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BlackRock's Koesterich: Fed Doesn't Feel A Need to Rush (Audio) · Bloomberg Intelligence

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  Speaker 1: nine percent. I'm Charlie Pello. That's a Bloomberg Business Flash.
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  Speaker 1: Will they or won't they? Will the Federal Reserve a
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  Speaker 1: raise interest rates one time this year twice this year? Well,
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  Speaker 1: what is the Federal Reserve going to do based on
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  Speaker 1: votes in the UK to leave the European Union and
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  Speaker 1: sluggish economic growth around the world. Well, let's find out
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  Speaker 1: from Russ Coster. Achie's head of asset Allocation for black
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  Speaker 1: Rocks Global Allocation Fund, helping the manage over four trillion dollars,
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  Speaker 1: joins us from San Francisco, Russ Coster, which thanks very
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  Speaker 1: much for being with us. All right, so give us
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  Speaker 1: your outlook for the Federal reserves policy. Well, I think
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  Speaker 1: the near term it's probably more of the same, which
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  Speaker 1: is remaining on hold. Uh. The Brill exit is a
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  Speaker 1: bit difficult at this point. Really, what it's about is uncertainty.
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  Speaker 1: What does it mean for the US economy? Arguably not much,
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  Speaker 1: But if if things do get rougher in Europe, that
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  Speaker 1: could affect consumer confidence, it could affect business confidence, and
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  Speaker 1: I think the set is gonna want to sit back
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  Speaker 1: for a bit and assess that before they raise rights. Well, then, boy,
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  Speaker 1: that that really does seem to me as if you
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  Speaker 1: think about it, that could easily then mean that they're
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  Speaker 1: going to be assessing at the end of the year
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  Speaker 1: because the negotiations between the UK and the EU are
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  Speaker 1: going to take a while. Number One, markets will settle down, right,
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  Speaker 1: But um, unless they're just mainly looking at financial contagion
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  Speaker 1: and and tightening financial conditions, maybe that sorts itself out
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  Speaker 1: by this autumn. But if it doesn't, then they could
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  Speaker 1: I guess they could say even if the economy picks up,
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  Speaker 1: they're just gonna sit there. Well, certainly this is something
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  Speaker 1: that's gonna linger for a long time, and Kathleen, you're right,
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  Speaker 1: this is not going to get settled in a couple
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  Speaker 1: of quarters. We're gonna be dealing with the uncertainty for
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  Speaker 1: many years to come. I think the way to frame
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  Speaker 1: it is, is there enough pressure in the domestic economy
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  Speaker 1: to give the FED conviction that even as things do
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  Speaker 1: become a bit unstable in Europe, the US economy is
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  Speaker 1: going to be all right. And it's worth remembering the
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  Speaker 1: last labor market report we had was disappointing and suggested
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  Speaker 1: maybe some of the momentum is coming out of the
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  Speaker 1: US economy. Maybe it's coming out of you with labor market,
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  Speaker 1: and in that context, I don't think the said feels
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  Speaker 1: the need to rush. Now if we've seen an improvement
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  Speaker 1: in the data, well, if there's enough of an improvement,
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  Speaker 1: that may trump the uncertainty from overseas and we may
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  Speaker 1: wind up getting a hike by the end of the year.
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  Speaker 1: But at this point it still needs to be proven.
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  Speaker 1: Russ Costrich. If you're talking to people that invest in equities,
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  Speaker 1: they're looking at return to the SMP five hundred of
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  Speaker 1: about two and a half percent so far this year.
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  Speaker 1: Should they continue to buy equities or should they just
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  Speaker 1: hold off on rebalancing perhaps and continue to buy fixed income,
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  Speaker 1: which has been the major performer. Well, I think you
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  Speaker 1: prefer equities over bond. Certainly within the global allocation fund,
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  Speaker 1: you know we've got not not neither one is presenting
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  Speaker 1: a great value right now. But between the two, US
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  Speaker 1: stocks do look cheaper than bonds. The problem is we've
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  Speaker 1: had the seven year bullmarket, with a lot of that
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  Speaker 1: being driven by multiple expansion people willing to pay more
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  Speaker 1: for dollar earnings. Bonds in the US have never been
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  Speaker 1: as expensive. So what it means is that if you
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  Speaker 1: look at a typical portfolio with stocks, maybe bonds, you've
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  Speaker 1: got to assume lower urns going forward that we've had
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  Speaker 1: over the past five years, and maybe even we've had
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  Speaker 1: over the longer term. Well, how about the job support tomorrow?
