Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day
Speaker 2: for insight from the best in markets, economics, and geopolitics
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Speaker 2: top story, the S and P five hundred posts and
Speaker 2: its best day in more than a month. As investors
Speaker 2: look through messy politics, Brian Leavitt of Investco rights in
Speaker 2: this I don't believe that these markets will be trading
Speaker 2: based on Trump's or Harris's prospects, but rather on the
Speaker 2: direction of the economy and FED action. I find the
Speaker 2: talk of the Trump trade versus the non Trump trade
Speaker 2: to be much ado about nothing.
Speaker 3: Frank, good morning. That's music to the ears of a
Speaker 3: lot of people.
Speaker 2: After politics has dominated the conversation in this country, in
Speaker 2: this market as well, for the last few weeks, what
Speaker 2: do you think is the number one issue right now.
Speaker 4: I think it's the direction of the economy.
Speaker 5: And so you may remember I was here about a
Speaker 5: week ago and I said, for the first time in
Speaker 5: a while, I'm getting a little bit more defensive. Then
Speaker 5: you have a big rally in small caps. In my
Speaker 5: thought as oh, these folks are never going to have
Speaker 5: me back. But I still continue to believe that we
Speaker 5: want to be a little bit more defensive. It doesn't
Speaker 5: mean equities can't do well. But to what you were
Speaker 5: talking about earlier, it's the larger cap, it's the higher.
Speaker 4: Qualities because growth slowly.
Speaker 5: Now, ultimately, I think the Federal Reserve pivots. So for
Speaker 5: the week after I was on the show, the focus
Speaker 5: was on the FED cutting rates. Now the focus is
Speaker 5: a back towards growth slowing. We'll get to the point
Speaker 5: where the focus is again on the FED. We've priced
Speaker 5: in the couple of right cuts now and things.
Speaker 4: Will broaden out.
Speaker 5: But in the near term it's more of a defensive
Speaker 5: environment as the economy slows.
Speaker 2: I've got a quite in front of me from Morgan Stanley,
Speaker 2: and I think it might resonate with you. It's from
Speaker 2: Lisa Shanna she said, I'm like sickle and unlike cycles.
Speaker 2: When fed rate cuts procede, recession and reaccelerating economic growth
Speaker 2: sustainably impacts the high bit of small cap cohort. This time,
Speaker 2: a goldilock soft landing is apt to reward large cap
Speaker 2: quality names that can deliver margin gains despite modest economic growth.
Speaker 3: Is that how you're thinking about things?
Speaker 5: It is, although I wouldn't say that it doesn't involve
Speaker 5: the small caps because if you can get through this
Speaker 5: period with as without a recession, I agree, then large
Speaker 5: caps should do well.
Speaker 4: The broad market should do well. But typically, if you look.
Speaker 5: Historically, when the yell curve normalizes the ill curve normalizing,
Speaker 5: you tend to see more participation from small and value
Speaker 5: and investors have been wondering why.
Speaker 4: This market's been so narrow.
Speaker 5: We've had twenty months of an inverted yell curve, maybe
Speaker 5: twenty one months of an inverted yell curve now, so.
Speaker 4: That's a challenge. This will change as we normalize the curb.
Speaker 5: But the problem in the short term is that we've
Speaker 5: priced in the ray cuts in the economy slowly.
Speaker 4: You know, we've priced in a couple.
Speaker 5: So we'll need to see more carried through and more
Speaker 5: signs that this economy can be resilient before before things
Speaker 5: start to broaden again.
Speaker 6: I like that the market message and the political message
Speaker 6: is the same. It's the economy stupid, and look at
Speaker 6: what's going on with respect to consumers and their happiness level.
Speaker 6: Are we getting a signal from the likes of vps, from.
Speaker 4: The likes of the airlines, from some.
Speaker 6: Of the commentary that we've heard early coming.
Speaker 4: Out in this earning season that.
Speaker 6: Highlights just how quickly growth is slowing.
Speaker 4: To you, yeah, I think so. And look, we have
Speaker 4: to remember that was the wish.
Speaker 5: You know, it was a year ago when things were
Speaker 5: robust and everybody was worried about inflation, and we heard
Speaker 5: things like hyper inflation and stagflation, and everyone was trying
Speaker 5: to be hyperbolic on these things. I was never going
Speaker 5: to be the case. The reality was the Fed was
Speaker 5: going to slow the economy, the fiscal stimulus was going
Speaker 5: to moderate, and consumers we're going to start to slow down.
