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The Market has Distinct Trading Pattern : Phil Orlando · Bloomberg Intelligence

0:05
Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.
0:08
Speaker 1: Along with my co host Lisa A. Brahmowitz. Each day
0:11
Speaker 1: we bring you the most important, noteworthy, and useful interviews
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Speaker 1: for you and your money, whether you're at the grocery
0:17
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0:20
Speaker 1: L Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com.
0:33
Speaker 1: With this earning season coming to a conclusion, what to
0:37
Speaker 1: expect next for stocks? Typically stocks rally into and during
0:41
Speaker 1: the earning season, depending force on the results of specific companies.
0:44
Speaker 1: Here to tell us about earnings and market valuations is
0:48
Speaker 1: Matt Forrester. He's the chief investment officer for b n
0:50
Speaker 1: Y Melon Lockwood Advisers. He helps to oversee nearly eight
0:55
Speaker 1: billion dollars. Is based in King of Prussia, Pennsylvania. Matt,
0:59
Speaker 1: thanks very much for in with me. You know, one
1:02
Speaker 1: of the one of the things that that always sort
1:04
Speaker 1: of is interesting is if you take a look at
1:06
Speaker 1: a chart of the SMP five hundred, let's just use
1:09
Speaker 1: that as a as a proxy, you can kind of
1:11
Speaker 1: tell when earning season takes place without even knowing what
1:15
Speaker 1: the dates are, what the calendar is on the bottom
1:18
Speaker 1: of the of the chart, because it seems that we
1:20
Speaker 1: have this pattern that has almost been ingrained in investor behavior.
1:25
Speaker 1: Have you noticed this as well? Absolutely, since since of
1:30
Speaker 1: the stock market gains have occurred during this earning season,
1:34
Speaker 1: and this one has been absolutely spectacular. Uh, course driven
1:37
Speaker 1: by the tax cuts, but we've had a remarkable earning
1:41
Speaker 1: season um and we've also seen analysts begin to pick
1:44
Speaker 1: up their expectations for future quarters going into the next
1:48
Speaker 1: you know, rest of and in the twenty nineteen. So
1:51
Speaker 1: we've clearly had some some really remarkable corporate results. Uh. Interestingly,
1:57
Speaker 1: the markets have not always in every visual case of
2:00
Speaker 1: certain cases where they have looked at these earnings and
2:03
Speaker 1: then looked at the guidance and look deeper. So I
2:06
Speaker 1: think it's fair to say that a lot of the
2:08
Speaker 1: good earnings number have been widely anticipated. But we've continued
2:12
Speaker 1: to have gains in markets, and we've sort of powered
2:15
Speaker 1: through this other levels of risks that we've seen every
2:18
Speaker 1: markets or the last few a few months. All right,
2:20
Speaker 1: we'll get to the risks in a second. But this
2:23
Speaker 1: notion that we see these gains, as you said, of
2:26
Speaker 1: the gains seemed to come in this in this specific
2:29
Speaker 1: time period. If you're an investor and you're looking for
2:32
Speaker 1: a time to get in, do you wait until the
2:35
Speaker 1: earning season is over, see what people are doing in
2:39
Speaker 1: terms of maybe taking some short term profits, and then
2:42
Speaker 1: go and prospect for the stocks the companies that you
2:45
Speaker 1: really want to own. Yeah, it could be. I suspect
2:48
Speaker 1: that we're going to have a summer where some of
2:51
Speaker 1: the issues that have recently cropped up UH and some
2:54
Speaker 1: of the risks are probably gonna give us these periodics
2:56
Speaker 1: buying opportunities. So if you're looking to make large new
3:00
Speaker 1: allocations to perhaps the equity market, you may want to
3:03
Speaker 1: see how that affects the overall macro picture. So clearly
3:07
Speaker 1: you've had the Italian news, which you know had some
3:10
Speaker 1: stuff just like it's right, but it gives you those
3:14
Speaker 1: buying opportunities that are very short lived. I think those
3:17
Speaker 1: are very hard for UH, for market players to adjust
3:20
Speaker 1: to UM. But if you look at those lists we
3:22
Speaker 1: ascaren February on average hourly earnings U, you know, it's
3:27
Speaker 1: somewhat crazy for markets to respond to a three tents
3:31
Speaker 1: of a of a increase from expected number and average
3:35
Speaker 1: hourly earnings, but it got the markets worried about the
3:38
Speaker 1: things that we might see in inflation, whether the FED
3:42
Speaker 1: was behind a curve, you know, raise questions about whether
3:45
Speaker 1: or not monetary policy was have to go even tighter, uh,
3:50
Speaker 1: you know, for more quickly than what the markets have expected.
3:53
Speaker 1: And when we see those types of fears work their
3:55
Speaker 1: way through the markets, UM, that's going to give us
3:58
Speaker 1: those periodic trade opportunities to the calendar there, you know,
4:01
Speaker 1: from here to the mid terms is going to be
4:03
Speaker 1: filled with these trade issues, which we're going to be ongoing. Uh,
4:07
Speaker 1: We're going to be continue to dealing with some of
4:09
Speaker 1: the European populism and what's what's arisen from the Italian crisis. H.
