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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and am Marie Hordern. Join us each
Speaker 2: day for insight from the best in markets, economics, and
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Speaker 2: Investo writing, market drawdowns and volatility are almost always the
Speaker 2: result of policy uncertainty. Investors main need to brace themselves
Speaker 2: for additional volatility, but I suspect we know this drill.
Speaker 2: Frian joins us now for more Bran, good morning, I'm
Speaker 2: going to see you. Is the peak uncertainty behind us yet?
Speaker 3: No?
Speaker 4: I don't think the peak uncertainty is behind us. Although
Speaker 4: I don't want to be overly negative. I'm just reflecting
Speaker 4: on coming off of a period volatility had been quite low,
Speaker 4: so I think ultimately it'll be a good environment for stocks.
Speaker 4: But it's going to be a little bit more difficult.
Speaker 4: We have inflation at the upper end of the comfort zone,
Speaker 4: which isn't terrible unless the Federal Reserve thinks they may
Speaker 4: have to take a different approach. And we still have
Speaker 4: to deal with the uncertainty around trade and industrial policies.
Speaker 5: So there's more to come on this. I don't you know.
Speaker 5: Investors probably looked at.
Speaker 4: What happened with Canada and Mexico with regards to the
Speaker 4: tariffs and said, Okay, all good. I suspect that's probably
Speaker 4: not the case. We'll have some volatility in here, but
Speaker 4: that doesn't change the fact that it's still a good
Speaker 4: backdrop for risk assets.
Speaker 2: In the meantime, we're just eighteen ands and consensustrits to
Speaker 2: start twenty twenty five. In the FX market, the dollar
Speaker 2: is weak and not stronger. In the bond market, yields
Speaker 2: are lower, not higher. And if you look at equities
Speaker 2: on a geographic basis, Europe is outperforming the United States.
Speaker 2: Do you want to fight that or pile in?
Speaker 5: I would pile in.
Speaker 4: I think the reality is we've had such a prolonged
Speaker 4: period of us OL performance driven by a handful of names.
Speaker 4: What we've all been wan is some broadening out in
Speaker 4: these markets. Now, just because things like small caps or
Speaker 4: European stocks were cheap didn't mean that they were going
Speaker 4: to outperform.
Speaker 5: You needed some catalysts. And what you have right.
Speaker 4: Now is of course easing in different parts of the world.
Speaker 4: You have valuations a little bit more extended in the
Speaker 4: United States. You have high, higher nominal growth improving expectations
Speaker 4: in Europe. So yeah, it's a better backdrop you think
Speaker 4: from You remember that period we all remember at twenty
Speaker 4: nine through twenty nineteen where nothing could perform but US
Speaker 4: growth stocks. We were in a very low nominal growth world.
Speaker 4: So now we're in a better or improving nominal growth environment.
Speaker 1: So the story you just told about Europe is not
Speaker 1: as exciting as a story that other people say, which
Speaker 1: is this is the beginning of actual spending of actual
Speaker 1: stimulus in addition to a disinflationary trend that can eventually
Speaker 1: allow ECB rate cuts. Are you basically saying you don't
Speaker 1: buy some of the optimism that this is really the
Speaker 1: moment that Europe could join together there issue euro bonds
Speaker 1: to support the bend stocks and inject some stimulus in
Speaker 1: the overall economy.
Speaker 4: Well, We've seen this before, so you know, fool me
Speaker 4: wants shame on you fool me twice shame. I mean,
Speaker 4: it's that how goes So I don't so I'm not
Speaker 4: ready to say that this is the moment. The way
Speaker 4: I look at Europe right now is not good or bad.
Speaker 4: It's better or worse, and things are getting better than
Speaker 4: where they were. We had this long environment where things
Speaker 4: were generally getting worse. The fact that floating rate mortgages
Speaker 4: exist in a lot of parts of Europe wasn't necessarily helpful.
Speaker 4: But now we've got this easing environment, sentiments picking up.
Speaker 5: I would look at it.
Speaker 4: More as a cyclical recovery in sentiment and a better
Speaker 4: policy environment, rather than necessarily viewing it right now as
Speaker 4: as a bigger structural story.
Speaker 5: We need some proof on that.
Speaker 1: There are some contradictions in the story. On one hand,
Speaker 1: if you have growth improving, doesn't that tie the hands
Speaker 1: of central banks in terms of how much they can
Speaker 1: cut rates, leaving benchmark borrowing costs to a higher pace,
Speaker 1: which typically pressure stocks.
Speaker 4: Well, different parts of the world of different answers. I mean,
Speaker 4: I think in Europe, in the UK, we're going to
Speaker 4: need to see interest rates continue to move lower in
Speaker 4: the United States. The point I was getting at is
Speaker 4: I like inflation at the upper end of the comfort zone.