Speaker 5: Inflation was going to come back into the comfort zone.
Speaker 4: So that's where we are.
Speaker 5: So we can't wish for something and then when it happens,
Speaker 5: be disappointed that it's happening.
Speaker 4: And so, yeah, things are slowing in the US. The
Speaker 4: global economy slowing. The US is a big part of that.
Speaker 6: Right now, how do you assess whether this is just
Speaker 6: one data point on a different kind of trajectory downward
Speaker 6: that's perhaps a little more traumatic versus simply the Goldilocks
Speaker 6: softening that everybody was hoping for.
Speaker 5: Well, if you look for the guideposts on a path
Speaker 5: to recession, usually see cyclical access.
Speaker 4: We don't have that.
Speaker 5: We do have the inverted you'll curve, so so far
Speaker 5: we we're one out of two.
Speaker 4: You see signs that the economy is.
Speaker 5: Slowing, you look at survey data. It's not great, but
Speaker 5: it's not collapsing. And then the most important one is
Speaker 5: our credit spreads widening and our bankers tightening lending stand
Speaker 5: there's not really so you would look at that and
Speaker 5: say the economy is in reasonably good shape. It doesn't
Speaker 5: suggest a recession, but the survey data suggests things are
Speaker 5: certainly slowing down.
Speaker 7: If you don't think right now, the Trump first non
Speaker 7: Trump trains much ado about nothing. When does it become
Speaker 7: something to do about something?
Speaker 4: I'm not sure it does.
Speaker 5: I know my big north star and that I've been watching.
Speaker 4: It the entire time.
Speaker 5: From the day Trump was elected through the day Biden
Speaker 5: was elected, the market was up seventy percent. Since Biden's
Speaker 5: been elected, the market's up seventy something percent. So I'm
Speaker 5: not sure why people focus on this that much. And
Speaker 5: I'll give you an example. When it looked after the debate,
Speaker 5: post debate, and Trump's numbers are going up, probability of winning.
Speaker 5: I'm getting these notes in my inbox that say, okay, here's.
Speaker 4: The Trump trade.
Speaker 5: Crypto goes up, European defense companies go up. You want
Speaker 5: to be short Chinese equities, And I'm scratching my head saying,
Speaker 5: wasn't that the.
Speaker 4: Last four years? Right? That's exactly what happened over the
Speaker 4: last four years.
Speaker 5: The other thing is, if I were to have been
Speaker 5: here in November twenty sixteen when Trump won and I
Speaker 5: said what would win, traditional energy or clean energy, everyone
Speaker 5: would have said traditional energy.
Speaker 4: Clean energy won by a lot.
Speaker 5: The exact opposite happened under Biden, where.
Speaker 4: Traditional energy one by Latin.
Speaker 5: I have people saying to me, you know, drill, baby, drill,
Speaker 5: If Trump wins, surely we're going to get back to drilling.
Speaker 5: We're drilling more barrels of oil right now than ever
Speaker 5: before you US history. So I think people are looking
Speaker 5: at this wrong. I think people have their own perceptions,
Speaker 5: their own confirmation biases that they bring to it.
Speaker 4: But when you dig deeper, right.
Speaker 5: The Trump traders energy and financials, Energy and financials did
Speaker 5: better under Biden than they did under Trump. So it
Speaker 5: just doesn't add up when you look deeper into it.
Speaker 2: Let's park history, and let's focus one specific thing, policy
Speaker 2: and where we are right now. If you come in
Speaker 2: now and cut immigration and put up tariffs and put
Speaker 2: wolves around the United States of America, do you not
Speaker 2: see how that would be inflationary? If you extend the
Speaker 2: twenty seventeen tax cuts, do you not see that that
Speaker 2: would be boosting the deficit at a time at a
Speaker 2: time where actually they are things that people are nervous about,
Speaker 2: the prospect of inflation reaccelerating the ability of the treasury
Speaker 2: market to handle that additional supply.
