US Equity Bullishness as Concerns Mount in Europe

Published May 6, 2024, 2:10 PM

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Bloomberg Surveillance hosted by Tom Keene and Paul SweeneyMay 6th, 2024
Featuring:

  • Liz Ann Sonders, Chief Investment Strategist at Charles Schwab, on why life's been good for large caps and the bifurcated market
  • Jackie Bowie, Managing Partner at Chatham, discusses the outlook for Euro economies and stagflation across global markets outside the US
  • Aoifinn Devitt, CIO at Moneta, on how bullish traders should be on equities heading into the summer
  • Bloomberg's Lisa Mateo with her Newspaper Headlines


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This is the Bloomberg Surveillance Podcast. I'm Paul Sweeney along with Tom Keene. Join us each day for insight from the best in economics, geopolitics, finance, and investment. You can also watch the show live on YouTube. Visit the Bloomberg Podcast channel on YouTube to see the show weekday mornings from seven to ten Eastern Remark Global Headquarters in New York City. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and as always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business App. And liz Anne Sanders, she's not sitting one hundred eighty nine bion os a cash.

She puts it to work.

Liz Ane Sonder's chief investment strategist for Charles Schwab. I don't know, Lizanne, if you're sitting one hundred and eighty nine billion dollars of cash this morning, what would you do with it?

Oh?

Bill and Chill, I kind of agree with that, but you know the real answer to that, leaving Warren, Buffett and Berkshire. How theway is, you know, we also have a decent size in terms of client assets at what nine point one trillion dollars. But the answer to ascid allocation how much to have in cash? That's obviously specific to each investor. There's no sort of blanket comment about that. But there's income and fixed income and therein lies this story.

So there in lies the story lives. It's great to see you. So Lzianne, where does that leave us?

Then?

How long does that story go on for?

Well, I think you know. Key to the equity market is more on the longer end of the bond spectrum. You've seen this pretty tight inverse relationship between the ten year yield and the US equity market, and the really acute inverse correlation dates back to the middle part of last year when you saw the big move up in the ten year yield from sub four percent to five percent from late July to late October, and that led to almost during the exact same period of time, a ten percent in the s and p twelve percent in the Nasdaq, and then of course yield started to move down, and the early part of that moved down, it was to the benefit of equal weight, it was to the benefit of small caps, and then we saw the yield move up from three point eight to more recently four point seven. The first part of that was largely to the detriment of smaller cap stocks of equal weight sort of down the spectrum, But then when you got up to the four to seven it obviously caused some trouble for the market more broadly. Now I think we're back in that more nuanced part of the cycle where moves up and down and yields is likely to have more of a direct impact down the cap spectrum, where you have the zombie companies, the companies that are more at the mercy of what happens with yields. You know, you've been reporting on it a lot this morning. Many of the larger companies earn more interest on their cash and they pay interest on debt. So I still think that the bond market is in large part in the driver's seat for the equity market market, even more so than this parlor game of when's the Fed, you know, going to cut rates? When's the first meeting? And how quickly and how many.

Lizenne, We're I guess about eighty percent away through the earnings for the S and P five hundred here any takeaways for you one way or the other.

Yeah, So the beat rate on earnings is above the long term average, but below the average over the last four quarters, although the percent by which companies have beaten is decent, but it's the top line number where the beat rate has been well below long term and shorter term. So I think the real key is the companies that have been beating on the bottom line. Particularly if they haven't beaten on the top line, it's largely because of cost cutting methods in order to protect margins, so I think that's part of the underlying story. But we are looking at about a ten percent growth rate, and that excludes the big one time charge for Bristol Myers Squib It would be two or three percentage points lower than that, but since that's one company, one time nature, I'm using more the ten percent number. But we're not seeing much movement in terms of extrapolating that better than expected first quarter into the latter part of the year. So I still think the outlooks are important. And then, as has been the case in recent quarters, companies stocks of companies that have missed earnings are getting disproportionately hurt relative to the reward accrue to companies outperforming expectations, so it just tells you that the market's in a little bit of a skittish state.