Speaker 4: You know, people have been wanting weaker, you know, rates
Speaker 4: to come down. In September, the FED Fund Implied Future
Speaker 4: said rates would be below three percent at the end
Speaker 4: of this year. What would have happened between then in
Speaker 4: end of twenty twenty five that rates had to be
Speaker 4: below three percent. That's a bad economic outcome. So the
Speaker 4: fact that we've reassessed that now we're not pricing and tightening.
Speaker 5: We've just backed out.
Speaker 4: The rate cuts, which suggests that this is going to
Speaker 4: be pretty good growth environment. Inflation at the upper end
Speaker 4: of the comfort zone, to me, is a better environment
Speaker 4: than where we were for a decade where we couldn't
Speaker 4: get it into the comfort zone because higher nominal growth
Speaker 4: a cruise to corporate profitability. Now, the risk to all
Speaker 4: of this is, obviously if inflation jumps and the Fed
Speaker 4: has to tighten, we are clearly not priced for that.
Speaker 4: That's where equity valuations get hit. That's end of cycle stuff.
Speaker 4: But I still think inflation's going to moderate. We saw
Speaker 4: it a bit with the producer price index. Seems like
Speaker 4: wages are moderating, shelters moderating, So I don't think it's
Speaker 4: as big of a concert CPI, what was that last Monday?
Speaker 4: I think that was a bit of an overreaction the
Speaker 4: market's recovered from.
Speaker 3: But what about tariffs?
Speaker 6: Could they be a hit to inflation to go above
Speaker 6: that range you seem too very comfortable with.
Speaker 4: Yeah, I suppose they could be, except if it's a
Speaker 4: little bit of a different environment than twenty eighteen. But
Speaker 4: if you use twenty eighteen as an example, you saw
Speaker 4: one off price shocks in products rather than broad based inflation,
Speaker 4: and actually you started to get a hit to sentiment,
Speaker 4: and that hit to sentiment actually caused markets to start
Speaker 4: to think about a recession by the fourth quarter.
Speaker 5: And you know, most people don't remember, as the Fed.
Speaker 4: Actually was easing in twenty nineteen, not raising rates. Now
Speaker 4: it's a different environment because inflation's at the end of
Speaker 4: the comfort zone rather than in a deflation environment. But
Speaker 4: historically tariffs don't lead to broad based inflation.
Speaker 6: What do you think causes more angst in the market. Is
Speaker 6: it the actual tariffs or is it the continued policy
Speaker 6: uncertainty about tariffs might becoming tariffs might be coming every single.
Speaker 4: Week uncertainty, and that was the story of twenty eighteen,
Speaker 4: was that it was sort of a trade policy by
Speaker 4: tweet at that time, and each time each week we
Speaker 4: got something new and it was very difficult to had
Speaker 4: to respond to and business sentiment really got hit. If
Speaker 4: you look at capital expenditures back then in the beginning
Speaker 4: of the trade where they were positive year over year,
Speaker 4: by mid to late twenty nineteen they were negative year
Speaker 4: over year.
Speaker 5: So that's the challenge.
Speaker 4: The risk to this is just a prolonged period of
Speaker 4: policy uncertainty.
Speaker 5: Tariffs, I think.
Speaker 4: We could all agree lead to a less optimal economic
Speaker 4: outcome right almost by definition, but we can deal with that.
Speaker 4: Businesses just need to know the rules of the game
Speaker 4: in order to proceed with confidence.
Speaker 2: FED Governor Chris Waller doesn't seem too worried at SOLL
Speaker 2: listening to him speaking over the long weekend. My baseline
Speaker 2: view is that any imposition of tariff's will only modestly
Speaker 2: increased prices and in a non persistent manner. Lisa going
Speaker 2: on to say, I favor looking through these effects. He's
Speaker 2: alluded to this before, reiterated it again.
Speaker 3: Some people have agreed with him.
Speaker 1: However, he has been an outlier as he did seem
Speaker 1: more hawkish last September and now seems to have shifted
Speaker 1: his tune, and some people are talking about maybe.
Speaker 3: His conditions for FED chair.
Speaker 1: That said, other FED officials have echoed this, both on
Speaker 1: the record and off the record, saying essentially, in the
Speaker 1: past they have been more of a suppressor of growth
Speaker 1: than they have been in ignition of inflation.
Speaker 5: He's running.