Speaker 5: Well, it may also be happening at the same time
Speaker 5: that the consumer's slowing a bit in here, so you know,
Speaker 5: the u of counteracting forces against inflation, things like AI,
Speaker 5: things like older population. So I wouldn't necessarily say it's
Speaker 5: inflationary to the market. What's going to mapp most on
Speaker 5: all these things as clarity give us some understanding of
Speaker 5: what this looks like, rather than when we did it
Speaker 5: in twenty eighteen, there was uncertainty, and so business investment
Speaker 5: dried up for a while with the lack of understanding
Speaker 5: of what it was going to look like. So long
Speaker 5: as there's clarity, the business environment will be able to
Speaker 5: handle its, consumers will be able to handle it and
Speaker 5: look the realities. Both sides seem to want to pursue
Speaker 5: somewhat of an American First agenda, So there's not a
Speaker 5: substantial amount of difference with regards to this America First approach.
Speaker 2: All those conversations about politics you've been having on Wall
Speaker 2: straight frasing cub Water, Oh life from Brian Levitt, I'm
Speaker 2: investco Bran is going to see it.
Speaker 3: Here's the latest.
Speaker 2: An unofficial ap tally has harrised, passing the number of
Speaker 2: pledge delegates needed to secure the top of ticket. President
Speaker 2: Joe Biden calling into campaign headquarters to offer his support.
Speaker 2: In his first public comments since ending his campaign, Isa
Speaker 2: Bortansky Btig says, this, we continue to believe it will
Speaker 2: be a close race, and we maintain our view that
Speaker 2: Trump is the slight favorite. Isaac joins us now for
Speaker 2: more is so let's start with the numbers. Follow the money.
Speaker 2: Eighty one million dollars race in twenty four hours, more
Speaker 2: than one hundred million dollars donated for the campaign since someday,
Speaker 2: and yet your fundamental view hasn't changed, Isaac White.
Speaker 8: So look the.
Speaker 9: Money that came in for the Harris campaign, I think
Speaker 9: is a representation of the relief that's washed over the
Speaker 9: Democratic Party given that Biden is stepping aside, and they
Speaker 9: think that they have someone who can prosecute the Kese
Speaker 9: against Donald Trump in this election. But our review of
Speaker 9: this is that we still have probably seven or eight
Speaker 9: different narrative changes between now and November fifth. And when
Speaker 9: I peel back that onion, I look at the swing
Speaker 9: seats that are going to define this right, the ones
Speaker 9: that are going to actually decide this election, and you
Speaker 9: look at those six states. The issues that animate voters
Speaker 9: the most in those six states thus far have been
Speaker 9: immigration and inflation. And if that's still the case on
Speaker 9: November fifth, I think that Donald Trump is going to
Speaker 9: be the next president.
Speaker 8: The caveat here is.
Speaker 9: No one knows what we're going to be talking about
Speaker 9: in one hundred and five days. If I keep in mind,
Speaker 9: it was just twenty five days ago or so when
Speaker 9: the debate happened and it reset.
Speaker 8: The entire election.
Speaker 9: So we're going to have to deal with these narratives
Speaker 9: changing and during that time of great uncertainty. I'm just
Speaker 9: going to keep going back to what animates the swing
Speaker 9: state voter when you look.
Speaker 4: At the issues.
Speaker 7: This is why a recent poll showed that actually majority
Speaker 7: of Americans thought Trump's presidency was excess versus Biden's. If
Speaker 7: that's the case, then how does Harris differentiate herself from
Speaker 7: Joe Biden? He said there he wants to go on
Speaker 7: the campaign trail with her.
Speaker 4: Does she want him there? Yeah?
Speaker 8: Look, I think that in certain places. Absolutely.
Speaker 9: I think that President Biden's going to spend a whole
Speaker 9: lot of time in Pennsylvania over the next few months.
Speaker 9: But I think that the Biden and excuse me, the
Speaker 9: Heritage campaign got to get used to saying that now
Speaker 9: is going to enjoy some of those contrasts emory Like,
Speaker 9: I really think I don't think there's any example in
Speaker 9: modern political history of a vulnerability like age becoming weaponized
Speaker 9: this quickly with the switch in the top of the
Speaker 9: Democratic ticket. Age was their greatest weakness. It is now
Speaker 9: the cudgel that they're going to use to push back
Speaker 9: against Trump.
Speaker 8: So that's what you're going to hear a fair amount about.