Yeah, I mean sometimes those drops like I'm on the closing bell, we report earnings and man, sometimes that punishment as an understatement, so we like a little bit tab in two bill and chill. I've been trying to come up with something really clever and it's not happening, but like large and lush like? Is it large caps and bust?

Like?

Is that?

Is that where you have to just I think it's Yeah.

I think where the factor focus needs to be in things like interest cover strength and balance sheet strong, free cash flow to enterprise value. High return on equity does tend to generally correlate up the cap spectrum, but that doesn't mean that there aren't opportunities outside of those megacap areas. And that's why we continue to think you want to have that factor orientation around some of those characteristics that I just mentioned. I think what you really want to avoid is the ultra low quality zombie company not profitable segment within indexes like the Wrestle two thousand.

Listen and talk to us about valuation. What's your call here. You know, we've had a big run up off those October lows and the stock prices. Earnings, as you mentioned, have come in better than expected. Is that enough to support valuations here?

Well?

Last year was a year where at the at least at the index level, the market did quite well, but we had very little learnings growth. So most of last year was valuation expansion. The recent draw down that we got in the S and P and the nasdact to a greater degree indexes like the Wrestle two thousand, that was largely multiple contraction. Because we're now in positive earnings territory, although importantly not for the Rustle, we're still in negative territory. So valuations are on the rich end of the spectrum. But as I always say, much like I say about sentiment, valuation is a terrible market timing pool. You could talk about it as a backdrop. Markets are still fairly rich, but that is not the same thing as it's sending a message that you need to sell stocks because of rich valuation. Valuations can get rich, centement can get frothy, and it can stay that way for quite some time. As we all learned in the late nineteen nineties, yep.

Absolutely all right, Luzanne, thank you so much for joining us.

As always, Lizzie Saunders, folks, she is a chief investment strategist at Charles Schwabi.

Appreciate getting a few minutes of her time.

We have lots of FEDS speak out today, three two FED speakers, eleven this week. Those are really going to be the main event. We also have some ECV speakers talking today as well, talking about how rates will be lowered gradually over time. One is looking at three interest rate cuts so far this year and again saying that the ECB is independent of FED decisions and that the impact will be contained on the euro Area. Let's get more insight into all this. Jackie Bowie is managing partner and head of EA firm Chatham Financial. Jackie, do you do you agree with that idea that, look, the ECB can cut three times, if they can do what they want, the ECB in Europe is going to be relatively insulated, no problems.

Yeah.

There certainly seems to be some transatlantic divergence and monetary policy, and that really reflects the very different economic conditions in the US versus Urope. You know, we've been talking a year about the strength of the US economy. You know, despite all those rate increases in the last two years, the economy has been very resilient. In the Euro Area, it's the opposite, the economies are extremely weak. The UK had the COVI session at the end of last year, so the divergence and monetary policy I think reflects those underlying economic conditions.

So Jackie, let's start with the UK. What is the Bank of England saying these days? What does a market believe the Bank of England will do.

Well?

There's certainly an expectation that a rate cut is coming early in the summer. So we have the Bank of England meeting and this week, so we'll get the announcement on the ninth of May. The market is really now pricing in a hold for this meeting and the first cut to come slightly later. And I guess that's been the story all year with all the central banks, where you know, the FED and the ECB and the Bank of England. We were all expecting these quite significant rate cuts to come, and what's happened is the timing of the first cut is getting pushed further out and the extent of the cuts being reduced down is to save story for the Bank of England.

But you know, come May nineteenth, there could be a save in Europe that will help growth and maybe boost inflation. What is that. She goes by the name of Taylor Swift. Oh boy, and I say that jokingly, but there was an argument that Taylor Swift's concert schedule in the US last year did a tremendous amount for the economy, and many economists have actually put numbers on it. She kicks off for European tour May ninth. Do you think it's going to materially help like services spending, really help boost growth or at least provide a floor. Joking but serious question.

