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Stocks Fluctuate; Economy Shows Signs of Stabilizing · Bloomberg Intelligence

• 0:02
  Speaker 1: Welcome to the Bloomberg PENL Podcast. I'm Paul swing you
• 0:05
  Speaker 1: along with my co host Lisa Brahma Waits. Each day
• 0:07
  Speaker 1: we bring you the most noteworthy and useful interviews for
• 0:10
  Speaker 1: you and your money. Whether at the grocery store or
• 0:12
  Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple
• 0:15
  Speaker 1: podcast or wherever you listen to podcasts, as well as
• 0:17
  Speaker 1: at Bloomberg dot com. Well. As we parse through the
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  Speaker 1: economic data, what's become clear to most market participants I
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  Speaker 1: believe is that the manufacturing, the business investment, that remains
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  Speaker 1: an area of caution. We're seeing some contraction in manufacturing,
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  Speaker 1: but the consumer, the consumer is still they're driving this
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  Speaker 1: economy forward. To get the latest. Uh. Returned to our
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  Speaker 1: good friend Neil Data Renaissance macrohead of US Economic Research. Neil,
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  Speaker 1: thanks so much for joining us. So give us your
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  Speaker 1: view of the economy. Is the consumer enough to continue
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  Speaker 1: to drive this economy forward? UM? I mean I think
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  Speaker 1: I think so, uh, you know, we have I think
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  Speaker 1: the you know, baseline is for for decent consumers ending
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  Speaker 1: growth over the next couple of quarters. I mean, we
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  Speaker 1: have relatively benign inflation and UM and labor incomes arising
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  Speaker 1: at a at a modest rate. I mean, you have
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  Speaker 1: slower jobs growth at wages are are okay and UM,
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  Speaker 1: and the work week is basically flat. So if you
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  Speaker 1: look at jobs, hours and earnings, that's growing at about
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  Speaker 1: four and a half percent with UM, with price inflation
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  Speaker 1: below two uh. And at the same time, so in
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  Speaker 1: other words, of the household's budget constraints still expanding. And
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  Speaker 1: and at the same time, you know, you've had a
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  Speaker 1: pretty sharp increase in UM mortgage roof financing, so you
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  Speaker 1: know that's freeing up household cash flow. UM. So yeah,
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  Speaker 1: I mean I think that consumers are doing okay UM.
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  Speaker 1: And at the same time, you know, it's true that
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  Speaker 1: investment spending has been weak, but it's also true that
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  Speaker 1: housing has picked up. Inventories are a lean so UM.
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  Speaker 1: You know, I think between consumer spending and housing, I
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  Speaker 1: mean that that should offset the weakness we're seeing in
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  Speaker 1: in the factory sector and investment. But you know that
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  Speaker 1: doesn't necessarily mean that investment is going to be weak
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  Speaker 1: next year. I mean, he's seen a pretty notable loosening
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  Speaker 1: in financial conditions. Um. You know, potentially global growth is
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  Speaker 1: sort of bottoming out, bottoming out here. So you know,
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  Speaker 1: the drivers of weakness for investment this year um probably
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  Speaker 1: won't be with us next year. I mean, it's not
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  Speaker 1: just the global economy. Remember two thirds of the weakness
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  Speaker 1: in uh in CAPEX in the third quarter was aircraft
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  Speaker 1: equipment and mining structures. And you know, if global growth
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  Speaker 1: is doing better, that should mean that oil prices reflate
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  Speaker 1: a little bit, and that should you know, put some
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  Speaker 1: of the juice back into things like oil rigs and
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  Speaker 1: and the like mining structures. And do you think that
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  Speaker 1: even industrials are going to get some lift here in
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  Speaker 1: the near future. Well, I don't think that, Lisa, look
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  Speaker 1: at the market. I know. That's why I'm saying what
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  Speaker 1: you're saying that you know, they might end up getting
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  Speaker 1: a little bit of support of from that, Yeah, I mean,
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  Speaker 1: I mean, look, I mean, this is the thing. I mean,
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  Speaker 1: the only thing that matters right now is whether you
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  Speaker 1: believe I think for macro is if you believe price
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  Speaker 1: leads data. Right, you either believe price leads data or
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  Speaker 1: it doesn't. And if price leads data, that means that
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  Speaker 1: the economy is going to look a little bit better
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  Speaker 1: next year, you know, I mean, listening to the bear
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  Speaker 1: is kind of tripper of themselves, you know, the stock
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  Speaker 1: markets whistling past the graver. I mean, it's like cognitive dissonance.
