Old Growth Is New Again

Published Jul 9, 2021, 6:49 PM

Well, so much for that reflation and reopening trade. David Bianco, chief investment officer for the Americas at DWS Group, discusses why high-growth, digitally focused companies are back on the stock market’s leaderboard. 

Mentioned in this podcast:

The Great Reflation Trade Is Buckling Around the World

Hello, and welcome to What Goes Up a weekly markets podcast. My name is Mike Reagan, and I'm a senior editor at Bloomberg. And this week on the show, well, it kind of feels like someone pulled the rug out from under the reopening and reflation trade that so many investors were gung ho about. Treasury yields are sinking, banks, energy and travel companies have vanished from the leaderboards of the stock market, and those old usual suspects, the tech and internet mega cap stocks are back in the driver's seat. What should we make of it all? Well, we'll get into it with the chief investment officer for the America's at a major asset management firm. But first, apologies to Charlie Pellet fans, but this week's co host is no mystery to our listeners. It's our old friend, Katie Greifeld, the cross sass every reporter and co host of Take Stock on Bloomberg. Quicktake, Katie. Great to have you back on the show. Thanks for inviting me. I'm I was excited to get your invite. Oh good and no offense, Katie, But I think you might be our least mysterious co host when it comes to mystery cost like I can predict. I think I could predict your weekend already. Can I try? Yeah, go for it. I'm curious. Okay, So Friday we all know starts with the famous Friday tweet from you with with a cat and the milk bath. Then, of course, then something involving animals in the weekend, either a horse or turtles, anything like that on top sounds about right like most Fridays. I'm going to tweet the cat at about four pm, gonna ride out the rest of the day. Then I'm going to drive to New Jersey, stay at my parents house, and probably go horseback riding. Okay, I promised. I have a vibrant social life. I'm married, people love me. I just go to New Jersey every weekend. There's there's nothing wrong with that. Also, I wanted to ask you about you had a a very tremendous outing last week. I think it was the Olympic Trials, the Olympic track Trials. Tell me about that, did I'm so glad you asked. I'm dying to talk about it. I went to Eugene, Oregon to catch the Track and Field Olympic Trials. Since I don't think I'm going to Japan. I don't think I'm gonna make it to Tokyo. I don't think, yeah, no, I'll get stopped at the door. So, I mean, I'm a huge track fan. Obviously, track has been in the news quite a bit the past week with Shackery Richardson. But I did get to see her run before that, so right, and so you didn't know one knew one so afterwards that she was going to be suspended and not able to compete, right, she she did the trials, so you got to see her run. That's interesting. What's your take on all that? So I think the failed drug tests she tested positive for marijuana was on June, so it's a one month suspension. It's not a like a hefty band or anything. But because of the date that had happened, it disqualified her results from the trials. So even though she's our fastest woman at the one, she can't compete, and it's it's I think it's hard for Americans. I mean, it's hard for me to wrap my mind around it that marijuana is considered a performance enhancing drug and that she can't compete in the Olympics, because I mean, it's legal in so many states here, but we're talking about international rules here, so STANDI too different. My joke, of course, was that you know, marijuana makes you slow and lazy, so if you're caught, we're not going to let you go win medals at the Olympics. That that's the thing. It's like, Okay, her time is arguably more impressive knowing that you know she was smoking marijuana having it in some form beforehand, Like that's those are fast twitched muscles you need. Doesn't go hand in hand with cannabis. Now you must be you must be tempted to put strap on the track shoes and get get there and fill that spot. You know if my country, it's me all right, well we need to hear on the podcast and uh now we're going to introduce the guests. Really excited to have this guest. He is, as I said, the chief Investment officer for the America's at DWS. His name is David Bianco. David, welcome to the show. Hello, Mike, thanks for having me. Great that. Now, David, I want to talk about sort of what we uh flicked at in the introduction there, and it seems to me that this week, um and maybe the last two weeks there's kind of kind of been sort of a repricing in the market of what to expect from the economy. Maybe people are a little less gung ho as they formerly were about how strong and how long this this boom from the economic reopening will be. I'm curious what your take on that is. How are you you know, has anything changed materially for for the economic outlook? Is this kind of a just a growth scare we're going