Speaker 2: I think we've said that before. A lot of people
Speaker 2: believe that's the case. Brant On Invesco so a Coronati City, saying,
Speaker 2: we do characterize ourselves as fundamental optimists, but we also
Speaker 2: recognize there's some important macro tail winds need to unfold
Speaker 2: which would transition us from a no cycle regime to
Speaker 2: something more like an early cycle. Bankdrop Scott joined us
Speaker 2: now from MOSK. Scott, Welcome to the program, Sir. I
Speaker 2: want to pick up a note. Pick up on a
Speaker 2: note that you put out just last week when you
Speaker 2: said tamer tariff talk. Now, Scott, I want to understand
Speaker 2: whether you believe the tamer tariff talk is ultimately in
Speaker 2: the driving seat of what we're seeing take place across
Speaker 2: Stokes bonds and foreign exchange.
Speaker 7: Well, I think we keep going from a threat to
Speaker 7: let's push things out and step back and better analyze
Speaker 7: the tariff situation, and that's been ongoing now for the past,
Speaker 7: you know, several weeks. What I think is important here, though,
Speaker 7: is that I think the market has been concerned regarding
Speaker 7: Trump red wave and tariffs for several months now, and
Speaker 7: I think it's been preparing for it psychologically, but probably
Speaker 7: not an actual positioning angle yet.
Speaker 8: I think that's still out there.
Speaker 7: But all told, what's happening is that you have ongoing
Speaker 7: tearff rhetoric, but at the same time, we're seeing a
Speaker 7: little bit more movement in terms of cost cutting initiatives,
Speaker 7: which are pretty apparent now, And what that does is
Speaker 7: begin to give you a more balanced effect of the
Speaker 7: aggregate Trump policy now versus what we were looking at,
Speaker 7: say a few months ago.
Speaker 3: So translate that into positioning.
Speaker 1: How much are you seeing essentially less growth from some
Speaker 1: of the cost cutting versus some of the pro growth
Speaker 1: measures that some people were talking about from the Trump
Speaker 1: administration than that that still needs to get priced into equities.
Speaker 7: Well, at least it's a really good question. So I
Speaker 7: think what we're looking at here. Just looking at the
Speaker 7: S and P performance, you have about four percent year
Speaker 7: to date. Look at where your leadership's coming. First off,
Speaker 7: where's it not coming from? And it's not coming from
Speaker 7: tech and consumer discretionary. You're seeing broadening work under the surface.
Speaker 7: In fact, the SMP top fifty for the first time
Speaker 7: in quite a while now are no longer leading the
Speaker 7: charge for the SMP. So broadening's happening. And I think
Speaker 7: what this reflects is a couple of things. An ongoing
Speaker 7: positive sentiment around the underlying economic direction, a little bit
Speaker 7: less concerned about tariffs in their own right now, and
Speaker 7: what that does do is begin to set up, I think,
Speaker 7: for a healthier S and P outlook as we go
Speaker 7: into the balance of the year.
Speaker 1: Do you believe Scott As we were just talking to
Speaker 1: Bank for America Elis Galou's Galuu about that the faster
Speaker 1: inflation today than what we saw in twenty seventeen in
Speaker 1: twenty eighteen effectively ties the hands of the Trump administration
Speaker 1: to go really tit for tat into a full blown
Speaker 1: trade war.
Speaker 8: I think potentially it does.
Speaker 7: I think it's too soon to make that call, though,
Speaker 7: I think there's no doubt that when you're looking at tariffs.
Speaker 7: The part of this bigger program is that you at
Speaker 7: some point are going to need revenue offsets to be
Speaker 7: positive to contend with what happens from the deficit math
Speaker 7: as you go to extend TCJA and potentially lower corporate
Speaker 7: taxes in other places.
Speaker 8: All totally.
Speaker 7: What's happening here is that you've got a combination of
Speaker 7: forces that are at work that are going to need
Speaker 7: to be addressed. Inflation is going to at some level
Speaker 7: be a little bit of a hand tied to how.
Speaker 8: Aggressive you get potentially with tariffs.
Speaker 7: But our view with terriffs is, for a while now
Speaker 7: has been it's less about the concern with inflation, more
Speaker 7: about the concern with gross margins and other supply chain disruptions.
Speaker 7: So they're still in our view of moving conversation around
Speaker 7: where the inflation dynamic fits in here. We're comfortable with
Speaker 7: the current backdrop right now. We're comfortable with FED funds
Speaker 7: and the expectations for a cut or two this year.
Speaker 7: We're comfortable with ten years hovering in this four fifty range.
Speaker 6: Scott, how do you start pricing in some of their talentation?
Speaker 6: Though we can see from other countries.
Speaker 3: If those terrors that.
Speaker 6: Trump has talked about, which besides China, we haven't seen
Speaker 6: them yet. But if the ones he's talked about actually come.