4:14
Speaker 1: On the backdrop of that, that was gonna be a
4:16
Speaker 1: lot of really good earnings numbers, you know, coming from
4:19
Speaker 1: from American corporation. So we're hoping that that is going
4:22
Speaker 1: to power us through these isolated events. Um. But there
4:26
Speaker 1: are real structure of reasons why investors should be somewhat
4:29
Speaker 1: concerned about Italy, the third largest bondasher on the planet,
4:35
Speaker 1: eighth largest economy around the world, twelfth largest by purchasing
4:39
Speaker 1: power parity concept. Uh. You know, if there are challenges
4:42
Speaker 1: to European populism. H those things are going to have
4:45
Speaker 1: an effect on on the Eurozone. Um, we're gonna have
4:49
Speaker 1: to power through these trade issues. The structural um connections
4:55
Speaker 1: between the U. S and China are really big. This
4:58
Speaker 1: is a really big deal. Uh, they are you know,
5:00
Speaker 1: we have more connections than any set of geopolitical or
5:04
Speaker 1: business rivals and maybe in the twentieth century. So we
5:08
Speaker 1: need to work through this. I think the structure probably
5:11
Speaker 1: means that we will tread carefully. But in so many
5:14
Speaker 1: of these things, markets are dealing with issues that are
5:18
Speaker 1: largely opaque. They may not be able to have a visibility.
5:22
Speaker 1: We don't know as market players what the Italian government,
5:27
Speaker 1: new populistic Italian government really wants to do. I don't
5:29
Speaker 1: think the new Italian necessarily. Maybe we've gotta We're limited
5:35
Speaker 1: in time, and I want to give you about thirty
5:36
Speaker 1: seconds here too. What do you specifically focused on in
5:39
Speaker 1: terms of where you're putting money to work right now?
5:42
Speaker 1: So I think because of these successes here as the risks,
5:46
Speaker 1: you have to think about your portfolio as an overall whole.
5:50
Speaker 1: You should have some pieces of your portfolio that may
5:52
Speaker 1: act as ballast. Uh. You know to help help keep
5:55
Speaker 1: the ship afloat when these periodic risk events continue to
5:59
Speaker 1: hit us. And for me that means gold, it means
6:03
Speaker 1: some amount of exposure to a long term high grade debt.
6:07
Speaker 1: We can't do this in all of our portfolios, but
6:08
Speaker 1: where we can, we try to isolate some places where
6:11
Speaker 1: we can have some pieces of ballast. Uh US small
6:14
Speaker 1: caps may be less exposed to some of the events
6:17
Speaker 1: going on overseas. For all those things, those kinds of
6:20
Speaker 1: things that we're for him to put into some for
6:21
Speaker 1: portfolios today. Thank you very much for being with me.
6:24
Speaker 1: You got Matt Forrester, Chief Investment Officer b n Y
6:27
Speaker 1: Melon Lockwood Advisers, helping to manage nearly eight billion dollars
6:30
Speaker 1: of customer assets. He says, look at gold, high grade
6:33
Speaker 1: corporate debt, and small cap stocks. Hello everybody, and welcome.
6:51
Speaker 1: I want to bring you in Dr David Kelly, he
6:55
Speaker 1: really knows how to CHRISTI wait a minute. You have
6:57
Speaker 1: to tell people you were hosting an amazing path at
7:00
Speaker 1: all at the b n Y Melon inside and Dr
7:04
Speaker 1: David Kelly was on it. And he always does a
7:07
Speaker 1: wonderful job at crystallizing and sort of distilling complicated economic
7:11
Speaker 1: issues into wonderful metaphors that actually ring home. He is
7:14
Speaker 1: chief Global Strategist at Jpmorkan Asset Management. And one thing
7:18
Speaker 1: that you said that really struck me was that you
7:21
Speaker 1: think that investors are being too barished in the short
7:24
Speaker 1: term and too bullish in a long term. Can you explain, Yeah,
7:28
Speaker 1: I think, I think in terms of the short term,
7:31
Speaker 1: we are seeing a real pickup at economic activity, and
7:34
Speaker 1: we've I think economic growth in the second quarter cope
7:36
Speaker 1: as much as four percent. Look at the lowest unemployment
7:39
Speaker 1: rates since nineteen nine. Earnings this year are going to
7:42
Speaker 1: be up about twenty six percent year over year. These
7:44
Speaker 1: are these are really wonderful numbers. And when you think
7:47
Speaker 1: about the stock market, I would invest in stocks today
7:50
Speaker 1: just because of the money companies are earning right now.
7:52
Speaker 1: Never mind about the future, because right now they're they're
7:54
Speaker 1: generating a no fault of cash that can be paid
7:56
Speaker 1: at in dividends that could be used to stock buybacks.
7:58
Speaker 1: That's that's all positive. I think. In the long run, though,
8:01
Speaker 1: we have to recognize that that. You know, there's a
8:03
Speaker 1: lot of talking to these days about three percent growth.
8:06
Speaker 1: I think we can do three percent growth for about
8:08
Speaker 1: a year. But because we don't have any growth in
8:11
Speaker 1: the number of our virtually no growth in the population
8:14
Speaker 1: age sixty four, we're really out of available workers. And so,
8:18
Speaker 1: you know, I think the employery can come down a
8:20
Speaker 1: little bit more, but then it's going to stop and
8:21
Speaker 1: growth has got to slow down to about two percent,
8:24
Speaker 1: and I think, you know, for the long run, we
8:25
Speaker 1: need to recognize that that's where we are. Unless we
8:28
Speaker 1: change our policies with regard to immigration and legal immigration
8:31
Speaker 1: to increase the number of skilled workers in the United States,
8:35
Speaker 1: we will slow down. But there's also a lot of
8:37
Speaker 1: opportunity overseas, and so I think that in the short
8:40
Speaker 1: run people are being um a little too pessimistic and
8:43
Speaker 1: not giving the market credit for the earnings that companies
8:46
Speaker 1: are earning right now. But in the long run, I
8:48
Speaker 1: think we're we're not recognizing the real structural problems the
8:51
Speaker 1: US economy has, not just around this labor supply, I think,
8:53
Speaker 1: but also around very big budget deficits which are growing.
8:56
Speaker 1: If you want to find out about the health of
8:58
Speaker 1: the US consumer, where do you go? I go to Costco.
9:01
Speaker 1: It's you know, it's a it's a it's a wonderful
9:03
Speaker 1: place here you I mean you see these mobs of people.
