US Equity Bullishness as Concerns Mount in Europe | Bloomberg Podcasts
[Music] Bloomberg audio Studios podcasts radio news this is the Bloomberg surveillance podcast I’m Paul Sweeny along with Tom Keane 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 7:00 to 10:00 Eastern from our global headquar 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 lizanne Saunders she’s not sitting on $189 billion of cash she puts it to work lizanne Saunders Chief investment strategist for Charles Schwab I don’t know lizanne if if you were sitting on $189 billion of cash this morning what would you do with it uh Bill and chill I kind of agree with that but but you know the real answer to that leaving leaving Warren Buffett and Brookshire haway is side you know we also have a a decent size in terms of client assets at $9.1 trillion but the answer to asset allocation how much to have in cash that’s obviously specific to each investor there there’s no sort of blanket comment about that but there’s income and fixed income and and therein lies um this story so there in lies the story Liz it’s great to see you um so lizan 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 10-year yield and the US Equity market and and the Really acute inverse correlation dates back to the middle part of last year when you saw the big move up in the 10year yield from sub 4% to 5% from Late July to late October and that led to almost during the exact same period of time a 10% correction in the S&P 12% in the NASDAQ and then of course yield started to move down and the early part of that move down it was to the benefit of equal weight it was to the benefit of small caps and then when you saw the yield move up from 3.8 to more recently 4.7 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 47 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 in 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 than they pay interest on on debt so I still think that the bond market is in large part the in the driver’s seat for the equity parket Market Market even more so than this parlor game of when’s the fed you know going to cut rates uh when’s the first meeting and and and how how quickly and how many lizanne we’re I guess about 80% away through the earnings for the S&P 500 here any any takeaways for you one way or the other yeah so the the beat rate on earnings is is above the long-term average but below the average over the last four quarters although the percent by which companies have beaten is uh decent but it’s the the Top Line number where the beat rate has been um well below longterm 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 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 10% growth rate and that excludes the big onetime charge for Bristol Meers squib it would be two or three percentage points lower than that but since that’s one company one time in nature I’m using more the the 10% 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 I still think the outlooks are important and then as has been the case in recent quarters companies stocks of companies that have U missed earnings are getting disproportionately hurt relative to the reward accw to company’s um 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 and we report earnings and man sometimes that that punishment is an understatement so if we like a little bit t t 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 focus yeah I I I think where the where the factor Focus needs to be in things like interest cover strength of 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 are’t opportunities outside of those Mega cap areas and that’s why we continue to think you want to have that factor orientation around some of those characteristics that I that I just me mentioned I think what you really want to avoid is the ultra lowquality zombie company not profitable segment within indexes like the Russell 2000 uh lizan talk to us about valuation what’s your call here um you know we’ve had a big run up off those October lows in the stock prices earnings as you mentioned have come in better than expected is that enough to support valuation J well last year was a year where the at the at least at the index level the the market did quite well but we had very little earnings growth so most of last year was valuation expansion the the recent draw down that we got in the S&P and the NASDAQ to a greater degree indexes like the Russell 2000 um that was largely multiple contraction because we’re now in positive earnings territory although importantly not for the Russell we’re still in negative territory so I I valuations are on the rich end of the spectrum but as I always say much like I say about sentiment um valuation is a terrible Market timing tool 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 senam can get frothy and it can stay that way for quite some time as we all learned in the late 1990s yep absolutely all right lizanne thank you so much for joining us as always lizanne Saunders folks she is a chief investment strategist at Charles Schwab we appreciate getting a few minutes of her [Music] time we have lots of fed speak out today three two fed speakers 11 this week that’s those are really going to be the main event we also have some ECB speakers uh talking today as well talking about how rates will be lowered gradually over time one is looking at three interest rate Cuts uh 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 and head of EMA uh fir chadam Financial um Jackie do do you agree with that idea that look the ECB can cut three times the FED can do what they want the ECB in Europe is is going to be relatively insulated no problems yeah there certainly seems to be um some transatlantic Divergence and monetary policy um and that really reflects the very different economic conditions in the US versus Europe you know we’ve been talking all year about the strength of of the US economy You know despite all those rate increases in the last two years the econom has been very resilient in the Euro area um it’s the opposite the economies are extremely weak the UK had a technical recession at the end of last year so the Divergence in monetary policy I think reflects those underlying economic conditions so Jackie let’s start with with the UK what is the Bank of England saying these days what does the market believe the bank of England will do well there’s certainly an expectation that a rate cut is coming um early in the summer or so we have the bank of England meeting and this week so we’ll get the announcement on the 9th of May the market is really now pricing in a hold um for this meeting um and the first cut to come um slightly later and I guess that’s been the story all year with all the central banks where you know the fed and the um ECB and the bank of England we were all expecting these quite significant weight 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 it’s the same story for the bank of England but you know come May 19th there could could be a savior 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 s’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 uh May 9th 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 um 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 