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  Speaker 1: Because Dave Wilson are stocks that made then the simple
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  Speaker 1: clear point. You know, it's simple, but it's so true
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  Speaker 1: that ultimately, as you start looking ahead to earnings and
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  Speaker 1: you're looking down the road, maybe not just for a
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  Speaker 1: quarter or what I purchase and invest in, but for
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  Speaker 1: the longer term, if you don't get much growth, it's
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  Speaker 1: going to be tough for a lot of companies to
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  Speaker 1: post better earnings. Right. So, uh, when you look at
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  Speaker 1: the report tomorrow, what is going to be the linkage
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  Speaker 1: between higher number than forecasts lower? When we look first
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  Speaker 1: of all the training reaction tomorrow in stocks and then
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  Speaker 1: down the road, well, I think the training reaction tomorrow
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  Speaker 1: is really going to come to Is it a good
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  Speaker 1: enough number that it gives you some conviction that the
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  Speaker 1: recovery is on track, but not so strong that's going
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  Speaker 1: to scare the Fed. So something in that one range
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  Speaker 1: that's probably a market friendly number. It's close to consensus.
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  Speaker 1: It makes you feel that may was a bit of
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  Speaker 1: an apparition, but it's not going to scare the Fed
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  Speaker 1: into getting aggressive longer term. You know, I think the
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  Speaker 1: importance of these numbers is, as I said, we've had
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  Speaker 1: a bull market largely based on multiple expansion. It's gonna
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  Speaker 1: be hard for you, as companies that are already very
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  Speaker 1: profitable to grow their margins. Is stocks are going to
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  Speaker 1: rise from here, they need to rise on higher earnings,
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  Speaker 1: which needs to happen on the basis of higher revenue.
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  Speaker 1: And for that to occur, the economy has to accelerate,
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  Speaker 1: and unfortunately we've been stuck into slow growth mode for
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  Speaker 1: a very long period of time. Effert rust, doesn't it
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  Speaker 1: really take increased buying to move stocks high? I mean,
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  Speaker 1: it doesn't really matter what the companies do. You can
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  Speaker 1: have companies that don't make any money and people will
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  Speaker 1: still buy the stock. You've just got to have willing buyers,
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  Speaker 1: and they don't seem to be appearing on the market. Well,
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  Speaker 1: and in him, I think you've nailed it. We don't
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  Speaker 1: have willing buyers. We've got a lot of money. We've
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  Speaker 1: got a lot of money on the sidelines, and honestly,
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  Speaker 1: if you're put any new money to work. It's less
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  Speaker 1: exciting doing that when the S and P five is
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  Speaker 1: trade in at nineteen and a half times trailing earnings
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  Speaker 1: versus four or five years ago, when the multiple is
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  Speaker 1: a lot lower. If we're going to get the games,
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  Speaker 1: we can't rely on as much of people constantly willing
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  Speaker 1: to pay more for dollar of earnings. We've got to
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  Speaker 1: see that companies are starting to raise their estimates and
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  Speaker 1: there's some acceleration in the earnings they can generate. So
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  Speaker 1: if we want to gettle more specific about this kind
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  Speaker 1: of world Brexit uncertainty, Uh, it takes some time to
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  Speaker 1: play out. Fed Maybe uncertain don't learn know about the economy.
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  Speaker 1: You go to something solid, like me the healthcare industry.
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  Speaker 1: Do you turn to come of these some of which
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  Speaker 1: look like you know they even though there's been a
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  Speaker 1: lot of alatility lately, they've hit bottom, they're moving higher.
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  Speaker 1: Where do you go first? I think there are a
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  Speaker 1: couple of things we do like health care. I think
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  Speaker 1: health care is one of those parts of the economy
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  Speaker 1: where you're going to see secular growth. We know we're
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  Speaker 1: all getting older, the country is getting older. People are
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  Speaker 1: spending more in healthcare less on things like apparel. So
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  Speaker 1: that's a it's a long term structural shift that I
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  Speaker 1: think benefits the sector. Second, Kathleen, you mentioned commodities. You know,
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  Speaker 1: the one asset class that has been doing well for
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  Speaker 1: what I think are obvious reasons has been gold. And
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  Speaker 1: if we're in an environment in which the Fed and
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  Speaker 1: other central banks are going to keep pushing real interest
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  Speaker 1: rates to zero or below zero, that's an environment where
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  Speaker 1: goal typically does well. So that's another asset class to
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  Speaker 1: think about if we're stuck in this world for a
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  Speaker 1: while longer. Yeah, but Russ, if you if what you
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  Speaker 1: say is accurate that the central banks are going to
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  Speaker 1: continue to push interest rates even lower, why not just
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  Speaker 1: go out and buy some bonds. Looking at the tenure
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  Speaker 1: if you bought the tenures Treasury at the beginning of
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  Speaker 1: the year, you would have made well. The rallying bonds
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  Speaker 1: has been extraordinary. Certainly, it's nothing that many people predicted,
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  Speaker 1: and I think bonds have a legitimate role in the portfolio.
