1 00:00:00,080 --> 00:00:02,600 Speaker 1: Let's get to our guest. Gary Sloshberg is with us. 2 00:00:02,640 --> 00:00:06,160 Speaker 1: Gary is the global strategist at the Wells Fargo Investment Institute. 3 00:00:06,240 --> 00:00:09,080 Speaker 1: He is in San Francisco. Thanks for being with us. Gary, 4 00:00:09,280 --> 00:00:11,119 Speaker 1: lots on pack here. I think we got to begin 5 00:00:11,160 --> 00:00:14,280 Speaker 1: with the China story, right, and an interesting piece that 6 00:00:14,360 --> 00:00:16,560 Speaker 1: I was struck by from the Wall Street Journal saying 7 00:00:16,640 --> 00:00:21,080 Speaker 1: that Terry Guo, the founder of Fox Con, essentially wrote 8 00:00:21,079 --> 00:00:24,200 Speaker 1: a letter to authorities in Beijing and urged them to 9 00:00:24,239 --> 00:00:29,280 Speaker 1: accelerate plans to dismantle COVID zero, and Go argued that 10 00:00:29,360 --> 00:00:33,360 Speaker 1: not to do so would essentially threatened China's central position 11 00:00:33,400 --> 00:00:36,120 Speaker 1: in global supply chains. Now, whether it was the protest 12 00:00:36,479 --> 00:00:39,920 Speaker 1: or the letter from Mr Woe, the fact remains they 13 00:00:39,960 --> 00:00:42,280 Speaker 1: have made a very sharp pivot here, and I'm curious 14 00:00:42,320 --> 00:00:44,240 Speaker 1: to get your take. Would you put money to work 15 00:00:44,280 --> 00:00:48,600 Speaker 1: now in China? Well, We're still looking for a fairly 16 00:00:48,680 --> 00:00:51,960 Speaker 1: moderate recovery in China over the next twelve months. We 17 00:00:52,000 --> 00:00:56,040 Speaker 1: still have a slumping property sector. The Chinese government undoubtedly 18 00:00:56,120 --> 00:00:58,520 Speaker 1: will be looking to revive that as part of that 19 00:00:58,600 --> 00:01:01,800 Speaker 1: growth recovery there county on, but we still see that 20 00:01:01,880 --> 00:01:05,160 Speaker 1: weighing on economic growth formally an important engine of it. 21 00:01:05,640 --> 00:01:10,160 Speaker 1: Exports continue to weaken overseas, and even domestic spending maybe 22 00:01:10,200 --> 00:01:14,319 Speaker 1: slow to recover as in infection rates rise. So all 23 00:01:14,360 --> 00:01:16,840 Speaker 1: in all, we continue to focus on the US market. 24 00:01:16,920 --> 00:01:19,480 Speaker 1: We think we'll hold up a bit better uh than 25 00:01:19,920 --> 00:01:23,520 Speaker 1: overseas including China over the next twelve to eighteen months. 26 00:01:24,800 --> 00:01:28,039 Speaker 1: So I know you you figured that the Federal Reserve 27 00:01:28,080 --> 00:01:30,520 Speaker 1: is going to start cutting interest rates in the middle 28 00:01:30,600 --> 00:01:33,440 Speaker 1: of next year. I'd like to know what you're basing 29 00:01:33,480 --> 00:01:35,880 Speaker 1: that on, because so many FETE officials have been saying 30 00:01:35,920 --> 00:01:39,640 Speaker 1: for several months now that they may they will certainly 31 00:01:39,680 --> 00:01:43,680 Speaker 1: pause at some point, maybe after the first quarter or so, 32 00:01:43,959 --> 00:01:46,680 Speaker 1: but they when they show the line where their hand goes, 33 00:01:46,760 --> 00:01:50,520 Speaker 1: it looks like it goes straight out at that restrictive 34 00:01:50,840 --> 00:01:55,040 Speaker 1: end level for the rest of the year. Well, we 35 00:01:55,120 --> 00:01:59,000 Speaker 1: do that as a possibility. As you mentioned, many including 36 00:01:59,120 --> 00:02:01,400 Speaker 1: US field that there's a very good chance that FED 37 00:02:01,440 --> 00:02:04,200 Speaker 1: will move to the sidelines. But we also hold out 38 00:02:04,200 --> 00:02:07,400 Speaker 1: the possibility for one or two cuts in the FED 39 00:02:07,480 --> 00:02:11,320 Speaker 1: funds target rate very late next year, and that's predicated 40 00:02:11,360 --> 00:02:15,600 Speaker 1: on a recession that we think will begin during the 41 00:02:15,639 --> 00:02:18,760 Speaker 1: early part of three. That's a little earlier than the 42 00:02:18,800 --> 00:02:21,880 Speaker 1: consensus view, which has it about the middle or latter 43 00:02:21,960 --> 00:02:26,240 Speaker 1: part of next year. If that recession materializes, that it's 44 00:02:26,360 --> 00:02:31,080 Speaker 1: as expected, even a moderate recession will take pressure off inflation. 