effect here in Europe actually it’s on the wrong side of the economy what the European economy is especially Germany um is an improvement in the heavy industrial construction side of the economy so talk give us an update Jackie on on Germany we we 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 their um you know exposure to China on the export side where is the German economy now and how are the how’s the European Central Bank viewing Germany yeah so there has been some um Flash data just in the last few weeks which is showing um a little bit of signs of recovery but it’s very marginal and generally you know Economist are still saying this isn’t the start of a recovery Trend and but you’ve hit on the the exact two points Germany’s getting squeeze they had they’re very dependent on um energy coming from elsewhere Russia you know pre the war those Energy prices now the year on year increase in those prices is coming back down but they’re still quite inflated and as you say it’s an export Le economy led by um heavy industrial the auto sector and we could have a whole other conversation about the EV 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 economies so Portugal Spain and Italy are actually doing a bit better service sector tourism um but then the biggest economy in Germany obviously not doing quite so well who’re trying to find the monetary policy stance that can fit both those scenarios is is is pretty challenging what’s interesting though is that President xianping didn’t go to Germany so went to France and then going to Hungary basically other countries that have a tangental tie in essence to Russia do you make anything of the fact that President X did not go to Germany um I didn’t read into that too much I’m sure there might have been an underlying message there but C certainly in the in the London headlines this morning it was very much all around um 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 too all right Jackie given that background that Central Bank background across Europe where are your clients when you talk to them where are they most comfortable allocating Capital these days well chatam really works and much more in the the private Capital Market 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 um 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 and to fund Investments so still quite a bit of negative sentiment there I would say that on the other side what we would call the infrastructure asset so that’s everything that sits within renewable energy and big public sector infrastructure that’s certainly where we’re seeing clients raising new capital and allocating into those um alternative energy and infrastructure sectors so anything in the public markets that also relates to that I would say is where capsule 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 yeah it’s a fair point and when does that strike for them um it will be the second half of this year so there’s been there was a little um half tongue and cheek phrase about in real estate that you just had to stay alive until 25 um and that would mean that interest rates were coming back down and you would be able to refinance now that is correct the interest rates will be lower in 2025 than they were at their peak of 23 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 into 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 interest rate Market looks like in the second half all right Jackie thanks a lot we really appreciate appreciate thank you for your time today Jackie Bowie managing partner at chadam uh joining us there on Europe the UK what clients are worried about if you’re in t- bills you’re making $2 million a minute and by you I mean one the general investor I would love to make $2 million a minute uh here with more is Ethan devit uh Chief Global Market strategist over at Moneta um Ethan t- Bill and chill when you’re taking a look at treasury paying out $2 million a minute it 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 18 months um however we’ve seen investors get a little un uncertain about that especially with the fomo we’ve seen around Equity markets and inflation Staying High that cash 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 defens of stocks they are all suffering from this but as we can see from the rally and 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 in Tahoe the skiers they got like two or three feet of snow over the weekend they’re going to be skiing till like July 4th 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 I always look for power in real life and we’ve had a bit of a surprise I’m 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 spring 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 um not much certainty in terms of the timing of rate cuts um and just like the sow pack is looking at 130% of its median we still have inflation at 130% of its average so it’s around 3% whereas we would hope it get closer to 2% that’s at least the target so we’re not there yet um some are making hey 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 it seems 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 that that lead in to the inflation point is going to be less of an issue and that maybe we will get to that soft Landing no Landing scenario that they’ve been thinking about so markets just seem to be incredibly resilient like the snow snow Resorts right now is it 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 when it snows in Tahoe it snows huge because it get the storm through off the ocean right so that’s not weird but keeping rates this low at the data may be weird I mean uh this High I should say like this High versus the data like is that weird is that sort of an anomaly um that Financial conditions for example continuing to get looser you take a look at slooh senior loan office survey and lending standards aren’t as tight as they might have been in 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 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 pretty tight environment and the question is you know how long can consumer stick with that um 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 um quite a lot of risks there to this Market resilience but and and as you said there isn’t really that loosening that look to kick off anytime soon given that background Ethan 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 midcap 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 we’re pretty keen on Equity still as before we’ve always been diversifying right now around real estate we’re a little hesitant we haven’t seen the movement in prices to suggest we’re at a bottom yet so real estate would’ be more hesitant but as far as picking sectors another thing where explor exporing is around just how digital assets are maturing we’re taking a look at Bitcoin 2.0 we’re still on the educ 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 um 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 uh in their restaurants total side note but nonetheless I would put money on myself for ski ball versus Paul but you know whatever um you mentioned Ethan small cap stocks for example um If the Fed does wind up cutting does that