9:07
Speaker 1: I mean they're piled back into the aisles, and then
9:08
Speaker 1: you look at their their cards and they have to
9:10
Speaker 1: push these big, oversized carts and then they pile everything
9:12
Speaker 1: up to a peak. But what what you really should
9:14
Speaker 1: do is look in the carts because people are buying
9:16
Speaker 1: enough mustard for a generation. I mean, why hasn't got
9:20
Speaker 1: the money? And and so if you want to see
9:21
Speaker 1: mindless consumerism come to Costco, Okay what I asked. I
9:25
Speaker 1: asked it for a reason because I want to get
9:27
Speaker 1: to the point that it is one thing to sit
9:29
Speaker 1: in front of a screen and watch a number. It
9:32
Speaker 1: is another thing to go out into the real economy,
9:35
Speaker 1: in the real world and find out what is new,
9:38
Speaker 1: what is innovative, what people are spending their money on,
9:40
Speaker 1: what they're not spending their money on. And I'm wondering
9:43
Speaker 1: whether this is something that you in a sense advocate
9:47
Speaker 1: combined with all of your higher level world absolutely, because
9:51
Speaker 1: you look at big numbers and I don't believe in
9:54
Speaker 1: in modeling based on anecdotes, but you can use anecdotal
9:57
Speaker 1: information to really get what's going on. I mean, you
10:00
Speaker 1: try and find a plumber in America today, you can't
10:03
Speaker 1: find one. I mean, you just you know, if you've
10:04
Speaker 1: got a problem right now, they're not going to come
10:06
Speaker 1: out today. Maybe wait, wait a week, maybe wait two weeks.
10:08
Speaker 1: But the but the problem is where there's a real
10:11
Speaker 1: shortage of skilled workers and you can see that in
10:13
Speaker 1: your day to day life if you actually try and
10:15
Speaker 1: hire something to do a particular job. Um And equally,
10:17
Speaker 1: you know, if if you want to see what's going
10:19
Speaker 1: on with consumer spending, as I say, you can, there
10:21
Speaker 1: are plenty of areas where you can see just how
10:22
Speaker 1: mind to see people spend whatever money is in their pockets,
10:25
Speaker 1: you know. But just to push back, if you look
10:26
Speaker 1: at it from the other point of view, if you
10:28
Speaker 1: want to just look at anecdotal evidence, there's still a
10:30
Speaker 1: lot of I don't know, pessimism out there among a
10:34
Speaker 1: lot of people. I mean, perhaps it's not captured by
10:36
Speaker 1: some of the economic surveys, but you certainly see this
10:38
Speaker 1: with the birth rate falling off from millennials, and you
10:40
Speaker 1: certainly see this with you know the fact that we
10:43
Speaker 1: aren't seeing wages increase more so, how do you reconcile that? Well,
10:46
Speaker 1: I think that's true. I mean the gap between rich
10:48
Speaker 1: and poor is growing, and I think it will continue
10:51
Speaker 1: to grow. Uh And and a lot of people are
10:53
Speaker 1: getting left behind. But again we're talking about you know,
10:56
Speaker 1: how do you how do you invest? And and you know,
11:00
Speaker 1: in the in the first quarter, operating earnings are up
11:02
Speaker 1: twenty six percent. In May, wages are up two point
11:05
Speaker 1: eight percent. That's not good for workers, but it's great
11:06
Speaker 1: for shareholders. So it's I think you have to recognize
11:09
Speaker 1: the economy that that we actually have here. We're just
11:11
Speaker 1: pretty good for corporations. One of the things that you
11:13
Speaker 1: said in the panel that I thought was really interesting
11:16
Speaker 1: was about how people in Sweden managed to equalize the
11:20
Speaker 1: amount of espresso they drink with the amount of vodka
11:22
Speaker 1: they drink in the evenings. Uh. And you're sort of
11:24
Speaker 1: making analogy that we've got this incredible tax plan that's
11:27
Speaker 1: boosting earnings and a really solid corporate backdrop, but we
11:31
Speaker 1: also have all the uncertainty from trade top. Can you
11:33
Speaker 1: just explain to well, yeah, I mean that's this is
11:36
Speaker 1: this This was mainly a slurn some colleagues of mine
11:39
Speaker 1: from Sweeten nothing not the entire Swedish nation. They appreciate it,
11:42
Speaker 1: but no, I think I think we have a sort
11:44
Speaker 1: of a mixture of Vodican expressing on the economy right now.
11:47
Speaker 1: We've got you know, espresso is clearly a stimulative and
11:50
Speaker 1: we've got all the stimulus from fiscal stiments, which is
11:52
Speaker 1: very unusual this lations cycle. But we've got this big
11:55
Speaker 1: tax cut, a lot of money in people's pockets, a
11:57
Speaker 1: lot of money in corporate pockets. That's helping the account
12:00
Speaker 1: of me grow. And if it was just for that,
12:02
Speaker 1: the economy probably be overheating. We'd be really worried about inflation.
12:05
Speaker 1: But at the same time, we've got the the the
12:08
Speaker 1: sedative or the vodica if you like, of um, tariff worries,
12:13
Speaker 1: Washington worries, political divide um, and all of that is
12:17
Speaker 1: creating uncertainty. The problem with uncertainty is the business is
12:20
Speaker 1: you know, when you've got uncertainty, what what? What do
12:22
Speaker 1: people say? Well, let's wait and see. The problems are
12:24
Speaker 1: three most dangerous words and economics I wait and see.
12:27
Speaker 1: If everybody decides to wait and see, what what, this
12:29
Speaker 1: is not good. And so we've actually got this drag
12:31
Speaker 1: from uncertainty which who are a particular round trade policy
12:34
Speaker 1: which is negating some of the stimulus from the fiscal
12:37
Speaker 1: from the fiscal package. Well, you know, caffeine and alcohol.