Speaker 9: You're going to hear the fact that Trump is a
Speaker 9: convicted felon, the vice president is a former prosecutor.
Speaker 8: And of course we're going to hear an enormous amount about.
Speaker 9: Reproductive rights, given that that's the one area that you've
Speaker 9: seen Democrats have success with animating voters in those swing states.
Speaker 7: And she's been the face of that for this administration.
Speaker 7: But beyond reproductive rights, she was a prosecutor, but he
Speaker 7: was a vice president and a senator. But we haven't
Speaker 7: really understood what her core values aren't a lot of
Speaker 7: policy issues what differentiates herself.
Speaker 8: Look at at the moment.
Speaker 9: The way that I'm thinking about this is I'm telling
Speaker 9: clients that there really isn't much daylight between Biden and Harris.
Speaker 9: I think that a Harris one administration would look a
Speaker 9: whole lot like Biden won. There is good reason to
Speaker 9: believe that Harris is more progressive ideologically than Biden, but
Speaker 9: this has been a relatively progressive administration the past few years,
Speaker 9: so I don't see much of a shift there. Furthermore,
Speaker 9: we've got to keep in mind presidents are often limited
Speaker 9: by the other side of Pennsylvania Avenue, right, and we
Speaker 9: still firmly believe that the Senate is going to switch
Speaker 9: to Republican control, So what can be done there is limited.
Speaker 9: I do think that there are going to be subtle
Speaker 9: areas of difference in terms of trade policy and in
Speaker 9: terms of how they would push forward on the issue
Speaker 9: of fiscal fiscal policy in these firing tax cuts, but
Speaker 9: it's all very subtle when you compare it to how
Speaker 9: Trump would do those things.
Speaker 6: Isaac markets would agree with you, and betting markets seem
Speaker 6: to suggest that generally people do believe that Trump still has.
Speaker 4: The edge, although it has narrowed to slightly.
Speaker 6: I am wondering though, about the bigger issue some people
Speaker 6: are saying, which is there is new energy in terms
Speaker 6: of bringing out voters that potentially that could affect the
Speaker 6: down ballot races for a congressional House, House and Senate.
Speaker 8: See do you buy that argument for the moment?
Speaker 9: Yeah, I mean, look, the most surprising stat of many
Speaker 9: over the past few months has been the yawning enthusiasm gap.
Speaker 9: When Biden was at the top of the ticket, seventy
Speaker 9: seven percent of Republicans were happy with their candidate. Only
Speaker 9: about a third of the Democrats were happy with their
Speaker 9: candidate when Biden was at the top of the ticket.
Speaker 8: You're going to see that normalized and you're going to.
Speaker 9: See that gap close, and I think that will have
Speaker 9: an impact on the House races. And this is something
Speaker 9: that I think is important to hit. The House is
Speaker 9: going to be closed no matter what. That is the
Speaker 9: reality from the gerrymanderd system that we all live in.
Speaker 9: So the House is going to be plus ten or
Speaker 9: fifteen seats one way or the other. So it will
Speaker 9: be very very close. And in that instance, I do
Speaker 9: believe that you're going to have an impact from this,
Speaker 9: and I think that it pushes back against the red
Speaker 9: wave narrative that we had all been seeing over the
Speaker 9: past few weeks.
Speaker 8: I think the House is going to be very very close.
Speaker 8: My bed is the house.
Speaker 9: Goes whichever way the White House does, but it will
Speaker 9: be within a few seats.
Speaker 2: I want to speak to what you're telling your client base,
Speaker 2: specifically the client base in the domestic community. When you
Speaker 2: put out the note over the weekend following this decision,
Speaker 2: there's a line that jumped off the page to all
Speaker 2: of us around this table, you said, focus on electability
Speaker 2: and not policy. Just build on that a little bit more.
Speaker 2: What have you been telling clients about that?
Speaker 9: Well, I think after the disastrous debate, the performance, I
Speaker 9: think everyone was trying to parse where the policy differences
Speaker 9: would be between Harris and Biden, right, And we were
Speaker 9: all going through her Senate record, We're going back to
Speaker 9: her actions as age in California, And I just don't
Speaker 9: think that there's much value in that because they replace
Speaker 9: the top of the ticket on the Democratic side, not
Speaker 9: because of policy, but because of age and cognitive capacity.