through. What's your what's your opinion? Well, Mike, I think the weather is changing, but not the climate. And what I mean by that is that this reflation of view and trade that people have been playing since the start of the year and about the reopening of the economy, the ref the reflation trade and the big inflation fears are blowing over, but the recovery is still with us. We still very much believe in a recovery, continued economic growth, even at an accelerated pace for the next couple of years. And what we think is happening is simply a return to the leadership of the digital and growth stock businesses in the equity market. So, whether it's changing but not the climate, it maybe a return to the normal situation of what we had within an economy and investment leadership prior to the pandemic, and so before we you know, really dig into you know, digital businesses and how you invest around that view. I want to talk a little bit more about this week because it's felt very um just very dramatic, and I'm curious, you know, when you look at what's happening with the bond market, with treasury yields, how that's bleeding through into equities. I mean, what is the trigger people really really concerned about the delta variant, for example, or is is this more positioning sort of wash out going on. It's a few things, and I guess they're each worth pointing out. What we've seen happen is a surprising decline uh in in long term treasury yields, as you said, from the about one point seven five percent back in March to one point three percent right now, even one and a quarter percent on an intra day basis. And this all occurred over the past several months. As most investors, including us, we're expecting interest rates to continue working their way upward. So why did interest rates um they collapse of the dramatic word, But why do they fall so much and so quickly when everybody was expecting the opposite. So yes, it may be people on winding a crowded bit of expecting interest rates to rise, but there's some good reasons for why this has happened at this moment, and that includes that. First, if you go back to the June fo MC meeting and and share Powell's press conference, he did a very good job of using his communication skills and communication tools. What he did was he acknowledged that inflation is uh running a bit hot, and he discussed that when the time comes, they will take their other tools to contain inflation, and and that that made the currency market a lot more comfortable that when the time comes, the FED will defend the dollar and keep inflation anchored close to its two two and a half percent expectation. So one, it started off with reassurances from the Fed that when the time comes, they'll take action and they've got the tools to take action, and we saw the dollar fine support and that was the first um trigger to bringing bond investors back with some confidence. Secondly, there's been these delays in new fiscal stimulus legislation many people figured there'd be an infrastructure package passed by the fourth of July, and then that has not happened, and there's fears that there may not be any legislation before the August recess. So we we still expect some stimulus packages, but probably a little bit later and a little bit more moderate and size than had been previously discussed UH back during the UH the elections, and and and afterward. And then third, yes, the delta variant this is this is with us, and it is a real threat to those in the world and those countries that don't have the vaccine. So it through as a wrinkle in the reopening story, certainly for the world as we're still struggling after all this time to fully return to normal UH in this in this pandemic UH. And then the idea that there would be tons of fiscal stimulus UH coming, we might have to wait longer, a little bit more moderate in size, And the FED has made it clear they're not going to let inflation run out of control in the coming years. For those reasons, tenure yields dropped UM because I think it's surprised everybody's expectations. But we do think that interest rates will grind upward over time, and our view here at THEWS as as a tenure yield, whether it be a year from now or not much longer than that, we do think the tenure yield will get back to above. It's interesting, you know, every time the bond market moves, it always seems like the stock market looks at the bond market as sort of the wiser older brother sister who knows something that you don't, and and stock market, you know, it takes its cues from that. David. Obviously, we're approaching sort of the beginning of earning season for the second quarter. Um, we're gonna get a fire hose of new information, uh, you know, not only reported results, but outlooks for the rest of the year. I guess the one kind of top of mind question I have is is there any concern about all these supply bottlenecks uh and and supply issues that that we're hearing about. Is that set the stage for possibly some some downward