12:40
Speaker 1: There are two things that can lead to addiction, right,
12:43
Speaker 1: I mean, you know, if you have a lot of caffeine,
12:45
Speaker 1: you need more and you need to keep it consistent, right,
12:48
Speaker 1: I mean, that's right, And they both have they both
12:51
Speaker 1: have bad long term and that really gets back from
12:53
Speaker 1: near term. People should be more bullish long term, they
12:55
Speaker 1: should maybe be more bearish because on the fiscal side,
12:58
Speaker 1: we're gonna have, you know, starting in Octobe, where we're
13:00
Speaker 1: gonna have federal defence of over trillion dollars for as
13:02
Speaker 1: far as I can see, that is going to impoverish
13:05
Speaker 1: US in the long run. Um And equally with trade,
13:08
Speaker 1: you know, you want to trade negotiations to result in
13:10
Speaker 1: trade agreements quickly, because uncertainly about trade just means that
13:14
Speaker 1: I don't know as a corporation. Should should I build
13:16
Speaker 1: a plant in Prioria? Should I build a plant in Poland?
13:18
Speaker 1: I don't know? And if I don't know, I'm not
13:20
Speaker 1: gonna do either. And so so I think both both
13:24
Speaker 1: extra uncertainty from Washington and unwarranted but budget deficits are
13:29
Speaker 1: those are both negatives in the long run to investors
13:32
Speaker 1: make investing too complicated for themselves, and absolutely they do.
13:36
Speaker 1: I think I think I think people need to think about,
13:38
Speaker 1: you know, for example, emerging markets. I think emerging markets
13:40
Speaker 1: is a great is a people should have in a
13:42
Speaker 1: portfolio right now. But people think, oh, it's too complicated.
13:44
Speaker 1: I have to know about all these things. No, you don't,
13:46
Speaker 1: I mean you don't. You need to have a good
13:49
Speaker 1: manager and let them invest in the forest. I'm not
13:52
Speaker 1: gonna I'm not going to to testify and behalf any
13:54
Speaker 1: individual tree in emerging markets. But the forest will grow,
13:57
Speaker 1: Emerging markets will grow fast, and the rest of the
13:59
Speaker 1: than to help markets for years to come along. Term
14:02
Speaker 1: investor should have position in emerging markets and just feel
14:04
Speaker 1: comfortable about that rather than trying to nitpick each individual country.
14:08
Speaker 1: He also said that you thought the theme most overvalued
14:10
Speaker 1: asset right now is bitcoin. Yeah, but the problem by
14:13
Speaker 1: bitcoin is I mean, I know, I know a lot
14:15
Speaker 1: of people unfortunately do this, but I want to invest
14:18
Speaker 1: in bitcoin. The problem with bitcoin or any cryptocurrency is
14:21
Speaker 1: there's no real barrier to entry. Now. I think blockchain
14:23
Speaker 1: technology is obviously a good technology. It's obviously gonna be
14:26
Speaker 1: useful in a a lot of ways, but right now it's
14:28
Speaker 1: you know, Bitcoin is is like the leader, but it's
14:30
Speaker 1: got nothing that's going to maintain its lead. It's got
14:32
Speaker 1: no barrier to entry. It's like you build a new
14:34
Speaker 1: Olympics Olympic stadium and you've got this weekend jog are
14:38
Speaker 1: running around, running around the path, and they look really
14:40
Speaker 1: good in the stadium. The problem is the varsity teams
14:42
Speaker 1: on a bus headed for the stadium, and when they
14:44
Speaker 1: get there, you know, the weekend jog is not gonna
14:47
Speaker 1: look so good. I think with the problem with something
14:51
Speaker 1: a cryptocurrency is it's not a store of value, it's
14:53
Speaker 1: not a unit of account, it's not a medium of exchange.
14:56
Speaker 1: In the long run, I think blockchain dollars, blockchain the end,
14:59
Speaker 1: blockchain euros will be much better. Best. Thank you very
15:02
Speaker 1: much for being with us. Dr David Kelly, chief Global Strategist,
15:05
Speaker 1: head of a global market insights strategy team at a
15:09
Speaker 1: JP Morgan Asset Management. I am very pleased to bring
15:27
Speaker 1: in Phil Orlando, chief equity market striate just at Federated
15:31
Speaker 1: joining us here in Orlando, Florida. Do you feel a
15:33
Speaker 1: particular affinity to Orlando is in Orlando, Yeah, do you
15:37
Speaker 1: feel like the city firth to you to answer that question.
15:40
Speaker 1: It creates a lot of confusion with T s A
15:43
Speaker 1: and hotel check in clerks and all sorts of So
15:47
Speaker 1: I want to start with a question, a kind of
15:49
Speaker 1: existential question it's been plaguing in the market, which is
15:52
Speaker 1: is this as good as it gets? With earnings? First
15:56
Speaker 1: of all, I want to say, you did a superb
15:58
Speaker 1: job moderating the panel this morning with with Rinehart and
16:01
Speaker 1: David Kelly. Uh, really good job. And and this was
16:05
Speaker 1: a topic that you touched on, uh with with your
16:09
Speaker 1: panelists this morning. Uh you talk about is your question
16:13
Speaker 1: is this as good as it gets? I would actually
16:15
Speaker 1: take the other side of the argument that I don't
16:17
Speaker 1: think the market believes a lot of what they see.
16:21
Speaker 1: We think that the stronger economic growth, stronger earnings growth,
16:25
Speaker 1: all of that in fact is sustainable, and the market's
16:27
Speaker 1: not as as a bulliant as it should be because
16:31
Speaker 1: they don't think that any of this is gonna last
16:34
Speaker 1: and it's all ephemeral and it's just gonna disappear. Um.