Speaker 7: Into effect, well I think we're going to have to
Speaker 7: get there.
Speaker 8: I think that's an ongoing concern.
Speaker 7: Again, all told, we have to expect teriffs, you have
Speaker 7: to expect retaliatory actions by countries affected. But importantly, when
Speaker 7: we're looking at the aggregate tariff setup, be careful here.
Speaker 7: When you're looking at a teriff on Canada, Mexico, a
Speaker 7: more specific country related tariff that probably is a negotiating
Speaker 7: tool towards accomplishing.
Speaker 8: Some other purpose.
Speaker 7: When you get on the path of say ten percent
Speaker 7: across the board, that maybe maybe gets dialed back to some.
Speaker 8: More balanced number, say five percent or so.
Speaker 7: What ends up happening, though, is the importance of that
Speaker 7: is number one in our view. How it fits into
Speaker 7: the revenue generation deficit math. The retaliatory part comes into play.
Speaker 7: But here's where you also have to begin to factor
Speaker 7: in the fact that a strengthening dollar over the past
Speaker 7: couple of months may at some level begin to price some.
Speaker 8: Of this in. We're certainly not immune to the issue.
Speaker 7: We are at the margin, so quite concerned about it,
Speaker 7: but just trying to make the point here that identifying
Speaker 7: tariffs alone as an issue, I think probably is the
Speaker 7: wrong way to look at this. The right way is
Speaker 7: that it's part of a bigger Trump package that's working
Speaker 7: its way through the system and through Congress right now
Speaker 7: and through the markets, and I think what the market
Speaker 7: is telling you is that it's pretty comfortable all told,
Speaker 7: with the balance that we're seeing between tariff's potential tax
Speaker 7: reform and then what's happening on the cost reduction front.
Speaker 3: Well, Scott keyword, there is potential.
Speaker 6: It might take months to see those tax cuts get
Speaker 6: on board when it comes to the House and the
Speaker 6: Senate in Congress. How is important for the markets to
Speaker 6: be able to have both at the same time, the
Speaker 6: tariffs but also the tax cuts.
Speaker 7: Yeah, it's a good question, because tariffs presumably can hit sooner, Okay,
Speaker 7: so they get modeled in terms of our twenty five expectations.
Speaker 7: Tax reform probably is a twenty six issue. Again, for
Speaker 7: several months now we've said Trump We're at sweep. An
Speaker 7: issue we have is that you need to see some
Speaker 7: focus on the spending side because that deficit math continues
Speaker 7: to linger as an issue for this year. We've been
Speaker 7: talking about the bond market vigilantesection perhaps coming back into
Speaker 7: the picture. We haven't seen that right yet, But I
Speaker 7: think the key point here is that the market is
Speaker 7: beginning to price a forward fairly aggressively where we think
Speaker 7: underlying earnings expectations go. That's a bigger issue for us
Speaker 7: right now, Emory, than are the terriffs themselves. Our concern
Speaker 7: is that the market is already pricing in fairly heady
Speaker 7: earnings growth presumptions for the next several years. That in
Speaker 7: our minds, is not necessarily negative, but what it does
Speaker 7: do is put a really big focus on earnings growth
Speaker 7: to continue to deliver as we go into twenty five,
Speaker 7: twenty six and beyond. So, by no means is this
Speaker 7: a coast is clear environment. There are still many hurdles
Speaker 7: that we're going to have to be navigating. So I
Speaker 7: think a big message for us is expect volatility. It's
Speaker 7: going to be a persistent feature of this market, and
Speaker 7: at this point we're we want to be conditioned to
Speaker 7: be buyers into said volatility.
Speaker 2: Hi, Scott, appreciate your view, Sir Scott Kronavit City, more
Speaker 2: Ecoate and fired speak on deck after recent inflation and
Speaker 2: retail sales prints whipsaw trade US through the last week.
Speaker 2: Niina Richardson of ADP writes, and consumer strength is due
Speaker 2: in large parts of the solid job market, cracks are
Speaker 2: forming beneath the surface and threaten to spillover to the consumer.
Speaker 2: Nata joins us. Now for more naed a good morning.
Speaker 2: It's going to see you as always. Let's start with
Speaker 2: those cracks. Where are they?
Speaker 9: Well, they're really in the good sector. But bigger picture,
Speaker 9: bigger level here, the consumer and the worker have been aligned.
Speaker 3: They've been in lockstep.
Speaker 9: The consumer's done well, the labor market's done well, and
Speaker 9: vice versa. Consumers are driving the labor market hiring. If
Speaker 9: you look at where the end is streets are taking off,
Speaker 9: it's in healthcare and leisure and hospitality. These are consumer oriented,
Speaker 9: consumer facing industries. So, yes, there's cracks. We saw them
Speaker 9: last week with the retail spending. If the consumer starts
Speaker 9: to folter, what does that mean for hiring in the
Speaker 9: labor market.