surprises and earnings in certain sectors? In your mind, I mean, are there some companies who because of these issues are not really able to participate in this booming rebound like they would otherwise if the supply chain was was functioning normally. Yes, there's challenges and meeting demand, and there's there's uh uh there there there's higher cost to many cases to to meeting demand, and part of that is because of a more lots sided nature of the demand. Everybody kind of ran to one side of the ship and wanted goods rather than the normal services that they would consume. During this pandemic, they went from their urban lifestyle to more of a suburban lifestyle, and they've turned their homes into their offices and their schools into their So the point is, yes, there's been demand ships, and there's been challenges in in responding to that demand. This is part of the reason why there there there are some signs of of inflation running hot right now. Um, And we'll talk more about inflation in a moment. But I think during earning season you will come across companies that point to not being able to achieve both the sales that they could have achieved owing to inventories being too light or their supply chains being bottlenecked. Um. But I actually think you're going to find more of those challenges at companies that are related to the reopening that are related to UH to goods demand. The funny thing is the digital side of the economy isn't having any trouble responding to demand. UM. Their growth is occurring and and they're keeping up with the demand very well with very low sometimes no incremental costs. Yeah, turn on another server in the cloud somewhere and it's aneviable business. I was trying to find the stat but Bank of America had a great statu last earning seasons that if you look at the number of mentions of inflation on earnings called it had gone up something like. That's not an exact number, so don't quote me, but I'm curious, David, I do want to hear about your expectations for this coming earnn's earning season. And also something I think about, uh, you know, every three months, is how much do earnings really matters? That really, uh, the most important signal for the stock market. It's supposed to be, but is it actually short answer, it is certainly one of the very most important aspects UH earnings, not just earnings today, but the earnings outlook of course, but earnings and interest rates, and then on certainty around earnings and interest rates, thus the risk premium, your discount rate. Those are the three things that drive the equity market. UM. So any insights we get on an important driver like earnings now and and for the outlook, yes, it's very important. And second quarter earning season is upon us. UM. We are going to go through this ritual of we all know that the companies are going to beat the analyst expectations. It happens every single quarter, other than when there's economic shocks that come on suddenly and then the earnings missed and it's part of a recession beginning UH. Other times, the aggregate earnings beat is usually about three percent, and usually two thirds of companies UH beat on the earnings estimates. What's happened in the recent quarters, including the first quarter, more than the companies beat the estimates. And in the first quarter the beat was and aggregate it was tremendous. We went into the first quarter earning season saying the numbers are too low, they're going to be beaten by at least ten percent, and we're saying the same thing for the second quarter right now. The analyst bottom up number for the SMP five aggregate earnings just forty five dollars per share. We expect that to be beaten by at least ten percent. That if we're gonna get fifty or higher of earnings in Q two, what I would tell you is what's ahead is a whole bunch of you know, beat reports from companies, But it is entirely expected from the equity market that if we don't have at least a ten percent, at least a double digit type of beat, that will be a disappointment. UM investors are basically valuing the SMP right now on the idea that there's at least two hundred dollars of annualized earnings power, and we saw very very close to that in the first quarter of this year forty nine per Sure, some things like lone loss reserve at leases helping to boost the earnings, but with the economic growth that we've seen during Q two, US real GDP growth should be eight uh growth on an annualized basis. That and even just the seasonality of second quarter earnings being stronger than first quarter, we expect in there and we very much believe there will be over fifty dollars of earnings out of out of the season. I've said a lot, but what I want to tell you, really, what I think would be interesting is if, on a sequential basis, the digital stocks, the tech communications, and the growth stocks in general, if they can keep pace with the same type of growth rates sales earnings as the big cyclical reopening place, if they have similar growth