16:37
Speaker 1: So I I you know our view. We've got a
16:39
Speaker 1: thirty one forecast for the SMP five by the end
16:42
Speaker 1: of this year. We think there's gonna be a strong
16:44
Speaker 1: fourth quarter rally once we get through the summer period
16:48
Speaker 1: where there's gonna be a lot of concern about the
16:51
Speaker 1: midterm elections and uh, what's the Fed doing? Are they
16:54
Speaker 1: eventually going to overshoot? What's their policy going to be? Uh?
16:58
Speaker 1: This pop and first quarter earnings is that sustainable? This
17:01
Speaker 1: pop that we think we're going to see in second
17:03
Speaker 1: quarter g d P is that sustainable. Everyone's assuming that
17:06
Speaker 1: that all of this is just a flash in the pan.
17:08
Speaker 1: It ends badly. Um, we think that that that we're
17:12
Speaker 1: putting in place a foundation that's gonna get us back
17:15
Speaker 1: to trend line or better economic growth. We're looking at
17:18
Speaker 1: at corporate earnings growth that hasn't been this good in
17:20
Speaker 1: seven or eight years, and and the market needs to
17:23
Speaker 1: be more excited about this, and I think eventually they will.
17:26
Speaker 1: Today's not that day. So you think we're gonna get
17:29
Speaker 1: another six points on the uh? So we're sitting in
17:34
Speaker 1: about okay points so so, and we think that the
17:38
Speaker 1: back of that is going to be a very strong
17:40
Speaker 1: fourth quarter. Ralty that that when you study the history
17:43
Speaker 1: that this year calendaren there's a very unusual confluence of
17:49
Speaker 1: three seasonal events. The selling man go away thing happens
17:53
Speaker 1: every year. We know about that um but this is
17:55
Speaker 1: also the second year of the four year presidential election cycle,
17:58
Speaker 1: tends to be very volatile of stocks. And we've had
18:01
Speaker 1: a leadership transition at the Federal Reserve. Now the Fed's
18:04
Speaker 1: been around a hundred years, has only been sixteen chairman.
18:07
Speaker 1: But the market has a very distinct trading pattern whenever
18:10
Speaker 1: we change horses, and and when when these three things
18:14
Speaker 1: come together, they've only come together six times in the
18:17
Speaker 1: last eighty five years or so, and and the previous
18:21
Speaker 1: five times you've had this sort of barbell shaped year
18:24
Speaker 1: where we started the year in good shape, there's a
18:26
Speaker 1: lot of volatility and instability in the middle of the year,
18:29
Speaker 1: and then we ended the year in really great shape.
18:32
Speaker 1: I think we're going through that that instability period right
18:35
Speaker 1: now in terms of what's gonna happen with the midterm elections,
18:39
Speaker 1: what's gonna happen with the Fed. We've got another f
18:41
Speaker 1: MC meeting coming up next week. All right, we think
18:43
Speaker 1: there's gonna be a quarter point hike. I think that's
18:45
Speaker 1: a fairly consensus view. But the question from then is
18:48
Speaker 1: what do the dots look like. What's the FEDS policy
18:51
Speaker 1: prescription gonna be over the course of the next eighteen
18:53
Speaker 1: months or so? Will they overtight? We don't know the
18:57
Speaker 1: answers to that. Well, it's just about a minute to
18:59
Speaker 1: go here. I'm wondering what your perspective is, given the
19:01
Speaker 1: fact that you expect a strong fourth quarter rally. Does
19:04
Speaker 1: the FED matter for that considering the fact that people
19:08
Speaker 1: are pricing in or are talking about certainly four rate
19:10
Speaker 1: hips is here, Well, it absolutely matters because our forecast
19:13
Speaker 1: is only three rate hikes. Uh So, so if we're
19:16
Speaker 1: wrong and and the Fed is gonna give us four
19:19
Speaker 1: or more, um, you know, there's been a rumor that, uh,
19:23
Speaker 1: you know j Powell one of the things he's thinking
19:25
Speaker 1: about is is sort of scrapping Janny Yellen's idea of
19:29
Speaker 1: only four press conferences, going to eight press conferences. And uh.
19:33
Speaker 1: The reason why that's significant is that the market has
19:37
Speaker 1: gotten into their head that only a press conference, only
19:40
Speaker 1: a pressor only a meeting with the presser's a live meeting,
19:43
Speaker 1: and that we're not going to do anything and the
19:45
Speaker 1: other meeting. Now that's not necessarily right, but Powell wants
19:48
Speaker 1: to strip that thought process away from the market and say, okay,
19:52
Speaker 1: every time we meet every six weeks for an f
19:54
Speaker 1: MC meeting, we might do something. And and the reason
19:57
Speaker 1: that Yelling apparently didn't want to do press there's every
20:00
Speaker 1: time is that it's a lot of work to prepare
20:02
Speaker 1: for them. We are broadcasting from b n Y Melon
20:06
Speaker 1: Inside in Orlando, and joining us, of course, is Phil Orlando,
20:11
Speaker 1: chief equity market strategist at Federated UH. Phil, let's talk
20:15
Speaker 1: about small and mid cap stocks for just a second.
20:18
Speaker 1: I was looking at the Russell two thousands up eight
20:20
Speaker 1: and a half percent so far this year. UH. Is
20:23
Speaker 1: it because they are more domestically focused or is it
20:26
Speaker 1: because they just didn't get any love previously? Combination of
20:30
Speaker 1: the two. This has been one of our biggest calls.