Well, interestingly, if you look at the two sides of the economy, between the manufacturing industrial side and the services sector side, the services sector side has actually been holding up slightly better. And that's the argument as to why inflation hasn't come down quite so much across Europe, and that that services sector wage inflation has been slightly sticky. So if we get the Taylor Swift about here in Europe, actually it's on the wrong side of the economy. What the European economy, especially Germany, is an improvement in the heavy industrial construction side of the economy.

So Todd gives an update Jackie on on Germany. We know that that's a challenging situation. They have kind of the double whammy, the exposure to Russian from the energy perspective, and then number two, they're you know, exposure to China on the export side. Where is the German economy now and how are the how's the European Center Bank viewing Germany.

Yeah, so there has been some flash data just in the last few weeks which is showing a little bit of signs of recovery, but it's very marginal and generally, you know, economists are still seeing this isn't the start of a recovery trend. And you've hit on the exact two points. Germany's getting squeezed. They have They're very dependent on energy coming from elsewhere Russia pre the war. Those energy prices now they know and year increase in those prices is coming back down, but they're still quite inflated. And as you is an expert led economy led by heavy industrial, the auto sector, and where you're going to have a whole other conversation about the EB market and what's happening there. But Germany's really stuck in the middle. So you're right, the European Central Bank has a bit of a dilemma because the peripheral European economy, so poachspin in Italy, are actually doing a bit better service sector tourism, but then the biggest economy in Germany obviously not doing quite so well. So trying to find a monetary policy stance that can fit both those scenarios is pretty challenging.

What's interesting, though, is that President Jijenping didn't go to Germany, so I went to France and then going to Hungary, basically other countries that have a tangentile tie in essence to rush up. Do you make anything of the fact that president did not go to Germany.

I didn't read into that too much. I'm sure there might have been an underlying message there, but certainly in the in the London headlines this morning, it was very much all around, you know, the Chinese French relationship and how this could be, you know, a bell weather for China and the rest of Europe. It seems like a bit of a leap to take it to that conclusion, but certainly that's the way it's being reported here in London.

To you, all right, Jackie, Given that background, that central bank background across Europe, where are your clients when you talk to them, were they most comfortable allocating capital these days?

Well, Chatham really works and much more in the private capital markets. So we have a lot of clients who are heavily invested into real assets, so real estate and private equity infrastructure. There certainly is still a fairly negative view on big parts of real estate across Europe, and that's completely related to where these interest rates are, you know, combination of the valuation of those assets and also the cost of debt to borrow to fund new investments. So still quite a bit of negative sentiment there. I would say that on the other side, what we would call the infrastructure assets, so that's everything that sits within renewable energy and big public sected infrastructure. That's certainly where we're seeing clients raising you capital and allocating into those alternative energy and infrastructure sectors. So anything in the public markets that also relates to that, I would say, is where capital is being allocated.

What are your clients most worried about then?

Right now, refinancing debt at higher rates.

Of interest and when is that going to come down? Yet, it's a fair point, and when does that strike for them?

It will be the second half of this year. So there's been there was a little half tongue in cheap phrase about in real estate that you just had to stay alive until twenty five and that would mean that interests were coming back down and you would be able to refinance. Now that is correct. The interest rates will be lower in twenty twenty five than beware at their peak of twenty three, but they're still going to be significantly higher than they were at the origination of some of those loans. So this refinancing avalanche, as it's being described, will really start to hit the second half of this year and in the next year. So there's been a little bit of a delay of some of those borrowers refinancing as they wait to see what the interst rate market looks like in the second half.

All right, Jackie, thanks a lot, We really appreciate it. Thank you for your time today. Jackie Bowie, Managing partner at Chatham joining us there on Europe the UK. What clients are worried about? You're in T bills. You're making two million dollars a minute, and by you, I mean one the general investor. I would love to make two million dollars a minute. Here with more is even devitt a cheap global market. It is over at Monetta, even T bill and chill. When you're taking a look at treasury paying at two million dollars a minute, what do you make of that? It's where we have been. Cash is no longer trash.