rates, If this is the moment for deep cyclicals to shine, and yet such of the growth stocks still have earnings of growth, that's pretty comparable. It may be again the reason why that reflation trade is whether that's fading away. So David, Uh, can you break it down for us, UH as far as kind of what what the house view is at THEWS, as far as allocation. You know, it sounds like you're pretty bullish on sort of the fang type of names that the digital uh, you know, heavy internet type of stocks. Uh, let me know if that's fair to say. And sort of what else, you know, where else in the market are you looking for opportunities and what are you kind of underweight at the moment. Yes, we are bullsh tech, We are bullish growth stocks, UM. But our biggest message since the start of this year, late last year was stay diversified. It's an uncertain environment. It's still the early years of a new expansion, new policies, UM, new investment trends, some of the some some of the same trends digitalization E s G, but some new ones to UH, what exactly we're gonna do if on the clean energy front out front faster we're gonna move toward that, UM, what's going to happen to the disrupted businesses versus the disruptors? Point is, UM, we don't want to uh take any oversized UM macro risks. What we are doing is we are moderately overweight equities UH, equity allocation versus normally for our moderate risk portfolios and ask an allocation were moderately overweight equities, moderately underweight fixed income the same about five points. And then within equities UH. Right now, since the start of the year, we've been overweight foreign equities both Europe and and Asia. UH. And then within the United States, we started the year overweight small caps. Now we're equal weight. The rest of our allocation in the United States is tilted toward growth, and our our idea was it was better to find value opportunities energy industrial materials abroad, such as in Europe. UH. And we stuck with the growth stocks, but plus banks in the United States, we've been underweight US energy industrials and materials companies. And so I'm curious to hear your FED expectations UH specifically both in terms of you know, when they actually uh move off of zero, but also obviously there's been a lot of taper chatter in the past few months. We had the talking about talking about meeting UH from the FED in June. How do you factor taper like the potential of a taper into your asset allocation view is right. So our view on what monetary policy is likely to be over the next few years is that is about using communication tools and that's a very powerful tool and share Powell did a good job of it at the f OMC media in in the press conference in June, as I said, but we do not think uh they taper until two. They may lay out a plan UH for when they do it UH in late one, but we don't believe they actually reduced the one billion dollars of purchases a month until and then they'll taper over the course of two, probably bring it to to zero or close to zero over a twelve month period, and then the lift off conversation, what will the Fed do with rates? We believe the Fed will not high rates until three UM about communications two about tapering, about h aiking rates, we don't think they hike until but how fast they hike and ultimately what rate they hike to is an uncertainty and one that ties back to inflation. So we are we would say no hikes for now, but there you know, a couple of years away, and when they come, we're not entirely sure where they plateau. But if fiscal policy is right sized, then the Fed probably doesn't need to go too far above two in order on the overnight rate to keep inflation close too. And David, obviously, one of the the sort of Fed watcher events this week was there had been a lot of speculation that maybe the Fed would start tapering their mortgage backed security purchases before before the treasury purchases. That notion seems to have been squashed this week by the Minutes and some other communications. UM. But to rewind a little bit to what you were saying about that hot housing mark, it I gotta say, boy, for any of us around back in oh six oh seven, UM, in the in the whole boom and bust cycle of the housing market. Um, it's hard not to have a bit of a flashback. I mean, obviously the structure of the you know, structured finance world is not as vulnerable I hope anyway, knock on wood as it was back then. UM. But still you gotta wonder about this super hot housing market and you know what that means going forward? Um, it's not a risk, it's sort of an overheating of the housing market, or risk in your mind has it overheated already? And how do we sort of how should we sort of think about housing going forward from here? I think the best way to think about housing is it is cyclical. Um. It is a long cycle UM. Industry, sector of the economy. UM. And sometimes it's something you just can't fight too much. And and yes, you know, we all have views on and when markets get