20:33
Speaker 1: We went to a table pounding burn yourself at the
20:37
Speaker 1: stake by on small caps last fall and there were
20:40
Speaker 1: probably a half a dozen key reasons. At the top
20:43
Speaker 1: of the list was the fact that the U. S economy,
20:46
Speaker 1: corporate earnings economic growth was starting to really perk up,
20:49
Speaker 1: and a small cap company typically does eighty percent or
20:53
Speaker 1: so of their business here, so theoretically that was going
20:56
Speaker 1: to benefit them Uh, if we were right that the
21:00
Speaker 1: economy and the corporate earnings we're gonna get stronger, that
21:02
Speaker 1: meant that the Fed was probably going to accelerate its
21:05
Speaker 1: tightening policy. That's happened, which meant that the dollar was
21:09
Speaker 1: going to finally catch a bit. Now. Remember dollar euro
21:12
Speaker 1: had gone from one oh three to one twenty five
21:15
Speaker 1: or so over the course of last year. We thought
21:17
Speaker 1: that was overdone and that we should have seen a
21:20
Speaker 1: rally back to about the one fifteen level or so.
21:23
Speaker 1: So we're sitting in about one see eighteen or so
21:26
Speaker 1: right now. The strength in the dollar should benefit small
21:30
Speaker 1: cap companies, just as the weaker dollar tends to benefit
21:34
Speaker 1: large cap companies. It makes their goods and services cheaper
21:37
Speaker 1: as they're exporting them overseas. Half or more of a
21:40
Speaker 1: large cap company stuff is done overseas. So the stronger dollar,
21:44
Speaker 1: based upon those other things was going to benefit small caps.
21:47
Speaker 1: So I'm just wondering before we move on to some
21:49
Speaker 1: of the other sectors, I'm just wondering a lot of
21:52
Speaker 1: people think that the dollar is gonna weaken again, probably
21:55
Speaker 1: in six months, maybe a year, as people start to
21:58
Speaker 1: realize how deep the deficits really are. Do you agree,
22:01
Speaker 1: and when would you consider start taking starting to take
22:03
Speaker 1: some risk out of small caps. So I'm not sure
22:06
Speaker 1: that I fully agree with that assessment. I am concerned
22:09
Speaker 1: about the debt and the deficit levels, no question. But
22:13
Speaker 1: Dan Clifton over at Strategos put out a note a
22:17
Speaker 1: week or so ago saying that when we start to
22:20
Speaker 1: get some of the data out of the government this
22:23
Speaker 1: year in terms of how much the federal tax revenue
22:28
Speaker 1: has increased because economic growth is better, capital gains taxes
22:31
Speaker 1: are better, etcetera, and and how much some of that
22:34
Speaker 1: has been applied to the debt and the depth said
22:36
Speaker 1: the numbers, he said, will look better. We as an
22:40
Speaker 1: investment community don't really have an appreciation of that because
22:43
Speaker 1: right now we're just speculating. So you think that the
22:45
Speaker 1: small caps have have a pretty long run ahead of them,
22:48
Speaker 1: It sounds like absolutely what about tech stocks because they
22:51
Speaker 1: have been reaching record highs and I'm just wondering how
22:53
Speaker 1: you're thinking about that. So we we love tech through
22:57
Speaker 1: last year into the first quarter of this year, and
22:59
Speaker 1: then sort of went neutral. I guess as the market
23:02
Speaker 1: was sort of peaking in that late January early February standpoint.
23:06
Speaker 1: The reason for that valuation appeared to us to be
23:09
Speaker 1: a little ahead of itself, and large cap world generally
23:13
Speaker 1: had outperformed large cap value by about twenty five percentage
23:16
Speaker 1: points over the course of seventeen in the first part
23:20
Speaker 1: of eighteen. Now, that's a one standard deviation event that
23:23
Speaker 1: has only occurred five times in the last forty years
23:27
Speaker 1: or so, So it appeared to us that growth was
23:29
Speaker 1: ahead of itself. Now, in those other four instances, when
23:33
Speaker 1: that inflection point came and money were starting to rotate
23:36
Speaker 1: back into value, the value had a phenomenal run. And
23:40
Speaker 1: and so we think we're at one of those inflection
23:42
Speaker 1: points now. And so we've been overweight energy stocks, financial
23:46
Speaker 1: service stocks, and industrial stocks in the domestic market as
23:50
Speaker 1: a result of that. I'm gonna throw a little bit
23:53
Speaker 1: of a curveball here, because, uh, we're talking about all
23:56
Speaker 1: of this in the context of this conference and people
23:59
Speaker 1: planning for their financial future and trying to uh in
24:02
Speaker 1: some way, not to simplify it, but make it applicable
24:06
Speaker 1: to their personal situation. Social security, right is a big
24:11
Speaker 1: part of people's retirement plan. Whether you have a lot
24:14
Speaker 1: of money or a little money, you're kind of in
24:16
Speaker 1: your mind have this notion you're going to get your
24:18
Speaker 1: social Security check. This is the first time since n
24:22
Speaker 1: two that the government's having to dip into the trust
24:24
Speaker 1: fund in order to fund social security payments. Right, what
24:28
Speaker 1: do you say to people who are using social security
24:31
Speaker 1: as the first piece of the bigger puzzle of a
24:35
Speaker 1: retirement plan. Well, if it's the only piece, um, I
24:40
Speaker 1: would be a little nervous. I think it's part of
24:43
Speaker 1: a mosaic that you've got your your four oh one
24:47
Speaker 1: k uh, You've got your I rara, you've got your
24:50
Speaker 1: Social Security, You've you've got some some some savings, you've
24:54
Speaker 1: got the equity in your house. All of that together,
24:57
Speaker 1: people should be fine if if you've done thing other
25:00
Speaker 1: than continue to hope and pray and light candles that
25:04
Speaker 1: the government will continue to, you know, be able to
25:06
Speaker 1: support you with your social Security checks. I think that's
25:09
Speaker 1: a risky strategy because we've got to address, in my opinion,
25:13
Speaker 1: the unsustainable trajectory of entitlements at some point in the future.