Speaker 3: That's what I'm watching.
Speaker 1: So that particular sector, the experiences sector, for you, will
Speaker 1: be the tell that this is truly a labor market
Speaker 1: that's turning over.
Speaker 3: Is that correct?
Speaker 9: It is one of the tells because when I also
Speaker 9: look at what else is happening in the labor market,
Speaker 9: business services aren't performing the way they did in the
Speaker 9: first half of twenty twenty four. We've seen a sluggishness
Speaker 9: in professional business services. So what carries the torch for
Speaker 9: this market? If the consumer's under pressure, the consumer feels
Speaker 9: the pinch, there's nothing to take up the slack, and
Speaker 9: that's the issue.
Speaker 3: It's not good.
Speaker 9: It's not manufacturing, it's not professional services. There's nothing left.
Speaker 1: It's not tech, and we're seeing those tech layoffs consistently
Speaker 1: announced across the board. We were just talking about Southwest
Speaker 1: announcing their first round of involuntary layoffs in their fifty
Speaker 1: year history. Are these headlines just one offs or is
Speaker 1: this growing to become a trend that you're watching in
Speaker 1: terms of efficiencies and that turning to job cuts in
Speaker 1: a way that it.
Speaker 3: Hadn't over the past couple of years now.
Speaker 9: I've consistently said, and it's true that the labor market
Speaker 9: is solid. You're seeing solid overall growth. It's the craps
Speaker 9: beneath the surface that we're watching. For example, new hires.
Speaker 9: We tend to match at ADP individuals, but sometimes it's
Speaker 9: great to just look at the cohort of crops of
Speaker 9: new hires this year versus last. There's been no pay
Speaker 9: growth in this crop. Why well, companies are hiring less tenured,
Speaker 9: less skilled workers now than they did last year. Is
Speaker 9: that a signal of a trend that more highly skilled
Speaker 9: workers are not as in demand as they were a
Speaker 9: year before. That's definitely we're something we're watching, and we
Speaker 9: see that across industries, especially in financial services and information.
Speaker 9: These are typically highly skilled industries.
Speaker 6: You know, your research is at sixty percent of US
Speaker 6: workers live paycheck to paycheck. Last week we found out
Speaker 6: inflation is still quite hot. At what point do you
Speaker 6: see these workers, these consumers pushing back exactly.
Speaker 9: We've been waiting for this. We've been waiting for consumer
Speaker 9: resilience to turn to consumer reluctance because of higher inflation.
Speaker 9: It has not happened, except last week we saw the
Speaker 9: beginning of that. Now, it could just be a cold
Speaker 9: weather month, but the broad based slowdown in retail sales
Speaker 9: suggests to me that it was more than just a
Speaker 9: really cold January. Something else could be afoot and it
Speaker 9: could be that these higher price levels are starting finally.
Speaker 3: To make a dent.
Speaker 9: We won't know until we get a little bit more
Speaker 9: data on.
Speaker 3: That, though.
Speaker 1: You said that the prices or the wages that people
Speaker 1: are earning when they come in are the same for
Speaker 1: the incoming class this year as they are last year.
Speaker 1: How much could that be due to the use of
Speaker 1: certain efficiency tools and I'm talking about machine learning to
Speaker 1: offset some of the roles that some of the highly
Speaker 1: skilled individuals coming in would have to have to hold.
Speaker 1: I mean, how messy is this data because of these
Speaker 1: bigger trends that are forming the labor market.
Speaker 9: When you think about where the slowdown is happening in
Speaker 9: business services, those entry level jobs are increasingly those that
Speaker 9: can be automated. This is new for the knowledge worker
Speaker 9: skill base, and so that trend is something that could
Speaker 9: have a through line from cyclical to structural.
Speaker 8: And that's what's.
Speaker 9: Really hard about the labor market now. With all these
Speaker 9: technological advances and the demographic changes, we don't know how
Speaker 9: much of this is sticking and how much of this
Speaker 9: is just you know, because interest rates are higher than
Speaker 9: we'd like them to be, and that's weighing in on
Speaker 9: hiring decisions.
Speaker 1: Earlier on the show, we were talking about the fund
Speaker 1: manager survey at of Bank of America, and right now
Speaker 1: the lowest number of people are expecting some sort of
Speaker 1: recession in at least three years. Based on your observations
Speaker 1: and the cracks. Do you think that that's miscast or
Speaker 1: that it should be a higher percentage?