overheated, UM, And sometimes we turn to policy centers to try to adjust things. But you know, the FED would quickly make the point that their tools are blunt tools and there's only so much they can do. And should they really change their asset purchase program because some people think the housing market is is too hot in terms of price UM. So I think it's one thing for them to comment about it carefully, um, but probably stay the course on their plans, you know, and responding to broader things like the labor market and inflation measures broadly before they change any of their big policy tools like asset purchases and and so forth. And and then you have more to your your your your question. Though my view on the housing market is, um, it's sending a very valuable price signal right now. It is saying we need more housing. It is haying that part of the pandemic has been that people are using homes as more than a place to hang their hat. H It is it is their office, that is their school, It is their sanctuary, is their oasis. And in these times, I think the pandemic might have been one of these life experiences where people say, I'm just gonna live for the moment, and if there's this car or boat or home I wanted they make, might be moving more quickly to do it. Certainly, the interest rates are low, and so a lot has come together to make a special moment for housing, and that doesn't mean it will last forever. I have argued that things like home prices, car prices commodity prices. These are the kind of things where I think we should be pretty comfortable with. The idea may take some Timeally, in the case of housing, that high prices will help fix high prices, there will be a supply side response. I don't see those things as persistent sources of inflation. UM. So I mean to answer your question, I do think the housing markets a little overcooked, but not that it's unhealthy. I don't expect to collapse in prices. Again, this ties back to interest rates. Um. But I do also think there will be a supply response. And then it's not as easy as it wasn't the US to do it, but there will be a supply response. Don't forget it's you know, it's easier for workers to be wherever they want to be and for new housing stock to be placed wherever you can place it versus, you know, next to city centers in the past. Right that that makes a lot of sense. David uh and Katie's David said, the housing markets sending a signal that we need more housing. I'm gonna send a signal that we need more crazy things. That's that's I was wondering where we were going with that it's usually I'm not very mysterious either. You can you can spot a segue for me. Come come into MILEA. So stand clear of the craziest things we saw in markets this week, David, we have a attrition. Some make including myself, may call it a gimmick here, but it's a lot of fun. We call it the craziest thing I saw in markets this week. Katie, let's start with you. I'm curious what your craziest thing is. Okay, so this this story. So there's this. It's sir goal. It's an issuer of a stable coin, a stable coin for people not in the crypto weeds. It's digital currency. It's peg to another asset sometimes that's the US dollar anyway, Circle which issues the U s DC stable coin. It's going public via a spack in a four point five billion dollar deal. And this is crazy to me because it feels very much like a January February one story. Like I thought we were over crypto. I thought we were over spacked. So this was to see this headline was kind of a blast from the past. That's pretty good. If you can marry crypto to a spack, I think we've reached peakslow for Yeah, yeah, I thought we were past the peak, and I don't know, maybe we never got off the mountain. It keeps getting more and more every day. Yes, you never know when that peak is. Really of of crazy things like that, that's pretty good one. I agree, I and uh, I kind of missed a boat on that. I had wanted to write a story just on the notion of stable coins. And it's tremendously harder than it sounds to get a crypto to actually trade it that one dollar price. It's it's an interesting phenomenon. I mean, I'm so obsessed with tether and the fact that it's it's just a money market fund. It just owns commercial paper. But that's a whole another podcast. That's a great way to think about it. And also you can think about it when a money market fund does break the buck, how traumatic that can be for markets. So so something keep an eye on for sure. How about you, David, what's the craziest thing you've seen recently? Well, maybe on a serious note, I mean, the crazy thing in markets over the past week was the surprising decline in interest rates, and yet the most of the Bonafi bond substitutes and the equity market. The utility sector didn't really budge it's interest rates are this low and and felt recently you tell what you should be doing better. Another disconnect was just the way we see these big cap tech names in the United States keep climbing to the sky and a lot of people