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  Speaker 1: The question is how much, uh you know, Certainly some
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  Speaker 1: of the longer duration bonds you are getting some pick
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  Speaker 1: up from what you get on the shorten the curve
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  Speaker 1: and The other advantage of that asset class, which is
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  Speaker 1: why I think you do own some of them in
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  Speaker 1: your portfolio, is they have proven a very effective hedge
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  Speaker 1: when stocks them and going lower. On the other hand,
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  Speaker 1: are you really going to pile into bonds with the
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  Speaker 1: ten you're yielding one point for eight percent? You know
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  Speaker 1: for a taxable investor for most of us that pay taxes,
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  Speaker 1: and that means that you're after tax income is actually
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  Speaker 1: going to be below the rate of inflation. So what
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  Speaker 1: I'd like to know about technology in here, because sometimes
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  Speaker 1: it seems to be in its own orbit, and of
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  Speaker 1: course you've got everything from ship makers to social media
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  Speaker 1: to you know, old line companies like Microsoft, anybody you
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  Speaker 1: like in there. In this kind of environment, they have
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  Speaker 1: some of those companies, for example, become almost sort of
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  Speaker 1: above all this or apart from that, because there's so
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  Speaker 1: much on their own trajectory. Well, I think it's a
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  Speaker 1: really interesting point. And certainly there parts of technology that
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  Speaker 1: have have demonstrated that they're going to keep growing earnings
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  Speaker 1: even in a slow growth world. And technology is one
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  Speaker 1: of the sectors we like. And it sort of goes
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  Speaker 1: back to the argument and made a moment ago about
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  Speaker 1: health care. You know, in a slow growth world, you're
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  Speaker 1: not getting that lift that we normally received from a
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  Speaker 1: growing economy. But there are segments that are benefiting from
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  Speaker 1: greater wallet share. We're all spending more money on technology,
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  Speaker 1: just like we're spending more money on healthcare, and that's
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  Speaker 1: like that they continue and that's one of the reasons
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  Speaker 1: I think that sector can continue to do relatively well.
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  Speaker 1: RUSS anything to do with hard assets. So you mentioned
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  Speaker 1: gold briefly, but I was thinking for example of real estate. Boy,
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  Speaker 1: I mean, if you can actually borrow the money, you're
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  Speaker 1: almost getting the real estate for nothing. Well, that's a
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  Speaker 1: that's a great point, and I think real estate is
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  Speaker 1: a little bit harder to access. Certainly there's liquidity issue,
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  Speaker 1: it's it's not as easy to sell. But any real
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  Speaker 1: estate that has income generating properties, I think that's another
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  Speaker 1: place and investors want to look and and the reason
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  Speaker 1: it's not hard to understand anything that can generate income,
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  Speaker 1: whether you're talking about a piece of real estate or
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  Speaker 1: you're talking about a dividend pain stock where you're talking
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  Speaker 1: about a bond, uh, let's say a corporate bond. People
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  Speaker 1: are flocking to those asset classes because the traditional sources
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  Speaker 1: of income cash, government bonds. Municipals are just paying a
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  Speaker 1: fraction of what they paid ten or twenty years ago. Well,
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  Speaker 1: RST Custards, thank you so much for joining us. You've
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  Speaker 1: really set the table for us at the stage for
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  Speaker 1: the job support tomorrow. Do you think with the uncertainty
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  Speaker 1: of Brexit, the feder Reserve and so much more rest
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  Speaker 1: as head of asset allocation for black Rocks, a global
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  Speaker 1: allocation fund. Well, we're heading into the clothes now, will
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  Speaker 1: be joined by Dave Wilson our Stock Center to look
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  Speaker 1: at the movers and shakers. Got the Dow actually down
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  Speaker 1: two tens thirty two points at seventeen thousand, eight eighty
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  Speaker 1: six s and P five hundred down about a tenth
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  Speaker 1: two and a half points at twenty ninety seven. The
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  Speaker 1: Nasdaq is up a third of a point sixteen to
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  Speaker 1: forty eight seventy five. This is Bloomberg