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RBC's Golub Favors US Equities In Low Vol Environment (Audio) · Bloomberg Intelligence

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  Speaker 1: Global business news twenty four hours a day. It's Bloomberg
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  Speaker 1: this is a Bloomberg business flag BROM Bloomberg World Handquarters.
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  Speaker 1: I'm Charlie Pellett. U S stocks are climbing for a
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  Speaker 1: third day. We've got the SMP five hundred index and
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  Speaker 1: the down Jones Industrial Average both trading at a record
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  Speaker 1: one fifty one right now. On the SMP five hundred
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  Speaker 1: index up fourteen points again of seven tenths of one percent.
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  Speaker 1: Down Industrial is up one hundred eighteen points to eighteen thousand,
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  Speaker 1: three hundred forty five. That's a gain of seven tenths
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  Speaker 1: of one percent. Naz Stack is up seven tenths of
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  Speaker 1: one percent, up thirty three points to five thousand, twenty two.
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  Speaker 1: The tenure down twenty five thirty seconds, the yield on
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  Speaker 1: the ten year one point five one percent. Gold down
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  Speaker 1: the most in seven weeks. That is down twenty two
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  Speaker 1: sixty the ounce at thirteen thirty four, a drop there
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  Speaker 1: of one point seven percent. And crude oil West Texas
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  Speaker 1: Intermediate Crude now trading higher by two oh five. The
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  Speaker 1: barrel eighty one on w t I. That is a
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  Speaker 1: gain of four point six. I'm Charlie Pellett and that's
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  Speaker 1: a Bloomberg business flash. This is taking stock with Pim
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  Speaker 1: Box and Kathleen Hayes on Bloomberg Radio Earnings and Equities.
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  Speaker 1: Do they actually follow each other? Let's find out more
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  Speaker 1: from Jonathan Golob. He is the chief US market strategist
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  Speaker 1: for RBC Capital Markets, and he joins me here in
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  Speaker 1: the studio. Jonathan, always a pleasure tell me about the
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  Speaker 1: earning season. You say, weaker earnings, higher multiples. Everyone's going
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  Speaker 1: to pay more for the same dollar of earnings. You know,
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  Speaker 1: it's it's amazing, Pimen. When I put this note out
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  Speaker 1: on on Monday, you almost get these hateful looks from
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  Speaker 1: investors because they always think the only way markets go
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  Speaker 1: higher is because of of of a pickup in in
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  Speaker 1: your earnings growth. But in reality, when earnings weekend, there's
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  Speaker 1: about a fifty fifty shot that the multiple is gonna
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  Speaker 1: go higher or lower. And it's really about very different
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  Speaker 1: things that drive one or the other, especially over recently
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  Speaker 1: short periods like you know, like we're seeing in the
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  Speaker 1: last several days, well, the last several days could turn
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  Speaker 1: people into a bull if they haven't already bought stocks,
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  Speaker 1: right if you know, it's there's this reluctance to believe.
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  Speaker 1: And you and I were talking about before we you know,
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  Speaker 1: we uh we which went live here about how this
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  Speaker 1: just almost seems like it's defying gravity. But there's a
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  Speaker 1: couple of things that I think are really forcing the
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  Speaker 1: market higher. And the first one is if you look
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  Speaker 1: at the yield on stocks, if you look at dividends
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  Speaker 1: plus buy backs, it's yielding four point seven percent at
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  Speaker 1: a time where treasury is right now, I think, according
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  Speaker 1: to Bloomberger about one point five, and you know, there's
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  Speaker 1: just two wide a gap between those, and it forces
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  Speaker 1: people in the The other thing is companies are doing
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  Speaker 1: a brilliant job of managing in a low revenue environment
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  Speaker 1: of squeezing out more profits, more cash flow as returning
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  Speaker 1: it to shareholders. So companies get the game right now
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  Speaker 1: that this economy is not going to do it for them,
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  Speaker 1: and they're they're really managing well against that. All right,
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  Speaker 1: let's take those two things, because you talk about in
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  Speaker 1: a sense relative yield, right, you're looking at the yield
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  Speaker 1: on a treasury bond versus the yield from stocks. Do
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  Speaker 1: you really believe that they're the same group of investors. Um,
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  Speaker 1: maybe not the exact same group of investors, but if
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  Speaker 1: you think about um, you know, I think about my mom,
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  Speaker 1: who's thinking that she needs to live off of a
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  Speaker 1: yield and if she can get more on a uh,
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  Speaker 1: you know, more in a stock portfolio. She has a
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  Speaker 1: dividend portfolio, she can easily get over three percent, and
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  Speaker 1: if she's putting money in ammuni bond or a government bond,
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  Speaker 1: she's not going to get that. And so yes, there's
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  Speaker 1: a little more volatility. And she also knows that the
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  Speaker 1: likeliders over time, that that dividend is going to grow
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  Speaker 1: on her portfolio. So it may not be the exact
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  Speaker 1: same group of investors, but they are looking at alternatives,
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  Speaker 1: you know, between eight versus big all right, which is
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  Speaker 1: what the Federal Reserve seems to want. They want you
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  Speaker 1: to take a little bit more risk, not only in
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  Speaker 1: what you're investing in, but what companies are investing in.