Speaker 4: Right.
Speaker 9: And I think that the similarity between Harris and Biden
Speaker 9: is a feature, not a bug.
Speaker 8: And so to me, it's just really.
Speaker 9: A question of how she impacts this race rather than
Speaker 9: the policy substance. So is she able to change the
Speaker 9: dynamics in Georgia and get voter turned out within the
Speaker 9: black population, which is unclear that Biden was able to
Speaker 9: do in Georgia. It's unclear if that would have been there.
Speaker 9: How is she going to impact women and independent voters
Speaker 9: in some of those swing states in the Sunbelt. Those
Speaker 9: are the things that I think matter way more for
Speaker 9: markets and all of us trying to get our arms
Speaker 9: around this election than subtle differences between them between Biden
Speaker 9: and Harris and their policy perspectives.
Speaker 3: Isaac.
Speaker 7: With that being said, was JD Vance the right pick
Speaker 7: for Trump at.
Speaker 9: The moment, But it sure doesn't look like it was right.
Speaker 9: I mean, I think that hindsight is something that really
Speaker 9: underscores the humility that all of us should have here.
Speaker 9: But at that moment, I think that Trump wanted to
Speaker 9: run up the score with his base, right. He wanted
Speaker 9: this to run up the score in Ohio and Pennsylvania
Speaker 9: and Michigan and Wisconsin with white, non college educated voters.
Speaker 9: And I think that at that moment he didn't worry
Speaker 9: too much about some of the other subsets. And Jade
Speaker 9: Vance really does not help you with many other voter groups,
Speaker 9: and so at the moment, it.
Speaker 8: Sure doesn't look like the right one.
Speaker 9: But I think A Marie really underscores the importance of
Speaker 9: who the vice president picks as her running mate, and
Speaker 9: I think that she is going to focus intently on
Speaker 9: someone that can help her in one of those swing
Speaker 9: states to broaden the base. That's why you're looking at Joshapiro,
Speaker 9: the governor of Pennsylvania, or even Andy Bisheer.
Speaker 3: Isaac, thank you, sir.
Speaker 2: Just want to flo over the last couple of days
Speaker 2: on at both times Kid of BTIG. With earning season
Speaker 2: ramping up, Jill Careyhole of Bank of America writing this,
Speaker 2: we still think pockets of small caps are poised for
Speaker 2: continued down performance. Be selective near term, focus on value
Speaker 2: stocks where we'd still stick with quality or profitable value.
Speaker 3: Jill Joonice.
Speaker 2: Now for more, Jill, good morning, this is your turf,
Speaker 2: this is your world, so let's get straight into it.
Speaker 3: Small caps.
Speaker 2: When I buy the Russell, what am I buying and
Speaker 2: why should I be buying it at the moment?
Speaker 1: Well, I think you know, we had gotten more cautious
Speaker 1: on the Russell two thousand as an index back in
Speaker 1: April when the inflation data had continued to come in stronger,
Speaker 1: and you know, really we highlighted there was two things
Speaker 1: that we need to see to get more bullish on
Speaker 1: the Russell as an index, and one is you know,
Speaker 1: more confidence of the FED will be able to begin
Speaker 1: that cutting cycle, which now is what we've started to
Speaker 1: see in what was a big driver of the rally
Speaker 1: we've seen over the past week or two. I think
Speaker 1: the other is fundamentals and profitability, and that's where you know,
Speaker 1: the Russell does have a high proportion of unprofitable stocks
Speaker 1: that saw much bigger earnings recession than the S and
Speaker 1: P five hundred, And that's where I think investors are
Speaker 1: a little bit worried because when you look at the
Speaker 1: beginning of the year, investors were expecting that by this
Speaker 1: earning season, small cap profits would have come back, recovered
Speaker 1: been better than large cap profits growth, and that's not
Speaker 1: what we've seen. We've seen, you know, a lot of
Speaker 1: hope held out for fourth quarter this year, a very
Speaker 1: strong recovery, but the first, second and third quarters of
Speaker 1: this year estimates have gotten revised down significantly. So I
Speaker 1: think that's what you know, we really need to see
Speaker 1: if we want to see if this rally sustainable. Is
Speaker 1: you know, can we get good earnings day to this
Speaker 1: earning season not only surprises to the upside, but the
Speaker 1: guidance that supports that the fundamental backdrop is healthy for sus.