It's a great place to stash money and to sit on dry powder. That has certainly been the case for the last eighteen months. However, we've seen investors get a little certain about that, especially with the FOMO we've seen around equity markets and inflation staying hi that hash yield. Remember, after inflation what we're thinking about isn't quite as compelling, but it has put pressure on bond substitutes, so things like infrastructure, real estate, defensive stocks, they are all suffering from this. But as we can see from the rally in markets, it isn't making any dent in the desire for growth participation and some of those higher octane stocks you know, I saw over.

The weekend that out West and Tahoe the skiers. I got like two or three feet of snow over the weekend. They're gonna be skiing to like July fourth here, And that was picked up by Ethan. How do you equate the snowfall out west to your market? Call Ethan, it's funny.

I always look for parallels in real life, and we've had a bit of a surprise.

I love skiing.

I wouldn't say I'm an expert, but I do love it. And just what they've said about the I follow all the ski resorts and they're saying as long as possible, They're staying open as long as possible, and that's that open ended the joy that the Springs skiers see. I saw parallel to that with some of the rhetoric from the FED at last week's meeting that they will leave rates high essentially as long as possible. So there's going to be not much certainty in terms of the timing of rate cuts. And just like the snowpack is looking at one hundred and thirty percent of its medium, we still have inflation at one hundred and thirty percent of its average, so it's around three percent, whereas we would hope it'd get closer to just two percent. That's at least the target. So we're not there yet. Some are making hay and the ski slopes. But for the FED, it's that open endedness of it, which I thought didn't seem to spook markets.

I thought it would.

Actually markets have been surprisingly resilient. I even thought that the jobs number on Friday not being as robust would spook markets. To have had the opposite effect, and that markets seem to have taken from that that the pressure on labor is going to be more subdued, that lead in to the inflation point is going to be less of an issue, and then maybe we will get to that soft landing no landing scenario that they've been thinking about. So Marcus just seemed to be incredibly resilient. Like the snow resorts right now.

Is is it weird to get snow.

In May like that? No, No, it is crazy out there.

They've had some good snow. But when it snows in Tahoe, it snows huge because you get the stormsure off the ocean, right, So that's not weird.

But keeping rates this low with the data may be weird. I mean this high, I should say, like this high versus the data, Like, is that weird? Is that sort of an anomaly that financial conditions, for example, continuing to get looser. You take a look at sluice in your loan Office of Survey and lending standards aren't as tight as they might have been other times in the cycle, Like, that's weird, No, it is.

I mean it's interesting. I think that the Fed right now is looking at the inflation number, looking at this ongoing tightening that they're doing behind the scenes by slowing their purchases and actually trying to offload part of their balance sheet. So that is a tightening measure. So they really are continuing to tighten, and as inflation falls, those interest rates will start to pinch more. And simply the fact that the longer these high rates are in effect, the more consumers and companies will be forced to refinance, so that transmission effect is going to start to bite even more. So even though they're doing nothing, it's still a pretty tight environment. And the question is how long can consumers stick with that? And you know, we're already feeling the cumulative effect of inflation that hasn't gone away. We're seeing the gas price increased at the pumps, and this geopolitical uncertainty that is just swirling in the background, and as the US election nears, it's going to get more and more noisy there, not only domestically, but it seems unfortunately internationally.

So I do see quite a lot of.

Risks there to this market resilience, and as you said, there isn't really that loosening that look to kick off anytime soon.

Given that background, Even where are you suggesting your clients allocate capital these days?

We're definitely more interesting to hear just the notes from Warren Buffett about AI and clearly this concentration in markets around AI and technology. We can't ignore that we've never had a strict thematic approach. We've always been believers in more of a core, broad based approach. We were encouraged by some of the sectors that rallied in the first quarter. It was pretty much across the board, we had strong performance. We're also encouraged by a suggestion that a cut in rates, when it finally does happen, will be good for mid cap and small cap stocks, so that should then again add some breath to this rally, which has been very large cap focused. So we're pretty keen on equities still as before, we've always been diversifying. Right now, around real estate we're a little hesitant. We haven't seen the movement and prices to suggest we're at of bottom yet, so real estate we'd be more hesitant. But as far as picking sectors. Another thing we're exploring is around just how digital assets are maturing. We're taking a look at Bitcoin two point zero. We're still on the education phase. There's a lot to learn about how that behaves in a portfolio. But since Warren Buffett seems to think that this is a casino economy that we're in, we need to know what the odds are at that casino and to try to put a little bit of fundamental research behind the kind of red black conundrum that investors may feel they're facing.