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  Speaker 1: I'm still well, that's changing, though, but that's actually shifting.
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  Speaker 1: And I'm wondering at what point has that shifted to
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  Speaker 1: such a degree that it's not you know, people are
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  Speaker 1: just basically gloom and doom and they have been since
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  Speaker 1: the financial crisis. And Okay, they're acknowledging the strength and
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  Speaker 1: perhaps the prices accurately reflect the strength that we're seeing
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  Speaker 1: in the economy. Yeah, I'm not sure we're there. You
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  Speaker 1: I mean, I still think that. I mean, if you
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  Speaker 1: look at most you know, sort of measures of market sentiment,
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  Speaker 1: I mean, it doesn't look like there's a big euphoria
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  Speaker 1: right now for equities. Still, um across a range of
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  Speaker 1: different sentiment metrics. Um. You know, the one that I
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  Speaker 1: look at is the sports survey. I mean, you still
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  Speaker 1: have um, you know, more consumers being surveyed. Let's say
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  Speaker 1: they think stock prices are going to fall in the
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  Speaker 1: next six months than rise. I mean, historically that's been
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  Speaker 1: a a sort of useful, kind of contrarian type indicator.
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  Speaker 1: But basically it means that you know, uh, consumers aren't
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  Speaker 1: really that builed up on equities. And if consumers um,
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  Speaker 1: you know, aren't aren't built up, um, you know, that
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  Speaker 1: could mean that there's still some room for equities to
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  Speaker 1: keep going up. It's usually when when when retail investors
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  Speaker 1: are built up on equities one time, when it's time
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  Speaker 1: to get cautious and we're not really there yet. Neil,
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  Speaker 1: do you have a recession in your forecast? No, it
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  Speaker 1: seems like how about the one of the arguments or
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  Speaker 1: one of them. I guess the arguments that we hear
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  Speaker 1: from time to time from economists is that you know,
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  Speaker 1: you better settle in for a lower for longer i e.
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  Speaker 1: Lower GDP growth for longer the days of three plus
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  Speaker 1: are over for the foreseeable futures. That's something that you
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  Speaker 1: abscribe to. Yeah, I think that's probably more that's closer
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  Speaker 1: to the mark. I mean, I do think that next
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  Speaker 1: year you could see a sort of a modest inflection
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  Speaker 1: and growth higher. Right, So a lot of the drags
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  Speaker 1: on GDP growth this year probably fade off a little bit. Right. See,
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  Speaker 1: you have seen some manufacturing weakness, Maybe you don't get
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  Speaker 1: as much manufacturing weakness next year. The housing market kind
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  Speaker 1: of follows do into consumer spending undrowable goods, you get
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  Speaker 1: a little bit of inventory restocking. Right, So, um, yeah,
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  Speaker 1: I mean I think that that's sort of good for
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  Speaker 1: maybe two and a quarter or two and a half
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  Speaker 1: percent growth. But you know, I generally agree that you know,
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  Speaker 1: this sort of rapid, you know, kind of leg higher
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  Speaker 1: and growth is unlikely absence some kind of pickup and
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  Speaker 1: productivity which we haven't really seen yet. So uh, that's
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  Speaker 1: good enough for equities, right, I mean, you know, for
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  Speaker 1: what matters for markets? Right? I mean, the economic outlook
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  Speaker 1: is the call. I mean, it's only useful in so
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  Speaker 1: far as it as it's combined with a market call.