Speaker 9: You know, it's recession. To me, those expectations is like
Speaker 9: the rain. Unless you tell me the time and the location,
Speaker 9: it's meaningless because recessions happen on a pretty you know,
Speaker 9: regular heartbeat when you look at history. This last economic
Speaker 9: expansion was way longer than historical norms. But I don't
Speaker 9: think there's anything that suggests right now, with a four
Speaker 9: percent four percent unemployment rate, that we're heading to recession.
Speaker 9: But there could be some slowdown in hiring. There's uncertainty
Speaker 9: and policy that would cause employers maybe to take a
Speaker 9: step back, not hire as robustly, not hire as aggressively
Speaker 9: as they had in previous years.
Speaker 2: We'll see if any of this shows up in jompless
Speaker 2: claims on Thursday, particularly the government layoffs, were all focused
Speaker 2: on at the moment. Neither It's good to see you
Speaker 2: and so always thank you Nia Richardson that of ADP,
Speaker 2: we begin to sat with US stocks in jin Kai
Speaker 2: Kevin Gordon to child swap with this to say, one
Speaker 2: of the whole marks of the US stock markets run
Speaker 2: last year was minimal scouring at the index level. That
Speaker 2: is unlikely to continue this year. Kevin joins us now
Speaker 2: for more. Kevin, that's a conversation we've had a few
Speaker 2: times with you. Beneath the surface, though, we're starting to
Speaker 2: see some real dispersion take place. You wrote in just
Speaker 2: last week about some of that dispersion within tech. We
Speaker 2: noted the moves we've seen in Meta. You pointed out
Speaker 2: the moves we've seen in Tesla. What makes sense from
Speaker 2: your perspective as to why that's happening.
Speaker 10: Well, I think that you know, within some of the
Speaker 10: themes for a group like the mag seven, if you're
Speaker 10: going to look at it on a sector basis, you
Speaker 10: know there's three sectors that are represented there. It's consumer discretionary,
Speaker 10: it's communication services, it's tech.
Speaker 11: And one of the things.
Speaker 10: We've really been pounding the table on in the past
Speaker 10: couple of years is not looking at that group as
Speaker 10: a monolith. And I think a lot of that is
Speaker 10: starting to show. You know, you could kind of date
Speaker 10: it back to last summer when there were a lot
Speaker 10: more capex concerns when we got to earning season in
Speaker 10: the in the late summer period. But now from a
Speaker 10: trade war standpoint and what the exposure is from a
Speaker 10: geopolitical perspective, there is probably a lot more being priced
Speaker 10: in there being reflected in the price there because if
Speaker 10: you look at even the split between consumer discretionary and
Speaker 10: tech versus communication services to point about the likes of
Speaker 10: Meta doing well versus the likes of Tesla or even
Speaker 10: you know, some of the hardware names, whether it's in video,
Speaker 10: whether it's Apple in the tech space not doing as well,
Speaker 10: some of that is maybe reflective of the exposure to
Speaker 10: China or the exposure to the rest of the world
Speaker 10: and what a potential terofar trade war could mean for
Speaker 10: those companies.
Speaker 2: How do you expect this to show up at the
Speaker 2: index level? This is all Benita surface. How do you
Speaker 2: expect to say this at the index level?
Speaker 10: You know, to some extent you're seeing it where even
Speaker 10: if you look over the past couple of months, the
Speaker 10: S and P five hundred hasn't really moved much. It's
Speaker 10: been this really tough kind of grind higher at times,
Speaker 10: a grind higher, mostly a grind sideways. But there have
Speaker 10: been other sectors that have really been leading the charge
Speaker 10: and picking up the slack. Financials has kind of been,
Speaker 10: you know, the standout there. So I think that from
Speaker 10: an index standpoint, you may not see as much excitement
Speaker 10: this year, but at the individual's stock level, or maybe
Speaker 10: at the individual industry level, you could see a.
Speaker 11: Lot more excitement.
Speaker 10: So it's kind of, you know, to the quote you
Speaker 10: pulled at the beginning of the segment, our theme around
Speaker 10: maybe not as much excitement as you saw last year
Speaker 10: because at the index level last year was great max
Speaker 10: draw down eight and a half percent, but the average
Speaker 10: draw out at the member level much worse twenty one percent.
Speaker 11: Maybe that gets flipped this year or not that we
Speaker 11: expect some.
Speaker 10: Imminent twenty one percent correction for the index, but there's
Speaker 10: just more of a churn kind of at the you know,
Speaker 10: at the index level, if there's not as much participation
Speaker 10: from some of the megacaps.