Which pairs to the point that Paul and I talked about Friday, that David Busters is allowing some gambling when it comes to physical stuff in their restaurant's total side note, But nonetheless, I would put money on myself for ski ball versus Paul. But you know, whatever you mentioned, even small cap stocks, for example, if the FED does wind up cutting, does that mean you expect that to be more of a normalization versus the economy struggling. Therefore I must cut. Therefore, small caps make sense, I.

Would think so.

I mean, small caps have really been on the back foot for a long time. They've got very little attention. They've never seen that kind of rally. They would have been pinched by inflation, less pricing power, high interstrates, just generally less leverage at the bank with banks, with credit providers. The one thing that might have been good for small cap stocks recently would have been the M and A trend which is around this just simply acquisitions by large conglomerates. They would have been trying to buy up some stocks. So a few tailwinds that mostly headwinds. Yes, I would think that they will do well if the economy remains strong and the FED does a normalizing rate cut. Clearly, if we're in economic woes, that will be hard for small caps. The mom and pop shop generally doesn't do well in that environment. So it's not a very high conviction call, I'll have to say, but it is relating to just a reversion to the mean, some kind of normalization as to how these sectors and cap that segments perform, right, Thank.

You, so much for joining us.

Ethan Devit, chief global market strategists at Moneta groupment all right, folks, you're deadly look at the front pages around the world at.

Least some MATEO. What do you got first today?

All right, it was something we were talking about earlier.

You mentioned it too, Alex. The Boeing spacecraft set to carry the astronauts for the first time tonight. So it's the Starliner blasting off ten thirty four pm Eastern from Florida two astronauts of the International Space Station. They're going to return them to Earth about a week after. But it's really going to test whether it's ready to handle like these NASA missions. But it's it's been a struggle. The project led to a one point four billion dollar accounting losses for Boeing.

But it could be good news.

I mean, Boeing could use some good news, right it's facing all the safety issues with its airline business.

But yeah, this is this is happening tonight.

So if I'm an astronaut and my little nervous getting on it, I don't know, I don't.

I mean, I think if you're an astronaut, are you kind of used to these things from I mean apparently Boeing has around a one and a half billion dollars extra costs to cover these starliner and delays some technical problems, and you would hope that they would all be sussed out. Also, I didn't know this, but the Ula rocket is partly owned by Boeing and Lockheed Martin. So I just thought that was really interesting. And they're both thinking about trying to like spin off that steak in in this Pentagon and contractor, but it hasn't happened yet. I just found that interesting. Also in terms of.

I'm not allowed to know what he works on.

Really, Yes, he's on I need to know basis.

Yeah, he tells me you don't need to know that something.

I was like, Okay, I'm sure he savors that. He savors that away.

I still pay for his phone bill.

Will oh that might stop.

I don't know.

I feel like that. And the Netflix, that's a little schedule.

I think we took care of that.

I'm definitely looking forward to that. That's going to be super fun just to see how that all goes. Lisa, what else are you interested?

So?

This is what Paul is right up your alley with the paramount. This is The New York Times said that since those guidance talks ended that a special committee their Paramounts Board of directors, they signed off to begin deal talks with Sony Pick Entertainment Apollo. You remember last week they bid that offer for the company around twenty six billion in cash.

So, well, Steve, who this goes?

You know they if they'll push further for negotiations with sky Dance two on top of this, So it's kind of opening it up, opening up the bidding.

Yeah, this one feels more real to me. You've got a real teagic player and Sony. You've got a real financial player and Apollo, So you think they can come up with the money.

You think they can add value there.

I don't know what the regulatory environment is for putting two big studios, the Sony Studio and the Paramount Studio together.

I'm sure there's gonna be some regulatory review there. But this one feels a little bit more real.

The question comes down to will this deal result in a premium pay to Sherry Redstone and her controlling shares. That's what she wants, and will she get it in this transaction?