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  Speaker 1: And um, and you know, the environment that I just described,
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  Speaker 1: I think is still you know, one where you know,
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  Speaker 1: equity prices grind higher agains. I'm trying to square the
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  Speaker 1: idea that we're about to re accelerate with the idea
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  Speaker 1: that the Federal Reserve just cut rates. Again, How does
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  Speaker 1: that make sense? Well, isn't that what always happens that
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  Speaker 1: cut rates in the economy picks up? Well, hold on
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  Speaker 1: a second, you think that the economy is picking up
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  Speaker 1: because they cut rates? No, I mean, honestly, that's ridiculous
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  Speaker 1: to think that the that the like credit conditions were
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  Speaker 1: too tight and that that was sort of what was
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  Speaker 1: holding things back. I mean, the REFI I just did
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  Speaker 1: lesa disagrees, Really did you? You just refined your mortgage?
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  Speaker 1: Did okay, and just multiply that, I mean, okay, cut
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  Speaker 1: over the last year. So you're telling me the set
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  Speaker 1: isn't pushing on a scrap a stick. But we're pushing
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  Speaker 1: on a stick. But Neil, with the money that you
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  Speaker 1: saved from the REFI and your and your monthly payments
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  Speaker 1: to your mortgage, are you using that money to go
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  Speaker 1: out and buy sweaters and hats and skis and things? Uh?
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  Speaker 1: Well yeah, I mean I mean, I mean it is Christmas. No,
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  Speaker 1: But I just I just think that, Look, I mean
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  Speaker 1: I think it's sort of um, it's to me, it's
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  Speaker 1: a it's a bit misplaced to say that it's not
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  Speaker 1: having an effect, right, I mean, you've seen refinancings obviously
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  Speaker 1: pick up. That's freeing up household cash flow. We know
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  Speaker 1: that home sales are also up, right, so um, you
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  Speaker 1: know that, and uh, you know, we had a little
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  Speaker 1: bit of sluggishness recently. I think because of the GM
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  Speaker 1: strike and what's that, What's what that's doing to inventory?
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  Speaker 1: But you know, if you told someone this time last
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  Speaker 1: year that auto sales will generally be running close to
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  Speaker 1: seventeen millions are for the last five or six months,
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  Speaker 1: you probably I mean, I know if I made that argument,
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  Speaker 1: clients would have laughed me out of the room. But
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  Speaker 1: that's exactly what's happened, right, So you have had some
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  Speaker 1: follow through in two rate sensitive spending. I mean, so yeah.
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  Speaker 1: And you know when Powell says the it's the market
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  Speaker 1: implied path of lower rates and that's what's kept the
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  Speaker 1: economy up. I think he's how do he's he there's
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  Speaker 1: some support for that. Thank you so much. Good luck
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  Speaker 1: with the sweater purchases and the ski purchases. Happy holidays,
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  Speaker 1: and congratulations on refining your mortgage. Neil Dada, Renaissance Macro,
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  Speaker 1: head of US Economic Research. We're just looking at the
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  Speaker 1: SMP this year up almost twenty. Yes, we had a bad, bad,
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  Speaker 1: bad fourth quarters we all can refer to. But what
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  Speaker 1: a turnaround here in to get a sense of maybe
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  Speaker 1: where there might be some legs left in this market.
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  Speaker 1: Return to Sam Stovall, Chief Investment strategists for cf R A, Sam,
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  Speaker 1: thanks so much for joining us. You know a lot
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  Speaker 1: of folks will stepping back and saying, you know, year
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  Speaker 1: every year, it's not obviously as as big as a ramp,
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  Speaker 1: but boy at moving SMP in nineteen, what do I
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  Speaker 1: do now? What do you say to those people? Well,
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  Speaker 1: first off, the market pretty much told us that we
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  Speaker 1: were going to get this kind of a return. We
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  Speaker 1: were up in both January and February, and the twenty
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  Speaker 1: eight times since World War Two that both months were positive.
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  Speaker 1: We ended up posting a full year total return that averaged.