running for the hills when it comes at least Americans anyhow. With with with Chinese technology stocks, Uh, well, there's some reasons for that, but uh, these are these are great companies, Eastern technology, Western technology, great companies. I I think, uh, there's some opportunities in those those Chinese stocks and technology stocks. Um. I don't know. It was fourth of July not so long ago. That was a wild time. I think for a lot of people is getting back out outdoors and uh enjoying themselves, uh without masks. Uh. I'm from Long Island Port, Washington. There's a fifty boat raft up out there, big party, a lot of fun. But you know what, I think there's gonna be a lot of boats for sale at the all right, that's got that's good. I wouldn't mind picking up a cheap boat here in New Jersey. I'll keep keep my eye out for that. But it's a great point about the China stocks trade in the US. I mean, I think they would call that a rug poll in the in the crypto world. What happened with and I confess I don't know do you pronounce a D D or diety the I've been saying d D. No one's corrected me. But yeah, I mean it's nuts. I think it's it's just fallen. Not every day since it's ipl but pretty much. And that was just last week. Yeah, yeah, I think that's a story. Uh, this China crackdown on Chinese company trading in the in the US, I think that's a story to watch. That's an interesting Uh all right, I'm gonna go with mine. As listeners know, I like the alternative st class and I really love for some reason, I don't ask me why, but I love antique documents as an asset class. So this story is courtesy of the Belfast Telegraph and very timely with the the euro Football Championship going on. But a copy of the earliest printed rules of Football will be auctioned later this month. Um. It was one of two surviving copies of the first rules printed in eighteen fifty nine by the World first football club, which was Sheffield in northern England. So it's time to play prices, right, David and Katie. Um, And this hasn't gone talction yet, but they listed some of these listed in expected bid for the first printed rules of football. And I will put out pretty interesting that some of the rules have survived all these years. The indirect free kick, the corner kick and stuff like that. We're in these original rules in eighteen fifty nine. So Katie, what's your bid for the original rules of football? Okay? Sorry, just to clarify, we're talking about like American football, soccer, soccer soccer. Okay, alright, I thought we were in England for a moment. Okay, so so soccer. I have no idea. I'm just gonna embarrass myself and say fifty grounds. I don't know, all right, I'm gonna I'm gonna keep a poker face on that. Um. Okay, prices right, rules are in effect. So you you could go under fifty grand or or you could go fifty thousand and one. Uh, I'd go over fifty thousand. UM. I often asked myself, you know, what is it? What would this be worth to who? And what does it means to those people to pay. If it was the NFL would be worth probably a little bit more than this, you know, than than European football soccer. But yeah, I'm gonna go with over fifty thousand. Hopefully it's on some nice parchment, so you'll so you'll go, uh, fifty one dollar. I gotta say, I'm stumped here. I don't know who to anoint the winner, because the answer is fifty thou pounds exactly. So I won, So Katie said fifty grand, she didn't denote the currency, and David said over, So I think I think you're both winners. I think, well, you guys, yep, you split the whatever prices, right, Uh it's a new car. That's always the big prize on the prices, right. But uh good, that's a great guest, Katie. Usually you're you're a high bidder. Usually you're you're you're above you know, and I try not to be. I just have I mean, after the whole n f T craze, I have no idea how much anything as well, who knows what anything's worth anymore? It's it's who knows, it's it's whatever the you know, the greater fool theory is in full effect and a lot of these things. But speaking of greater fools, I think that's time for me to say goodbye and thank you both Katie and David. Really great conversation. David, I really enjoyed here in your thoughts and uh, hopefully we'll get you back again to talk about markets once again. That'd be great. Thanks Mike, thanksty What Goes Up. We'll be back next week and so then you can find us on the Bloomberg Terminal website and Apple or wherever you get your podcast. We'd love it if you took the time to rate and review the show on Apple Podcast so more listeners can find us. And you can find us on Twitter, follow me at Bring Anonymous. Katie greyffeldt is at a greifeld can also follow Bloomberg Podcast at podcast. I think you to Charlie Pall of Bloomberg Radio and the voice of the New York City Subway System. What Goes Up is produced by Top of Forehead. The head of Bloomberg Podcast is Francesco Leaving. Thanks for listening. To see you next time.

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