Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Liz Ane Thonder's joining us right now. Chief investment strategists
Speaker 2: over at Charles Schwad and Lizanne. What was most surprising
Speaker 2: to you what we learned from the Fed today or
Speaker 2: the market's reaction to it.
Speaker 3: Well, the market reaction was quite stream. I don't think
Speaker 3: this was a big surprise. We actually were of the
Speaker 3: view that there was justification for the Fed pausing at
Speaker 3: this month's meeting today. Now, expectations were such, you were
Speaker 3: at about a ninety eight percent probability. You had the
Speaker 3: Timorros article that came out suggesting the Fed was going
Speaker 3: to do something, But it was I think pretty easy
Speaker 3: to expect a hawkish cut given stickiness and inflation and
Speaker 3: relatively resilient growth. I guess what the market reacted to
Speaker 3: was the cutting in half of the number of rate
Speaker 3: cuts expected in twenty twenty five, not to mention the
Speaker 3: fact that you had a discent this time, and it
Speaker 3: was an interesting descent because you know, it's a brand
Speaker 3: new president in terms of the Cleveland Fed, So it
Speaker 3: was it was an extreme move on the downside, but
Speaker 3: we were already seeing a lot of churn and weakness
Speaker 3: under the surface really, since the election is just masked
Speaker 3: by the until today strength by the max seven.
Speaker 4: Right, and just took out the legs from them, and
Speaker 4: then there you go. Now you have negative breadth versus
Speaker 4: positive breath. At the end of the day, Lizanne, it
Speaker 4: was clear from the press or that there were some
Speaker 4: FED officials who were looking at potential policy changes as
Speaker 4: a way that their economy and growth and inflation forecast
Speaker 4: was shaping up for next year. How then do you
Speaker 4: manage your asset allocation when there is so much confusion.
Speaker 3: Well, it's not just confusion around the path of FED policy,
Speaker 3: but confusion around government policy. And I you know that
Speaker 3: there were so many reporters that tried to flesh that
Speaker 3: out from Powell, But he's in a position much like
Speaker 3: the rest of us, which is, you know, the ultimate
Speaker 3: shrug emoji, because particularly in in areas like immigration, like
Speaker 3: tariff and the playbook that we have from twenty eighteen
Speaker 3: with regard to tariffs, we just don't know when the
Speaker 3: announcements are going to come, whether this truly is a negotiating.
Speaker 5: Tactic, or whether they will go to the extreme.
Speaker 3: It's hard to argue against the idea that tariffs all
Speaker 3: else sql put downward pressure on growth, they put upward
Speaker 3: pressure on inflation, and that arguably is something that came
Speaker 3: into the mix in terms of summary of economic projections,
Speaker 3: and the bias now much more in favor of the
Speaker 3: risk of higher inflation relative to lower inflation, and that
Speaker 3: was a big switch from the September dots plot and
Speaker 3: summary of economic projection. So I think that was embedded
Speaker 3: in the market weakness today too.
Speaker 1: I love the fact that you brought up a shrug
Speaker 1: emoji because Alex and I are saying there are so
Speaker 1: many of His answer is pretty much amounted to that.
Speaker 1: When it comes to the FEDS inflation target, he clarified
Speaker 1: that it is still two percent. It's not two and
Speaker 1: a half percent, it's not two is percent. What is
Speaker 1: your confidence though, that that's what is going to stick
Speaker 1: with given that there's so many things that are evolving
Speaker 1: and will evolve in twenty twenty five.
Speaker 5: You know, I don't.
Speaker 3: It's hard to have competence in a metric that is
Speaker 3: at least near term likely to be driven by government policy,
Speaker 3: particularly tariffs. Yes, you know, I mentioned the twenty eighteen playbook.
Speaker 3: The difference, of course is that in twenty eighteen. You know,
Speaker 3: the pro tariff folks will say, well, it didn't lead
Speaker 3: to inflation. Well, they were much more targeted, they tended
Speaker 3: to be in intermediate goods, they were much shallower in
Speaker 3: terms of percent, and we didn't otherwise have an inflationary backdrop.
Speaker 3: Obviously a very different situation today, Not to mention broader,
Speaker 3: larger tariffs targeted on imports from multiple countries. What we
Speaker 3: did see in twenty eighteen is that tariff goods did
Speaker 3: see a big surge in inflation relative to non tariff goods.
Speaker 3: But we just don't know what twenty twenty five's playbook
Speaker 3: is going to look like.
Speaker 5: But again it's hard to argue that.
Speaker 3: The bias is an up at least near term and
Speaker 3: inflation to calibrate policy. And to the first part of
Speaker 3: your question, trying to trade from an acid allocation tactical
Speaker 3: or otherwise around that, I think it's a really tricky exercise.
Speaker 3: I think you want to sort of stay close to
Speaker 3: your sort of benchmark strategic acid allocation waitings, but really
Speaker 3: take advantage of volatility for maybe portfolio based rebalancing as
Speaker 3: opposed to waiting for the calendar to dictate rebalancing.
Speaker 2: And then that gets into the ideal Liz and as
Speaker 2: the weather looking through some of these issues, meaning the
Speaker 2: uncertainty around the Trump administration, the potential volatility, and obviously
Speaker 2: the potential inflationary impact. I deride J. Powell for saying
Speaker 2: he's looking past it. Maybe that's what he has to say,
Speaker 2: But is there a case for investors to indeed look
Speaker 2: past it is certainly if you're a bottom up bus
Speaker 2: stock picking type of person.