Speaker 2: So let's pick a sector, a dominant sector on the RUSS,
Speaker 2: the financials. We can talk about a financials. The regions
Speaker 2: have been a big part of the story. Now for
Speaker 2: the best part of twelve months, we've had a big
Speaker 2: rally there. Do you think this reason to believe earnings
Speaker 2: will pick up and reaccelerate as we start to interest
Speaker 2: rates at a federal reserve, that things get better for
Speaker 2: that cohort of companies, right?
Speaker 1: Yeah, I mean financials has definitely been a big leader
Speaker 1: of the rally recently, and certainly, you know, if we
Speaker 1: see an outlook where we're looking for FED cuts, where
Speaker 1: we're looking for soft landing, you know, no significant deterioration
Speaker 1: in the economy that should be supportive for financials. I think,
Speaker 1: you know, when you look at factors like the regionals
Speaker 1: and credit conditions, that's still a risk that's out there.
Speaker 1: So you know, if we're in a backdrop where where
Speaker 1: the Feds cutting because economic conditions have deteriorated significantly, credit
Speaker 1: spreads are rising, that would be more negative versus a
Speaker 1: backdrop where the econ is still supportive. But certainly for financials,
Speaker 1: you know, I think we've been due for a catch up,
Speaker 1: you know, especially within small caps. You know, looking out,
Speaker 1: I think we still would be more cautious on some
Speaker 1: of the regionals in its scenario where you want to
Speaker 1: be selective in relative to the large caps, which you know,
Speaker 1: large already got regulated, they saw their multiples contract for
Speaker 1: a number of years after the financial crisis. Regionals still
Speaker 1: could be subject to that. You know, if we see
Speaker 1: greater focus on some of these regional banks that haven't
Speaker 1: had the regulation that the larger cities.
Speaker 6: Have, there's sort of a tortured relationship a lot of
Speaker 6: investors have with these names is simply because they have
Speaker 6: gotten so beaten up that on a valuation perspective, they
Speaker 6: look great, and then you look under the hood and
Speaker 6: you start to see a lot of concerns. One of
Speaker 6: these numbers, I'm talking more generally, not just the financials,
Speaker 6: more generally. You put this out that only thirteen percent
Speaker 6: of second quarter reporters of small cap companies have beaten
Speaker 6: on earnings for share and sales. That compares to fifty
Speaker 6: one percent of large caps. Can you give us a
Speaker 6: sense of why why smaller companies are struggling to really
Speaker 6: meet some of the expectations even as large caps continue
Speaker 6: to outperform.
Speaker 1: Yeah, I mean it's been still pretty broad based, where
Speaker 1: just that that overall profits recovery has been much much
Speaker 1: slower to come to fruition in small caps, and the
Speaker 1: earnings decline was pretty much across the board, And when
Speaker 1: you look at second quarter expectations, pretty much most sectors
Speaker 1: are expected to still see negative earnings growth this quarter. So,
Speaker 1: you know, smaller companies have been more challenged. And when
Speaker 1: you look at the large caps, obviously a lot of
Speaker 1: the Magnificent seven, some of the big tech stocks have
Speaker 1: been the drivers of earnings growth. We do expect that
Speaker 1: to slow and see a broadening out to the rest
Speaker 1: of the you know, other four ninety three of the
Speaker 1: SMP of five hundred. So it's a similar story for
Speaker 1: small caps. But a lot of these smaller company companies
Speaker 1: have still been challenged. You've had less profitable companies within
Speaker 1: the index. You've had sectors like healthcare where you know,
Speaker 1: that's been one of the sectors that's all the biggest
Speaker 1: decline and now is expected to see among the biggest recoveries.
Speaker 1: So I think when you're thinking about buying the fundamentals
Speaker 1: of these companies, that's why we've been you know, still
Speaker 1: more cautious on the overall index, but I think in
Speaker 1: pockets of small caps there's still a lot of opportunity.
Speaker 1: And you know, as you've pointed out, the valuation backdrop,
Speaker 1: the positioning backdrop is very supportive. Investors have been very
Speaker 1: underweeks under allocated to small caps. You know, we've seen
Speaker 1: investors want to get more more bullish on small caps.