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  Speaker 1: You mentioned also, um, the earnings picture, right, give me
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  Speaker 1: your give me your best estimate, what we what do
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  Speaker 1: we go through? Alca, fifteen cents versus the estimate of
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  Speaker 1: nine cents made people happy yesterday, right, So I think
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  Speaker 1: we have to look at what's happening near term or
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  Speaker 1: in in the last you know, year or so, we've
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  Speaker 1: have what a lot of folks have called an earnings recession.
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  Speaker 1: What you really have is a weak earnings trend where
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  Speaker 1: earnings are growing three percent, four percent, something like that,
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  Speaker 1: and in the last year the energy sector has collapsed
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  Speaker 1: and made it look like there was an earning session
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  Speaker 1: of recession. The reality is is if normally earnings grow
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  Speaker 1: at seven we're growing at half that pace. So when
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  Speaker 1: you get rid of the head wind from energy, here's
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  Speaker 1: the here's the bad story. You're not gonna get faster,
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  Speaker 1: much faster earnings anyway, The trend is still a really
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  Speaker 1: weak environment. The question for stock investors is can you
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  Speaker 1: get more upside without the earnings? Because I don't think
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  Speaker 1: that they're going to re accelerate. So can you get
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  Speaker 1: more upside without those earnings? Are people gonna pay more
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  Speaker 1: for the same thing that they could have bought let's say,
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  Speaker 1: you know, a year ago. I think it gets back
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  Speaker 1: to these these arguments, which is relative relative yield, this
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  Speaker 1: efficiency of corporate management, and it's squeezing out more cash flow.
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  Speaker 1: Companies right now, for example, are generating about more free
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  Speaker 1: cash flow than normal for every DELA running. And there's
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  Speaker 1: one more thing we we we talk about the market
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  Speaker 1: being really vulnerable Breggs in and upcoming elections and all
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  Speaker 1: these things, but there's a measure of altility you have.
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  Speaker 1: You have, you have the VIX. You can look at
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  Speaker 1: it every day on your on your Bloomberg screen. And
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  Speaker 1: we are running right now at a VIX about thirty
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  Speaker 1: percent or more below long term averages. And when volatility
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  Speaker 1: is lower, you pay more of a multiple for things,
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  Speaker 1: you pay more for a less risky asset, and investors
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  Speaker 1: are more caught up in the headlines than the actual data.
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  Speaker 1: So yeah, I think this upside. Well, here's the data
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  Speaker 1: when it comes to the VIX. The VIX right now
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  Speaker 1: is thirteen point five, and you're right, I mean that
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  Speaker 1: is historically low. And if you take a look, just
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  Speaker 1: going back to January, we have that big whip saw
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  Speaker 1: action January February which was as much as thirty right
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  Speaker 1: And I look at if I'm measuring it and without
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  Speaker 1: looking day to day, over the last five years, it's
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  Speaker 1: average probably thirteen to fourteen. And if you look at
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  Speaker 1: it the last twenty years, it's average twenty. So we
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  Speaker 1: are in a again, it doesn't feel this way. We're
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  Speaker 1: in a very low volatile h you know, low vulatail environment,
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  Speaker 1: and you have to pay more for socks in that environment,
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  Speaker 1: and the market actually is doing that. So I think
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  Speaker 1: there is upside, all right, upside in the United States,
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  Speaker 1: or you want to look more broadly, I think the
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  Speaker 1: United States is particularly attractive compared to the rest of
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  Speaker 1: the world. In a slow growth environment, you want to
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  Speaker 1: be in businesses that have low fixed overhead. And so
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  Speaker 1: what does that mean? Service oriented companies, companies with intellectual property,
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  Speaker 1: biotech technology. And if you look at the US compared
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  Speaker 1: to Europe or Japan, we all the innovation, all these
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  Speaker 1: service oriented companies are really centered in those industries in
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  Speaker 1: the United States. In Europe, for example, very heavyweighting and
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  Speaker 1: banks and autos and machinery companies. In the US you
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  Speaker 1: have a whole different kind of group of companies. So
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  Speaker 1: I think the US is much better. What's the biggest
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  Speaker 1: trap for investors today? The biggest The biggest trap is
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  Speaker 1: probably you know we talked about risk is professional investors.