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  Speaker 1: So in a sense, the market said, see, I told
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  Speaker 1: you we did have a challenging made through October period,
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  Speaker 1: but we're now back in the seasonally optimistic period November December,
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  Speaker 1: when the market gains an average of almost three percent,
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  Speaker 1: and we tend to see a gravitation away from the
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  Speaker 1: defensive sectors and toward the more cyclical groups. Sam, it's
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  Speaker 1: been quite a volatile year when it comes to the
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  Speaker 1: narrative that is directing markets. For a while, it was uh,
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  Speaker 1: the trade war will eventually resolve itself, will be fine.
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  Speaker 1: Then people saying that just the uncertainty that has gone
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  Speaker 1: on for so long, is impeding business plans and is
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  Speaker 1: going to impede growth, and has impeded growth. And now
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  Speaker 1: we seem to be back to a place where there
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  Speaker 1: will be some trade trups and the economy will re accelerate.
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  Speaker 1: What happened to the the narrative that we just left
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  Speaker 1: behind UH that there already has been damage done that
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  Speaker 1: could potentially deepen without some sort of resolution. That's significant. Well,
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  Speaker 1: at least I think that the damage has been done,
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  Speaker 1: and that's why we started the year thinking we would
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  Speaker 1: see about a five percent growth in SMP five earnings,
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  Speaker 1: but now the expectation is for a zero point seven
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  Speaker 1: percent rise. But I think investors are pretty much dismissing
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  Speaker 1: two thousand and nineteen and saying, you know that it's
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  Speaker 1: so late in the year. Let's start focusing on two
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  Speaker 1: thousand and twenty, and right now expectations are for about
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  Speaker 1: a nine percent gain. And should we end up getting
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  Speaker 1: the Phase one accord, should we start to see a
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  Speaker 1: falling of relations UH and improvement in GDP growth, the
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  Speaker 1: three interest rate reductions kicking in, I think investors are saying,
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  Speaker 1: you know what, maybe we end up with even more
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  Speaker 1: than the current estimate of close to ten percent. So, Sam,
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  Speaker 1: given that we are ten plus years into this economic cycle,
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  Speaker 1: we have had this big move up. Uh, so far
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  Speaker 1: in what sectors are you favoring versus maybe not favoring
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  Speaker 1: so much? Well, solid but sustainable is what I'm describing.
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  Speaker 1: The economic growth expectations for next year anywhere from two
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  Speaker 1: point two to two point five GDP growth for each
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  Speaker 1: of the four quoters. I'm leaning cyclically right now, overweight
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  Speaker 1: recommendations on the technology communications services area. We recently upgraded
• 11:29
  Speaker 1: our outlook on financials and materials and downgraded our outlook
• 11:34
  Speaker 1: for some of the defensive groups, in particular consumer staples
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  Speaker 1: and utilities. Utilities right now are trading at about a
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  Speaker 1: thirty five premium to its average PE over the last
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  Speaker 1: twenty years going forward. What could potentially happen that would
• 11:51
  Speaker 1: make you turn more bearish? Well, uh, I think bullmarkets
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  Speaker 1: don't die of old age, they die of fright. But
• 11:59
  Speaker 1: they're most afraid of is a recession. Every recession since
• 12:03
  Speaker 1: was preceded by a double digit decline in housing starts
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  Speaker 1: as well as a near double digit decline in consumer confidence.
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  Speaker 1: I would have to see the consumer basically say, I
• 12:13
  Speaker 1: am very worried about my job. I am going to
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  Speaker 1: be holding back on my spending UM, and I would
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  Speaker 1: then expect to see an earnings recession to successive quarters
• 12:24
  Speaker 1: of earnings declines, mainly because since World War Two, sevent
• 12:30
  Speaker 1: of all earnings recessions have morphed into economic recessions. So
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  Speaker 1: I would pretty much have to see a sliding off
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  Speaker 1: the cliff of consumer confidence. Sam. It appears that when
• 12:42
  Speaker 1: you look at the futures market that the market's looking
• 12:44
  Speaker 1: for maybe one more rate cut in the next six
• 12:46
  Speaker 1: to nine months. If that is in fact the case,
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  Speaker 1: is that enough to support your equities outlook? I think so.