Speaker 3: Well, again, there's the timing issues. So with regard to
Speaker 3: tariffs and immigration that can be done via executive order,
Speaker 3: so that is near term, will be some point where
Speaker 3: we have more clarity and we.
Speaker 5: Could start to look past that, particularly to.
Speaker 3: The end of the year where you have potential to
Speaker 3: start to see some more of the pro growth policies,
Speaker 3: whether it's on the tax funt or the regulatory front.
Speaker 3: Those require congressional approval though, so we're talking about different
Speaker 3: animals here in terms of timing and in terms.
Speaker 5: Of the process.
Speaker 3: I think what we are likely to see is a
Speaker 3: focus on fundamentals, that connectivity between fundamentals, quality based fundamentals,
Speaker 3: trajectory in terms of earnings exclusive of any variability associated
Speaker 3: with government policy. I think that's where the focus is
Speaker 3: likely to be is where will those fundamentals be maintained
Speaker 3: with that growth bias, with that profitability, strength of balance sheet,
Speaker 3: interest coverage, exclusive of concerns about policy uncertainty.
Speaker 4: So, lizam, where does that leave small caps in mid caps?
Speaker 3: Well, I think the move up from you know, sub
Speaker 3: three eight to more than three and a half on
Speaker 3: the tenure today was certainly a big part of why
Speaker 3: you saw the big turnaround in small caps to the downside.
Speaker 5: You know, most many.
Speaker 3: Smaller companies, particularly the zombie companies, there's more variable rate
Speaker 3: debt and they are more at the mercy of what
Speaker 3: happens on the long end of the spectrum. And I
Speaker 3: think that will continue to be the case, that small
Speaker 3: caps will be at the mercy of the move in
Speaker 3: the bond market. And so I think you have opportunities.
Speaker 3: But what we have been saying is when you go
Speaker 3: down the cap spectrum looking for opportunities, do not sacrifice quality.
Speaker 5: We had a low quality trade that kicked in in
Speaker 5: the last month or so.
Speaker 3: We were saying, fade that low quality trade down the
Speaker 3: cap spectrum. If you're going to go down the cap
Speaker 3: spectrum absolutely stay up in quality.
Speaker 1: So, Lizanne, at the end of the day, how much
Speaker 1: do you read into today's sell off in stocks and
Speaker 1: bonds and doesn't set the tone for the remaining days
Speaker 1: of twenty twenty four.
Speaker 3: Well, there was some signs of some turn under the surface.
Speaker 3: If you look at the NASDAC. Obviously the market has
Speaker 3: done really well since election day, but the average member
Speaker 3: maximum drawed down with then the SMP is negative nine
Speaker 3: percent just in see election. It's negative twenty one percent
Speaker 3: in the Nasdaq just in see election, and that doesn't
Speaker 3: include today. So we were seeing some underlying weakness, it
Speaker 3: was just masked by what the cap weighted indexes were doing.
Speaker 3: I think that type of turn under the surface could continue.
Speaker 5: We may continue to see some.
Speaker 3: Catch down by their recent sort of high momentum leaders.
Speaker 3: I would look for the point where you start to
Speaker 3: see some grinding better performance under the surface, much like
Speaker 3: we started to see back in the mid July period
Speaker 3: of time. So that's what I'm keeping a close eye
Speaker 3: on as we go through this process of weakness, even
Speaker 3: if it's only a one day phenomenon.
Speaker 5: I have no idea that's the case.
Speaker 2: Well, that kind of circles us back to corporate earnings, Lisanne.
Speaker 2: I mean you mentioned what we saw earlier this year
Speaker 2: with some of the same fears of materialized, and then
Speaker 2: when companies started to report, at least the larger cap companies,
Speaker 2: all was well, relatively speaking, And I do wonder if
Speaker 2: maybe we see a repeat of that where people do
Speaker 2: rush back to some of those big tech just big
Speaker 2: cap names, not just tech, but big cat names, those
Speaker 2: that have proven to have the cash flow of the
Speaker 2: revenue course the profitability to justify their valuations.
Speaker 3: I think you're right, Romain, and it's not just profitability
Speaker 3: but profit margins. So expectations for calendar your twenty twenty
Speaker 3: five earnings, both for the S and P but also
Speaker 3: down the cap spectrum in an index like the rest
Speaker 3: of two.
Speaker 5: Thousand are relatively lofty.
Speaker 3: In the case of the S and P five hundred,
Speaker 3: those fairly lofty double digit kind of gains and earnings
Speaker 3: are predicated on record breaking profit margins. The good news
Speaker 3: is is that forward twelve month profit margin estimates continue
Speaker 3: to go higher. If that is maintained and you continue
Speaker 3: to see decent productivity numbers, then I think you're okay.
Speaker 5: In those segments of the market where.
Speaker 3: You've got that profitability profile. But I think you're right.
Speaker 3: I think that trajectory of profitability and in particular maintenance
Speaker 3: if not growth and profit margins.
Speaker 5: Is really key to story in twenty twenty five.
Speaker 1: All right, liz Anne, really appreciate your joining us today.
Speaker 1: Fantastic insight from liz Anne Sanders, Chief Investment Strategies over
Speaker 1: at Charles Schwab on the selloff