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  Speaker 1: There's a risk that you miss the upside because you
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  Speaker 1: know you're not willing to buy into it. Um. When
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  Speaker 1: I'm talking to even some of the smartest investors, they
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  Speaker 1: can't get over the fact that stocks can go up
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  Speaker 1: in a weak growth environment. And that's probably their biggest mistake,
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  Speaker 1: the biggest risks. I mean, we know what the risk are.
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  Speaker 1: I think that that the Brexit was a head fake.
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  Speaker 1: But European risk might be real at some point in time. Um,
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  Speaker 1: But the European banks like Italian Well yeah, I mean okay,
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  Speaker 1: so for sure, Well again, well, I think that Brexit
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  Speaker 1: was an overstated concern. I don't think that the European
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  Speaker 1: banks are I think that that, you know, if we
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  Speaker 1: learned anything for the financial crisis is when bad things
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  Speaker 1: happen to banks, bad things happen to markets, and that
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  Speaker 1: that matter is probably more than Brexit, and anything which
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  Speaker 1: would threaten the common currency could have bigger ramifications. But
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  Speaker 1: right now the market is telling you that none of
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  Speaker 1: those bits in the rear end, and it's smooth sailing.
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  Speaker 1: At the beginning of the year, you came out with
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  Speaker 1: a call that said that the SMP would be up
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  Speaker 1: for the year about nine percent. Right, right, We're about
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  Speaker 1: halfway there, right, four and a half percent. How much
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  Speaker 1: flak did you take for that call. I took a
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  Speaker 1: lot of flak for that nine percent call, and I
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  Speaker 1: didn't think it sounded like such a crazy outlier until
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  Speaker 1: I saw what other people were forecasting, and until until
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  Speaker 1: you live through the late January February decline. It was.
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  Speaker 1: You know, there was a tremendous press amount of pressure
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  Speaker 1: on meat. You know when when the market was down
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  Speaker 1: ten eleven percent in February, John, your numbers are un realistic.
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  Speaker 1: They were high, They were too high going in your
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  Speaker 1: two polladis you know, take it down and get realistic.
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  Speaker 1: And I believe that we were going to see a
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  Speaker 1: bounce off of it. We we have um interestant when
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  Speaker 1: we put this note out on Monday, you know lower,
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  Speaker 1: you know, weaker earning stronger mole to Bowles. The debate
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  Speaker 1: we're having is do we raise our number because I
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  Speaker 1: think that this run is going to continue. We didn't
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  Speaker 1: have the guts to do that, but I do think
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  Speaker 1: that this run is going to continue. The other thing
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  Speaker 1: is this economic cycle, I think is going to be
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  Speaker 1: longer than normal. So I think that when when you
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  Speaker 1: have a weaker what what what causes the economic cycle
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  Speaker 1: to ultimately come to an end is the fact that
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  Speaker 1: you run out of spare capacity, the fact that, um
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  Speaker 1: that you get inflationary pressures. Right now, inflation for seven
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  Speaker 1: years into the cycle is still well contained. We still
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  Speaker 1: appear to have some some slack in the system. So
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  Speaker 1: in a slow growth environment, this is likely to continue
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  Speaker 1: for longer than normal. Mind you, the last thirty years
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  Speaker 1: we've had a recession once every ten years um. And
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  Speaker 1: in a slower environment we could take that potentially even longer.
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  Speaker 1: What do you say to people that look at corporate
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  Speaker 1: bonds treasuries and they say, look, they've done really well
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  Speaker 1: this year. You know the long bond you had bought
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  Speaker 1: that at the beginning of the Here you're looking at
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  Speaker 1: a return of anywhere from capital return. I'm not overleak,
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  Speaker 1: you know. Do I think interest rates will edge higher? Yes,
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  Speaker 1: so I think that they're going to run away and
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  Speaker 1: squash bond investors. Probably not. And people have been screaming
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  Speaker 1: that that you know that, you know that, you know
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  Speaker 1: that the interest rates are gonna rise and kill bond
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  Speaker 1: investors for the last five years and and and it
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  Speaker 1: hasn't happened. The futures market, So what the markets prediction
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  Speaker 1: of where things are going to be a year or
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  Speaker 1: two year, three years out is saying that we don't
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  Speaker 1: get to two percent interest rates until now? Do I
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  Speaker 1: think the market is a little bit too I don't
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  Speaker 1: want to say complacent, but but that we that we
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  Speaker 1: get something higher than that sooner. I think so. But
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  Speaker 1: I think the bond investors maybe better shape than perhaps
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  Speaker 1: the fearmongers would say, well, thanks very much for spending time.
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  Speaker 1: It's always Jonathan Gollum, he is the chief strategist for
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  Speaker 1: RBC Capital Markets. With that guts he called nine return
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  Speaker 1: to the SMP. We are halfway there. You're listening to
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  Speaker 1: taking stock will take you through to the clothes and
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  Speaker 1: this is Bloomberg h