25:18
Speaker 1: I don't know that today is that day, because I
25:20
Speaker 1: don't think we have the right mix of government officials
25:23
Speaker 1: with the backbone and the vision to be able to
25:26
Speaker 1: fix the problem. But but this problem is getting progressively
25:29
Speaker 1: worse every day. Uh. And and if I were sitting
25:32
Speaker 1: in the White House right now, I'd be trying to
25:34
Speaker 1: put together a plan that that brings the best thinking
25:38
Speaker 1: of both sides to compromise on the issue that that
25:41
Speaker 1: we've got to do some things to recognize better health UH,
25:46
Speaker 1: longer UH retirement ages UH means testing of benefits for
25:53
Speaker 1: the super wealthy, increasing the tax base. There's a bunch
25:56
Speaker 1: of different things that we need to do in order
25:58
Speaker 1: to get Social Security on a more sustainable footage. Thank
26:01
Speaker 1: you so much for being with us, Phil Orlando. Always
26:03
Speaker 1: wonderful to get your insights, especially in the town that
26:07
Speaker 1: was named after you. Phil Orlando, chief equity market strategist
26:10
Speaker 1: at Federated ruling over his roost here at the Insight
26:15
Speaker 1: Conference in Orland. So thank you so much for having me.
26:18
Speaker 1: This was this was a thrill to be with you, guys.
26:35
Speaker 1: Our next guest spent more than two decades at the
26:38
Speaker 1: Federal Reserve in a variety of capacities. He now serves
26:42
Speaker 1: as the chief economist at Standish, which is part of
26:45
Speaker 1: b n Y Melan Asset Management. I want to bring
26:48
Speaker 1: in vincent Reinhardt thank you so much for joining us.
26:51
Speaker 1: Really a pleasure having you for having me. I want
26:53
Speaker 1: to start with a lot of some of the handwringing
26:57
Speaker 1: in the economics profession right now. Is the Phillips curve dead? Uh?
27:01
Speaker 1: Can we throw away the yield curve as it flattens
27:04
Speaker 1: and disregarded even though in the past it's been a
27:06
Speaker 1: telling indicator of recessions. What do you think the biggest
27:09
Speaker 1: thing is right now that the economics professional economists are
27:13
Speaker 1: getting wrong? First thing they remember is all that handwringing.
27:17
Speaker 1: Notwithstanding at the end you have to go back to
27:19
Speaker 1: certain mechanisms because that's what keeps your understanding and the
27:23
Speaker 1: U of the world in motion. Uh. To me, I
27:27
Speaker 1: think the biggest thing the brethren get wrong is that
27:32
Speaker 1: the rest of the world is bigger and it doesn't
27:34
Speaker 1: act exactly like us. That a lot of macroeconomists are
27:39
Speaker 1: used to a closed form representation of the US economy
27:43
Speaker 1: and much more comfortable of that. But the plain fact
27:46
Speaker 1: is we went from something like um emerging markets being
27:51
Speaker 1: a third of the UH Federal Reserved Exchange Rate Index
27:57
Speaker 1: to being more like seventy of the of the Federal
28:00
Speaker 1: Reserves Exchange Rate Index. So what's the practical implication of that?
28:03
Speaker 1: I mean, how does that factor into sort of the
28:05
Speaker 1: everyday existence of Americans. So it's a couple things. One is,
28:09
Speaker 1: it's probably why they're so uh so much pressure keeping
28:13
Speaker 1: inflation from going up even though there's evident resource pressure,
28:16
Speaker 1: because the rest of the world is there meets somewhere
28:19
Speaker 1: our demand. Because the rest of world also doesn't act
28:23
Speaker 1: like us. Uh. Emerging markets in particular try to limit
28:27
Speaker 1: their fluctuations of their exchange rate piece of FISA dollar.
28:31
Speaker 1: That implies that major currencies aren't as important as they
28:34
Speaker 1: used to be. Have we become more isolated in our thinking?
28:40
Speaker 1: I think we didn't change and therefore are relatively more
28:44
Speaker 1: isolated than we should should have. I e. If you
28:47
Speaker 1: missed the fact that China is the largest economy in
28:51
Speaker 1: terms of international purchasing power, you're you're gonna you're you're
28:55
Speaker 1: gonna be missing out on on on the explanation. Great example.
29:00
Speaker 1: We know from the minutes that back in January, the
29:02
Speaker 1: f m C had a long discussion about inflation determination.
29:06
Speaker 1: They put a page and a half in the FLM
29:08
Speaker 1: scene in its I used to sign those for six
29:10
Speaker 1: or seven years. That's a lot. That's a big footprint.
29:13
Speaker 1: Over those page and a half you will find nowhere
29:17
Speaker 1: global supply chain, rest of the world, exchange value of
29:21
Speaker 1: the dollar. It was all domestic center. So uh, you know,
29:26
Speaker 1: we spoke about this earlier, but scottman Ard of Googgenheim
29:29
Speaker 1: came out and today said that the flattening yield curve
29:33
Speaker 1: now at the flattester about since two thousand seven, is
29:36
Speaker 1: an indicator that we're getting closer to the end of
29:38
Speaker 1: this cycle, that we're probably within two years of a recession.