Speaker 1: They've they've been such a laggard for such a long time.
Speaker 1: So I think the areas that are you know, perhaps
Speaker 1: less sensitive to to refinancing risk if there's still some
Speaker 1: uncertainty on the FED could be a good area. Areas
Speaker 1: that are sensitive to you know, still cheap but have
Speaker 1: positive estimate revisions. If we're in a backdrop where that's still.
Speaker 6: Uncertain, you went to the area that I wanted to
Speaker 6: go to. At the three pillars of economy, earnings, and politics,
Speaker 6: we're focusing on the first two. We've talked about earnings,
Speaker 6: but what is the read through to the economy This
Speaker 6: question of small caps ostensibly have more floating rate debt,
Speaker 6: are more sensitive to perhaps higher rates by the Federal Reserve.
Speaker 3: Is that a key.
Speaker 6: Reason why you're not seeing earnings increase at a faster pace.
Speaker 6: Akin to some of the larger companies, they were able
Speaker 6: to lock in some of those funding costs that were
Speaker 6: really cheap earlier on.
Speaker 1: Right, Yeah, small caps definitely have a lot more as
Speaker 1: you pointed out, floating rate short term debt. About almost
Speaker 1: about half of their debt falls into that profile, whereas
Speaker 1: large caps about eighty percent of their debt is that
Speaker 1: you know, long term fixed rate debt. So, you know,
Speaker 1: I think the fact that we've seen inflation start to
Speaker 1: come down and the Fed could be on track to
Speaker 1: begin cutting rates. Our expectation is in December of this year,
Speaker 1: but obviously the risks have been pulled forth that maybe
Speaker 1: maybe a cut in Septembers possible, So you know that
Speaker 1: that eases some of the risk. The fact that we've
Speaker 1: seen credit spreads have been low. You know, some companies
Speaker 1: have been willing to refinance even though rates are high
Speaker 1: because you know, credits backdrop has been supportive. So you know,
Speaker 1: that's the risk as if we see credit spreads you know,
Speaker 1: start to rise again, that that could become a headwind
Speaker 1: to the to the profitability as well. So you know,
Speaker 1: I think this is a backdrop where you want to
Speaker 1: be selective within small caps and not just by the
Speaker 1: rustle which you know, we think further clarity on the
Speaker 1: profitability backdrop could help. But for now, you know, our
Speaker 1: and also be AVAG cover about a thousand small and
Speaker 1: mid cap stocks. I think there's a lot of opportunities
Speaker 1: for for alpha if you can focus on you know,
Speaker 1: like I said, the names that actually just have positive
Speaker 1: Estimer revisions and a backdropper revisions have still been coming down.
Speaker 1: Guidance has been weaker in small caps some of the
Speaker 1: value stocks. But you know, we're watching what companies are
Speaker 1: saying this earning season. If if guidance can can get
Speaker 1: a bit better, it's still been a bit weak, you know,
Speaker 1: within small caps. Then you know, companies beating and raising
Speaker 1: I think could be supportive of a broader you know
Speaker 1: index rally and you know, similar to the risk rally
Speaker 1: we saw over the past week or two.
Speaker 7: Joe, I have to ask about the third camp that
Speaker 7: Lisa alluded to, the politics. How much is small caps
Speaker 7: a bet on Trump vance?
Speaker 1: Well, I think when you look at you know, the
Speaker 1: rally over the past week, really some of the initial
Speaker 1: drivers were more on positioning and you know, risk on
Speaker 1: We saw financials as a big rally deep value stocks.
Speaker 1: We saw stocks with high short interest rally as we
Speaker 1: saw some initial short covering, and what we've looked back really,
Speaker 1: you know, while while certain political factors or political policies
Speaker 1: can certainly impact small caps when you're looking at tax
Speaker 1: rates or when you're looking at policies that could impact growth, overall,
Speaker 1: we found that profits tend to matter more than politics
Speaker 1: for small caps and for equities. So, you know, I
Speaker 1: think what's going on with GDP and interest rates is
Speaker 1: going to be a bigger driver of the index than
Speaker 1: necessarily which political parties in office.
Speaker 3: That's the piece of a story we're waiting for. Jill.
Speaker 2: Let's try to catch up Joe caerry Hill there of
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