mean you expect that to be more of a normalization versus the economy is 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 would have been pinched by inflation less pricing power High interest rates just generally less leverage at the 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&a trend which is around this buy just simply acquisitions by large conglomerates they would have been trying to buy up some stocks so a few Tailwinds but 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 the environment so it’s it’s not a very high conviction call I’ll have to say but it is um relating to just a reversion to the mean some kind of normalization as to how these sectors and and cap segments perform right Ethan thank you so much for joining us Ethan Dev Chief Global Market strategist at Moneta group [Music] all right folks your daily look at the front pages around the world Lisa Matteo what do you got for us 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 10:34 p.m. Eastern from Florida two astronauts to the International Space Station they’re going to return them to Earth about a week after but but it’s really going to test whether it’s ready to H handle like these NASA um missions but it’s it’s been a struggle the project led to a $ 1.4 billion accounting losses for Boeing um 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 um but yeah this is this is happening tonight so let if I’m an astronaut am I a little nervous getting on it I don’t know I don’t I mean I think if you’re an astronaut aren’t you kind of used to these things um I mean apparently Boeing has around one and a half billion dollars in extra costs to cover these Starliner delays and Technical problems and you would hope that they would all be uh sussed out also I didn’t know this but uh the Ula rocket is uh partly owned by Boeing and lock heed Martin so I just thought that was really interesting and they’re both thinking about trying to like spin off that stake in in in this Pentagon and contractor but it hasn’t happened yet I just found that interesting also in terms of Martin I’m not allowed to know what he works on really yes only 2 so cool he’s need to know bases yeah and he he tells me you don’t need to know Dad so I was like okay I’m sure he Savers that he Savers that anyway I still pay for his phone bill though oh oh that might have to stop I don’t know I feel like that uh and the Netflix too that’s a little sketchy I think we took care of the Netflix I’m definitely looking forward to that uh that’s going to be super fun just to see how that all goes um Lisa what else are you interested in yeah so this is what Paul is right up your alley with the Paramount um this is the New York Times said that since those Sky Dan talks ended that a special committee their par mounts board of directors they sign off to begin deal talks with Sony Pictures Entertainment Apollo you remember last week they bit that offer for the company around 26 billion in cash uh so we’ll see where this goes you know they they if they’ll push further for negotiations with Sky Dan too 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 strategic player in Sony uh you’ve got a real Financial player in 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 Stu Studios the Sony studio uh and the Paramount Studio together I’m sure there’s going to 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 paid to Sher Redstone and her controlling shares that’s what she wants um and will she get it in this transaction we’ll have to see apparently the financial times though reported that James Cameron and R Emanuel are actually backing the sky Dan bid whether or not that actually mean something material something very different 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 can bring well say I wonder if Sky Dan would come back I mean sweeten the deal could they sweeten it even more who knows that’s um did you go to the movies this weekend that’s what I wanted to ask you guys did you see anything no but I really wanted to see Fall Guy okay there you go and you’re not the only one who did not say uh it’s a Ryan Gosling Ryan goling yes he plays like this action star um but it didn’t do well at the box office so it was1 125 million production Comcast universal pictures it brought in just 285 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 you I mean you get Emily Blunt Ryan Gosling and Hannah winingham I mean I don’t know what more you could possibly want you get cheesy romance you get things blowing up this movie was literally made for Alex steel yet you did not go you did not you did not watch the Derby what did you do this weekend what did you do this weekend what did I do I did some Pilates and I slept what did I do on Saturday oh I played ski ball I played ski ball on Saturday with my daughter at industry City in that’s good yeah so let is Paul and I we both like the ski ball so I got got a couple thousand we’re gonna get Alex down to the Jersey sh this summer people Boardwalk a little ski ball I tell you if so the question is will any movie this summer make a billion dollars in box office the thing I mean they said there’s two big there’s inside out two which might be maybe you’ll take your daughter that one and then there’s also Deadpool and Wolverine oh oh dead so a Deadpool I love sorry I could talk for like hours I mean Deadpool muline I will like take the day off work I will like stay overnight like I will hustle to see this movie and who’s who’s the Deadpool guy he’s the other Ryan yeah the other Ryan Reynold Ryan Rey both from Canada both really funny not for the kids definitely I know I think the 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 R it’s like R plus is like not for KS really okay imagine all the cursing and anything inappropriate is in this movie which is why it’s so good very good all right ABC news last thing ABC News president Kim Godwin stepping down um this was a big thing that came out Sunday night she sent an email out to staffers um she was named president 2021 she worked for CBS before that they don’t know who’s going to take over um from here on but it was a tough role like it it just said there was it was a Cutthroat toxic work environment that’s what people were saying um Good Morning America ratings kind of went down a bit but um it’s a tough position 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 is the investment in broadcast network news 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 NBC um 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 uh so that’s interesting there so and it’s it they just did a lot of restructuring in February so it took a lot away of her management type um okay but this is also very difficult cuz 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 podcast rning around yeah but then it’s only podcast and something is got to give everyone gets a podcast you’ll dilute it I know exactly all right Lisa Matteo 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 7:00 to 10: 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 [Music]
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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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