29:42
Speaker 1: Do you agree? So I can say the easy thing,
29:45
Speaker 1: and that is the U S economy is dynamic. In
29:48
Speaker 1: the post war period, about fifteen percent of the years
29:51
Speaker 1: had recessions in them. So if you're asking me for
29:54
Speaker 1: a multi year forecast, there's gotta be a probability of
29:57
Speaker 1: recession in there. Now does the yield? Is the yield
30:00
Speaker 1: nerve as scary as it used to be? And I
30:02
Speaker 1: think the answers know. And the reason is yield curve
30:06
Speaker 1: used to be very scary because if short rates were
30:10
Speaker 1: below long rates, it meant that long rates incorporated the
30:14
Speaker 1: expectation of the FED easy. If short rates were real high,
30:18
Speaker 1: it meant the FED had a tight policy. So what
30:20
Speaker 1: gets the FED from tight too easy a recession and
30:25
Speaker 1: so therefore it was good at predicting a recession. What's
30:28
Speaker 1: the difference now, and that is long rates always incorporated
30:32
Speaker 1: term premium, the scarcity you know, uh value associated with
30:37
Speaker 1: holding treasury securities. Well, treasuries are really really scarce because
30:42
Speaker 1: the feder reserve and foreign official accounts hold them. In
30:45
Speaker 1: that environment, estimates of the term premium are actually negative,
30:49
Speaker 1: so it's not as big as signal about a future
30:52
Speaker 1: FED mistake when long rates are low relative to short rates.
30:56
Speaker 1: You've heard the phrase the generals fight the last war?
30:59
Speaker 1: Have economists and politicians are they fighting the last war?
31:03
Speaker 1: Particularly on trade? Rather than figuring out how to live
31:05
Speaker 1: in a world where China is, as you described as
31:08
Speaker 1: dominant our we seem to be fighting skirmishes at the
31:13
Speaker 1: edges to try to satisfy some nostalgic version of what
31:17
Speaker 1: we think the world ought to look like. I think
31:19
Speaker 1: a good way to frame it is we're still thinking
31:22
Speaker 1: about the accomplishment of bringing China into the global trading
31:27
Speaker 1: order with their accession to the World Trading Organization, and
31:31
Speaker 1: we're all backslapped and saying that's a real accomplishment. What
31:35
Speaker 1: we aren't thinking about was exactly who we brought into
31:39
Speaker 1: that world trading organization, that global system. It's somebody. It's
31:44
Speaker 1: a country that has a much more longer term focused
31:47
Speaker 1: than us, that has a desire to um get market
31:53
Speaker 1: share and get the technology that we've gotten. It's not
31:56
Speaker 1: the same kind of trading partner that that that you
31:59
Speaker 1: write down in most economic bombs. You know. We also
32:02
Speaker 1: we hit on our emerging markets earlier in Turkey's central
32:05
Speaker 1: bank earlier today's surprise the market by raising interest rates,
32:08
Speaker 1: the main interest rate to nearly eighteen percent. They just
32:12
Speaker 1: had a near record amount of inflation over the past year.
32:17
Speaker 1: How are you thinking about emerging markets right now? Well,
32:19
Speaker 1: and by the way, the Argentine Central Bank went up.
32:24
Speaker 1: And those two examples are just great to teach in
32:27
Speaker 1: a classroom on financial crisis because it tells you about
32:31
Speaker 1: the impossibility of an interest rate defense. You're trying to
32:35
Speaker 1: hold your exchange rate and you're going to do it
32:37
Speaker 1: by raised raising your domestic rate. Well, the problem is
32:41
Speaker 1: that's not real credible because the more and more you
32:44
Speaker 1: jack up your your policy rate to lessen the pressures
32:48
Speaker 1: on the exchange rate, the more likely you're killing your
32:50
Speaker 1: own economy, the more likely you're gonna get replaced, the
32:54
Speaker 1: more likely it's not going to be sustained. So in fact,
32:57
Speaker 1: the need to do something that dramatic is read by
33:01
Speaker 1: investors is saying there's something dramatic underneath. Well, and certainly
33:05
Speaker 1: there is, but I'm just wondering, you know, given the
33:07
Speaker 1: fact that we're seeing Argentina, Turkey, Brazil kind of suffering
33:12
Speaker 1: with their currency falling out of bed a bit, you know,
33:15
Speaker 1: is this sort of indicating a bigger issue at this point.
33:18
Speaker 1: So Brazil is a good example where it wasn't an
33:20
Speaker 1: interest rate defense. They didn't lower rates when they had
33:23
Speaker 1: the opportunity, and and an opportunity they took that Argentina
33:28
Speaker 1: didn't take was they built up more reserves. So they're
33:30
Speaker 1: a little distinct. But guess what they've got political risk
33:33
Speaker 1: to They're also going to be a source of uncertain
33:36
Speaker 1: The scary thing about this is it wasn't much of
33:40
Speaker 1: a backup and interest rates that exposed the pressure US
33:45
Speaker 1: interest rates that exposed pressure on e M and who
33:49
Speaker 1: did markets focus on. It focused on the economies that
33:53
Speaker 1: had ongoing budget deficits, and current account deficits. Market participants
33:58
Speaker 1: are not your friend when they're worried about funding your
34:02
Speaker 1: ongoing obligations. And that's something officials forgot over the prior
34:07
Speaker 1: couple of years when it was so easy to sell
34:11
Speaker 1: long term securities. Ten seconds. What is Vincent Reinhart reading
34:16
Speaker 1: at the beach this summer reading at the beach. I'm
34:19
Speaker 1: catching up on a bunch of old his Mark Twain books.
34:24
Speaker 1: Thanks very much for being with us, Thanks for having
34:26
Speaker 1: always a pleasure. Vincent Reinhardt is the chief economist of
34:30
Speaker 1: what He's got a quadruple mandate Standish Melon Capital, the
34:34
Speaker 1: Boston Company Asset Management, and b n Y Melon Asset
34:38
Speaker 1: Management North America. Thanks for listening to the Bloomberg P
34:45
Speaker 1: and L podcast. You can subscribe and listen to interviews
34:48
Speaker 1: at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer.
34:52
Speaker 1: I'm pim Fox. I'm on Twitter at pim Fox. I'm
34:56
Speaker 1: on Twitter at Lisa abramowits one before the podcast. You
34:59
Speaker 1: can always hatch us worldwide on Bloomberg radioh