Speaker 1: If this turn is sort of continued, I wonder how
Speaker 1: much that's the reason for this split that we're seeing
Speaker 1: in surveys where you have AIII coming out with the
Speaker 1: greatest degree of pessimism among retail investors going back three years,
Speaker 1: at the same time that institutional investors have the greatest
Speaker 1: degree of optimism in years, and you've got the lowest
Speaker 1: rates of cash going back to twenty ten. How do
Speaker 1: you put these two things together with some sort of conclusion.
Speaker 10: Well, you know, this has become for us kind of
Speaker 10: a post pandemic phenomenon, especially when we talk to our
Speaker 10: investors and our clients, you know, which it's a great
Speaker 10: deal of people. It's more than forty million people, so
Speaker 10: we have a pretty good gauge of what sentiment is like,
Speaker 10: both on the attitudinal but also on the positioning side
Speaker 10: of things. But what we've seen post pandemic is that
Speaker 10: that attitudinal you know, those attitudinal metrics are sometimes much
Speaker 10: more skittish and much more jumpy, and they don't necessarily
Speaker 10: reflect what's going on in positioning. So you talk about
Speaker 10: those two headlines kind of side by side. Yes, a
Speaker 10: huge pickup embearishness for something like AII, but not reflected
Speaker 10: in equity positioning at all. To us, the attitudinal stuff
Speaker 10: probably becomes more of a useful, shorter term gauge as
Speaker 10: to when you get a washout and sentiment and when
Speaker 10: the market can kind of pick up and get back
Speaker 10: on its feet. You know, over the past several weeks,
Speaker 10: which we've seen from a behavioral standpoint, it kind of
Speaker 10: shows you that over the long term, we're still in
Speaker 10: pretty frothy territory. Because you look at the household exposure
Speaker 10: to equities for the FED data that we have going back,
Speaker 10: you know, almost a century, you're still at near record exposure.
Speaker 10: The only other time you were at this level was
Speaker 10: in two thousand.
Speaker 3: How much are some.
Speaker 1: Of the headlines around policy changes affecting retail investors more
Speaker 1: than institutional investors who are looking through it until they
Speaker 1: get something concrete.
Speaker 11: You know, it's fascinating.
Speaker 10: Is for the first time since I can really remember,
Speaker 10: especially leading up to the election, when we were talking
Speaker 10: to clients and going around and doing events, and I
Speaker 10: was just speaking to a bunch of clients last week,
Speaker 10: first event ever where tariffs were not at all a
Speaker 10: part of the question. All of the questions were about
Speaker 10: immigration policy. So I think that there is this interesting
Speaker 10: shift now at play where I think there's more meat
Speaker 10: getting kind of put on the bones as to what
Speaker 10: the potential growth hit is from a labor standpoint, And
Speaker 10: a lot of the focus tends to be or has been,
Speaker 10: on the inflation impact potentially from tariffs, But now it's
Speaker 10: shifting to what does this mean not only for inflation
Speaker 10: from a labor standpoint, but also what does this now
Speaker 10: mean for a potential hit to growth. So it was
Speaker 10: a really interesting shift where clients are now starting to
Speaker 10: ask what are those sort of fundamental issues. Maybe if
Speaker 10: you go to the extreme end as to what's being
Speaker 10: proposed for immigration, what are.
Speaker 6: Clients asking when it comes to tax cuts, do they
Speaker 6: want to see those tax cuts alongside potentially the hit
Speaker 6: from immigration and tariffs.
Speaker 11: You know, it's a mixed bag.
Speaker 10: I think tax cuts just kind of at the outset
Speaker 10: are at a headline level, garner a lot of attention
Speaker 10: and a lot of support generally. I think the tough
Speaker 10: part about this is that it's the struggle right now
Speaker 10: in Washington is just to get the extension of the TCJA.
Speaker 10: So it's really just maintaining the status quote. It's not
Speaker 10: initiating this new wave of tax cuts. And the other
Speaker 10: hard part about this, and this is kind of where
Speaker 10: I struggle and scratch my head a lot from a
Speaker 10: policy standpoint, and what's contradictory coming out of Washington is
Speaker 10: tariffs and tariff revenue is kind of being poised as
Speaker 10: this driver of revenue to offset the extension of tax cuts.
Speaker 11: But then every time the.
Speaker 10: Tariffs get either delayed or peeled off, then the market
Speaker 10: sort of cheers it. But then I'm asking myself, well,
Speaker 10: where is that supposed revenue coming for the tax cuts.
Speaker 10: So it's a little bit of this vicious circle that's
Speaker 10: at play, where yes, you could have excitement for something
Speaker 10: like fiscal policy continuing to be relatively expansionary and accommodative,
Speaker 10: but at the same time you also have potential restrictions
Speaker 10: coming from aggressive tariff policy.
