were just doing some analysis, um with some of
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  Speaker 1: my college here at RBC on this, and what we
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  Speaker 1: found is that when you're in a very low yield environment,
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  Speaker 1: let's say right now, we're like a one and a
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  Speaker 1: half yield on a tenure government bond, even if interest
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  Speaker 1: rates were to edge up towards let's say two percent,
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  Speaker 1: you're still likely to see um, those businesses with higher
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  Speaker 1: dividends and those that are returning lots of capital out
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  Speaker 1: performing so so we probably have a ways to go
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  Speaker 1: even if interest rates rise for for this um you know,
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  Speaker 1: you know, first for yield that we're currently experiencing in
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  Speaker 1: the marketplace. So uh, you say, the economy as you're mentioned,
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  Speaker 1: uninspiring but stable and non recessionary, and so uh, this
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  Speaker 1: favors growth over value, higher dividend paying stocks, lower ball
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  Speaker 1: companies abundant in staples, healthcare, business services and defense contractors.
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  Speaker 1: Don't give us a name or two that you like
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  Speaker 1: a lot, you know, I'm I'm not you know, I'm
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  Speaker 1: not an individual stock picker. But if you look for
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  Speaker 1: example in business services, I'll just use this perhaps as
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  Speaker 1: as an example rather the stock recommendation. But companies that
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  Speaker 1: would haul waste you know, like a waste management or
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  Speaker 1: or or like those are businesses that whether the economy
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  Speaker 1: is better or worse, they still have to show up
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  Speaker 1: every day and and and always. Uh. You know, companies
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  Speaker 1: like Sintas who makes you know, uniform you know makes
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  Speaker 1: or or claimed uniforms and things like that. Those kind
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  Speaker 1: of business services as opposed to you know, industrial companies
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  Speaker 1: that are more manufacturing base have a very different type
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  Speaker 1: of a or much less sensitivity to the economic whims
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  Speaker 1: and they tend to hold up um, you know, they
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  Speaker 1: tend to hold up much much better in a weaker environment.
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  Speaker 1: I think there will the question that we're going to
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  Speaker 1: start to debate more and more as we look forward
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  Speaker 1: into and after the election. There's there's a lot of
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  Speaker 1: discussion about government stimulus, fiscal stimulus on all kinds of projects,
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  Speaker 1: and if we see that type of activity, you could
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  Speaker 1: see this market leadership shift away from these more stable
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  Speaker 1: growers towards companies that are more economically sensitive. And I
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  Speaker 1: think that we're not there yet, but that's if if
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  Speaker 1: you're for those who are looking for the next thing
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  Speaker 1: and what would change the market leadership. That's the thing
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  Speaker 1: that I'm really sensitive to as I look forward again,
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  Speaker 1: I think we're a little early on the trade, but
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  Speaker 1: there's more chatter in that direction. Jonathan goll have interested
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  Speaker 1: in buying commodity stocks or energy stocks. If if I
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  Speaker 1: saw and I'm not sure this is good or bad policy,
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  Speaker 1: but if I saw that that that that we're looking
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  Speaker 1: at more fiscal stimulus after the election, government expenditure on
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  Speaker 1: you know, roads and bridges and uh, you know, things
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  Speaker 1: of that nature, you are going to see the commodity
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  Speaker 1: sensitive groups, infrastructure sensitive groups take off, and that very
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  Speaker 1: well could happen after the election, something like home builders, Yes,
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  Speaker 1: why are home builders up today? In a nutshell? And
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  Speaker 1: is this an area you would be interested? You've got,
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  Speaker 1: in fact, you've got told brothers up more than you know.
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  Speaker 1: I I'm not sure that that a you know, I'm
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  Speaker 1: not sure I have a good answer on why a
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  Speaker 1: group like that moved today. Um, but we are seeing
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  Speaker 1: that the consumer is much healthier than the press is
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  Speaker 1: making it out to be. We have a four point
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  Speaker 1: nine percent unemployment rate, the cost of financing a home
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  Speaker 1: is at all time or near all time lows. We're
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  Speaker 1: seeing wages incrementally picking up, the work week is picking up.
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  Speaker 1: So it's not surprising that that that you have, you know,
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  Speaker 1: a positive did on the home builders. But I'll tell
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  Speaker 1: you and we put a note down in this today
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  Speaker 1: consumer discretionary broadly, the fundamentals look very attractive, and the
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  Speaker 1: consumer is probably healthier than uh than again than the
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  Speaker 1: press would make it out to be. I guess I
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  Speaker 1: can't get your interested in anything having to do with
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  Speaker 1: gold or gold miners. Probably probably not, But you know
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  Speaker 1: I am in general I don't like investing in in
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  Speaker 1: gold as a commodity just because it doesn't earn your money.
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  Speaker 1: It doesn't. It's aunt basically, yeah, exactly, and so so
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  Speaker 1: in order to like gold you have to you're really
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  Speaker 1: making a bet that you're the central banks are going
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  Speaker 1: to be creating more inflation, and if they do, gold
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  Speaker 1: will go up. But otherwise I think that there's always
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  Speaker 1: better things to Okay, you think the Fed will move
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  Speaker 1: on race the key rate, probably in December, but you say,
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  Speaker 1: unlike the consensus, we think this will be positively received
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  Speaker 1: by the stock market. Y John Gollobs, Well, the big
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  Speaker 1: issue here is that it's the Fed moved. It's because
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  Speaker 1: the marketplace is telling the Fed that we're ready for it. Um,
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  Speaker 1: the Fed is going to move because the economy is
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  Speaker 1: healthy enough to take it without their being a hiccup.
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  Speaker 1: So right now, as I mentioned before, we have unemployment
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  Speaker 1: under five you know, that's very good. We have inflation
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  Speaker 1: which is taking depending on whether you know how you
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  Speaker 1: measure it, towards two percent. That's right, more or less.
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  Speaker 1: At the feds um long term view, market volatility is
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  Speaker 1: relatively lower, actually extremely low, and the global concerns right
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  Speaker 1: now are substantially lower than they've been, than you know,
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  Speaker 1: than where they've been over the last couple of years.
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  Speaker 1: So the Fed really needs to have a reason to
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  Speaker 1: not move because conditions really are feeling pretty good. Thank
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  Speaker 1: you very much. Jonathan golob is Chief US market Strategist
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  Speaker 1: for RBC Capital Markets, giving us his view of what
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  Speaker 1: to do with your money. We're going to take you
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  Speaker 1: through to the clothes next. On taking stock, I'm pim Fox.
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  Speaker 1: My co host Kathleen Hayes. This is Bloomberg. Yeah,