Well?

Off to see.

Apparently, the Financial Times They're reported that James Cameron on Ari Emmanuel are actually backing the sky Dance bid. Whether or not that actually means something material isn't great, but they both came out in favor of.

That, both players. But they're not in this realm.

In this I think you need some seriously deep pockets like Apollo and some serious strategic value like Sony could work.

I say, I wonder if sky Dance would come back.

I mean, yes, sweetened the deal.

Could they sweeten it anymore?

You who knows? Did you go to the movies this weekend?

That's what I want to ask you, guys. Did you know what I really wanted to see? Fall?

Guys?

Okay, there you go. And you're not the only one who did not see The Fall. It's a Ryan Gosling. Ryan Gosling, Yes, he plays like this action star. But it didn't do well at the box office.

So it was one hundred and twenty five million dollar production Comcast Universal Pictures. It brought him just twenty eight and a half million domestic box office over the weekend. I mean, you thought he brought in the boost for Barbie, but it didn't do it with this one.

I will see it okay, that weekend. I mean you got Emily Blunt, Ryan Gosling and Hannah Wattingham. I mean, I don't know what more you could possibly want. You get cheesy romance, you get things going. This movie was literally made for Alex Steele.

Yet you did not go. Yeah, you did not watch the Derby this weekend. To do this weekend? What did I do?

I did some Blandis and I slept on Saturday. Oh, I played a skey ball. I played sky Ball on Saturday with my daughter in Industry City. That's good. So this is Paul and I. We both like the ski ball. So I got a couple of thousands to.

Get Alex down to the Jersey shore this summer. People forward to walk a little sky ball, I tell you if so. The question is, will any movie this summer make a billion dollars in box?

I mean they said there's too big. There's inside Out to which might be a maybe you'll take your daughter that one. And then there's also Deadpool and Wolverine.

So Deadpool, sorry, I can talk for like hours, I mean Deadpool Wolverine. I will like take the day off work. I will like stay overnight like I hustled to see.

This movie and who's Who's the Deadpool Day?

He's the other Ryan, the other Ryan Ryan. Both from Canada. Both really funny. Not for the kids, both definitely.

I know.

I think that the rumor is that Taylor Swift is supposed to be in that, So that makes my daughter really really really excited to go see it and we're like, sorry, kid, like there, why is it are? It's like r plus it was like not freaking really okay, imagine all the cursing and anything inappropriate is in this movie, which is why it's so good.

All right.

Last thing, Yeah, ABC News president Kime Godwin stepping down. This was a big thing that came out Sunday night. She sent an email out to staffers. She was named president twenty twenty one. She worked for CBS before that. They don't know who's going to take over from here on. But it was a tough role, like it just said, there was. It was a cutthroat, toxic work environment. That's where people were saying, good morning America. Ratings kind of went down a bit, but it's.

Tough, all right, ABC News.

I mean it's you know, you wonder where in the world of streaming and cord cutting, and you know where the investment in broadcast network you tell me, yeah, I know it used to be Obviously, it used to be. The real pride and joy of a network was your news organization, whether it's CBS, ABC, at NBC. But now, with you know, declining viewership due to cord cutting, what's the investment that those businesses require?

You know, I don't know. And so that's interesting there, and it's it.

They just did a lot of restructuring in February, so it took a lot of away of her management type.

Okay, this is also very difficult because you need the you need the day to day stuff to feed the content to feed the beast for streaming and for digital, right, but it can't just be that and you need so what that balance is I don't I don't think anyone's figured that out.

Podcasts, but now we're runing around.

Yeah, but then it's only podcast and something's got to give. Everyone gets a podcast, you'll dilute it, I know, exactly.

All right, Lisa Miteo with the newspapers, thank you very much. We appreciate that. This is the Bloomberg Surveillance podcast bringing you the best in economics. Geopolitics, finance, and investment. You can also watch the show live on YouTube. Visit the Bloomberg Podcast channel on YouTube to see the show weekday mornings from seven to ten Eastern from our global headquarters in New York City. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and as always, on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business app.

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