Speaker 6: Right, and there's been a lot of bark, not a
Speaker 6: ton of bite except for one the ten percent of
Speaker 6: Chinese imports. You put it in your note projecting any
Speaker 6: kind of terror related hit to stock, So the degree
Speaker 6: of precision is impossible.
Speaker 3: So then what do you project.
Speaker 11: Well for tariffs?
Speaker 10: You can't, I mean to that point, you can't project
Speaker 10: anything almost from anything policy related.
Speaker 11: You can't make a projection because it changes every single day.
Speaker 11: So really, what you much of.
Speaker 6: A hit to the market is just that constant turn
Speaker 6: of uncertainty.
Speaker 8: Oh.
Speaker 10: I think that's where a lot of the hit resides.
Speaker 10: And you know, I think that this is a lot
Speaker 10: of the focus, maybe rightly so, gets put on the
Speaker 10: actual policy. What's the dollar amount for the tariffs? You know,
Speaker 10: who gets hit, When does it happen, how is it
Speaker 10: phased in over time? I think that's important, but I
Speaker 10: think it also misses the point of the nature of
Speaker 10: this policy making is what creates this And I think
Speaker 10: I mentioned it last time.
Speaker 11: I hear this, this real.
Speaker 10: Thick fog of uncertainty where it's it's just harder for
Speaker 10: businesses to operate in that environment.
Speaker 1: One thing that's been less and certain is that one
Speaker 1: of the cost savings is going to be driven by
Speaker 1: just cutting jobs.
Speaker 3: I mean, we've seen that pretty much.
Speaker 1: Across the board with the efforts of DOGE and reports
Speaker 1: about thousands of government workers being laid off. Do you
Speaker 1: see that being factored into any market valuations of companies
Speaker 1: that have contracts with governments, with the government, or any
Speaker 1: other kind of employer base that might be looking at
Speaker 1: this and taking its cues.
Speaker 10: You know, it's early days, I think to see that
Speaker 10: the federal hit. Especially if you're going to just look
Speaker 10: at the overall labor market, the share of the workforce
Speaker 10: for federal workers is quite smaller in low single digits
Speaker 10: to me, and I think what is becoming a more
Speaker 10: material risk in it's not happening right now, but I
Speaker 10: think what's worth watching in terms of it being a
Speaker 10: material risk is the eventual hits the state and local
Speaker 10: you know, employment and if that because that's a much
Speaker 10: larger share. I mean, you're getting into double digits in
Speaker 10: terms of the percentage of the workforce. So you talk
Speaker 10: about number one a big driver of job growth over
Speaker 10: the past several years, but number two just a big
Speaker 10: part of the total labor force in the country. If
Speaker 10: there is that connection and that eventual follow through from
Speaker 10: what's going on at the federal level, then I think
Speaker 10: you get to a little.
Speaker 11: Bit more of a worrisome situation.
Speaker 10: Fortunately, you know, it's not something that's happening, you know,
Speaker 10: right now and eminently, but a lot.
Speaker 11: Of this is moving really quickly, so you do have.
Speaker 10: The potent of seeing that show up maybe relatively soon
Speaker 10: in a job report.
Speaker 2: Speaking of moving quickly, can we finish on Europe six
Speaker 2: weeks of gains on the euros Doc fifty. You talked
Speaker 2: about your clients, your client's getting interested.
Speaker 10: Yeah, you know, I will say it's taken a long time,
Speaker 10: meaning years, for clients to get kind of fully on
Speaker 10: board with it. But you know, from especially if you're
Speaker 10: kind of talking about in factoring in some of these
Speaker 10: risks from a policy standpoint. Are my colleague on the
Speaker 10: XUS side, Jeff Clientop, talks a lot about THESI, MCIIFA
Speaker 10: being more exposed to Japan and the UK to the
Speaker 10: extent you want to look at those areas of the
Speaker 10: world that are maybe less exposed to a trade or
Speaker 10: a tariff risk from the US side of things, you know,
Speaker 10: maybe there is a little bit more of a benefit there.
Speaker 10: So we've been very vocal about kind of balancing things there,
Speaker 10: not just you know, back up the truck, dump everything
Speaker 10: US and then load up on you know, x US.
Speaker 10: But it has taken to your point, it's taken a
Speaker 10: long time for clients to kind of, you know, I
Speaker 10: would say, latch onto that or.
Speaker 2: It's still early days, let's say, if it works out,
Speaker 2: But so far in twenty twenty five up double Ditch
Speaker 2: on the Eurostocks fifty Kevin Gordon there, child Swap Kevin.
Speaker 2: Always good to see you. I thanks, appreciate it, thank you.
Speaker 2: More headlines coming from that meeting taking place in Riad,
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