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  Speaker 1: UM History tells us that the market advances a little
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  Speaker 1: more than ten percent on average six months after the
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  Speaker 1: first rate cut, and then an average of more than
• 13:05
  Speaker 1: fourteen percent twelve months later. The dividend yield on the
• 13:08
  Speaker 1: SMP five hundred exceeds the yield on a ten year note.
• 13:11
  Speaker 1: Whenever that has happened since nineteen fifty three, the market
• 13:14
  Speaker 1: was up on average of I'm not expecting that kind
• 13:18
  Speaker 1: of growth, but basically, bonds are not really offering an
• 13:22
  Speaker 1: attractive substitution alternative. So right now, what is the one
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  Speaker 1: thing you will not buy. Uh. I am uh not
• 13:34
  Speaker 1: a big buyer of bonds obviously at this point because
• 13:37
  Speaker 1: I think, um, they are pretty much as low as
• 13:40
  Speaker 1: they're likely to go. And Sam just on, we just
• 13:43
  Speaker 1: completed this earning site or we're pretty much done through
• 13:45
  Speaker 1: this earning cycle? Is there any key takeaway from you
• 13:49
  Speaker 1: coming out of this earning season here? Well, even though
• 13:52
  Speaker 1: this is likely to be the thirty first consecutive quarter
• 13:56
  Speaker 1: in which actual results exceeded end of quarter estimates, what
• 14:00
  Speaker 1: I'm not thrilled with is um that we basically had
• 14:04
  Speaker 1: been shaving fourth quarter estimates as well as two thousand
• 14:08
  Speaker 1: and twenty assumptions. Only one of the eleven sectors has
• 14:12
  Speaker 1: seen an increase in their two thousand and twenty estimates
• 14:16
  Speaker 1: as compared with what the forecast was on September, and
• 14:22
  Speaker 1: only one in three sub industries saw a ratcheting higher
• 14:26
  Speaker 1: of their two thousand and twenty earnings. So I would
• 14:29
  Speaker 1: like to see a turnaround in that before I feel
• 14:32
  Speaker 1: overly confident. Just real quick, here we are getting news.
• 14:35
  Speaker 1: Uber's loss currently has accepted nine percent, which means the
• 14:39
  Speaker 1: company's shares have sunk to a record intra day low.
• 14:42
  Speaker 1: Sam just just lastly, here to wrap it all up,
• 14:45
  Speaker 1: we are seeing a bunch of pain in specific company
• 14:48
  Speaker 1: stories in particular. Uh, these some unicorns that are disappointing
• 14:52
  Speaker 1: when it comes to profitability. Do you think that that's
• 14:55
  Speaker 1: just specific to these stories or endemic of something larger.
• 15:00
  Speaker 1: I don't think it's endemic of something larger. Um. I
• 15:03
  Speaker 1: think that these are embryonic companies that are going to
• 15:05
  Speaker 1: be going through uh, growing pains, if you will. I
• 15:09
  Speaker 1: mean most of them really just have no earnings whatsoever.
• 15:12
  Speaker 1: And so we're it's like we're back in the early
• 15:15
  Speaker 1: two thousands one of a lot of the web based
• 15:17
  Speaker 1: companies that we're trading on revenue, revenues and earnings of
• 15:22
  Speaker 1: such assumptions. Um. But so I think a lot of
• 15:26
  Speaker 1: these unicorns right now are just going through the metamorphosis pain.
• 15:31
  Speaker 1: Sam Stobo, thank you so much for being with us
• 15:33
  Speaker 1: c f R, a Chief investment strategist. Thanks for listening
• 15:36
  Speaker 1: to the Bloomberg P and L podcast. You can subscribe
• 15:39
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• 15:45
  Speaker 1: And Lisa bram Woyds I'm on Twitter at Lisa bramw
• 15:48
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