45 00:02:31,160 --> 00:02:34,079 Speaker 1: We do look for inflation coming off the boil pretty 46 00:02:34,160 --> 00:02:37,080 Speaker 1: rapidly over the course of next year. Between that and 47 00:02:37,120 --> 00:02:40,040 Speaker 1: the slowdown and the economy moderate as it is, we 48 00:02:40,160 --> 00:02:43,000 Speaker 1: think that provides a backdrop for the FED to ease 49 00:02:43,120 --> 00:02:47,119 Speaker 1: up very late. Okay, so there's the macro. Let's drill 50 00:02:47,160 --> 00:02:50,919 Speaker 1: down into market reaction in that scenario or under that scenario. 51 00:02:51,160 --> 00:02:53,320 Speaker 1: We were talking earlier in the day with Jim Paulson 52 00:02:53,480 --> 00:02:57,120 Speaker 1: from the Loothold Group. He was saying, Hey, the equity 53 00:02:57,120 --> 00:02:59,360 Speaker 1: market is going to take off next year at least 54 00:02:59,360 --> 00:03:02,960 Speaker 1: at five percent rally in US equities to see off 55 00:03:02,960 --> 00:03:08,480 Speaker 1: the mark. Well, we're a bit more cautious than than Jim. 56 00:03:08,560 --> 00:03:11,560 Speaker 1: We do think that the worst of the earning slowdown 57 00:03:11,760 --> 00:03:15,359 Speaker 1: is still ahead of US um Indeed, fiscal stimulus may 58 00:03:15,400 --> 00:03:17,440 Speaker 1: be out there, but we don't see that as being 59 00:03:17,480 --> 00:03:21,639 Speaker 1: a game changer for the economic cycle that we see unfolding. 60 00:03:22,240 --> 00:03:26,040 Speaker 1: Evaluations already have been compressed by the backup and interest rates. 61 00:03:26,600 --> 00:03:28,960 Speaker 1: We don't see those rates coming down to the latter 62 00:03:29,000 --> 00:03:31,639 Speaker 1: part of the year, so one engine of the stock 63 00:03:31,680 --> 00:03:34,520 Speaker 1: market rally, we think will be on the sidelines. The 64 00:03:34,560 --> 00:03:38,560 Speaker 1: more important, though, the earning slowdown that we expect to 65 00:03:38,600 --> 00:03:41,240 Speaker 1: see in sync with the recession during the early part 66 00:03:41,240 --> 00:03:44,360 Speaker 1: of the year needs that. We believe that the stock 67 00:03:44,440 --> 00:03:48,200 Speaker 1: market will face headwinds during much of three. We do 68 00:03:48,280 --> 00:03:52,480 Speaker 1: look for a recovery late next year in anticipation of 69 00:03:52,920 --> 00:03:55,760 Speaker 1: a recovery in the general economy. That recovery in the 70 00:03:55,800 --> 00:03:59,480 Speaker 1: stock market could take place as early as the summer, 71 00:03:59,720 --> 00:04:03,920 Speaker 1: as market anticipates to turnaround in the economy. Well, if 72 00:04:04,000 --> 00:04:07,320 Speaker 1: I want to anticipate that, how do I take proper 73 00:04:07,480 --> 00:04:12,000 Speaker 1: anticipatory steps? Should But in a portfolio, I go from 74 00:04:12,080 --> 00:04:14,200 Speaker 1: this side to that side? What are the sides? What 75 00:04:14,200 --> 00:04:18,080 Speaker 1: what industries look good to you? Well, the sectors of 76 00:04:18,120 --> 00:04:22,480 Speaker 1: the market over the next six to eight months, until 77 00:04:22,520 --> 00:04:26,640 Speaker 1: we see that recovery materializing in the economy and an 78 00:04:26,680 --> 00:04:31,200 Speaker 1: anticipatory recovery in the stock market. Until that happens, we 79 00:04:31,279 --> 00:04:34,240 Speaker 1: continue to focus not only on the US market, but 80 00:04:35,000 --> 00:04:40,600 Speaker 1: large cap liquid stocks, the those with stronger finances, and 81 00:04:40,680 --> 00:04:44,279 Speaker 1: those sectors of the market like healthcare that are less 82 00:04:44,320 --> 00:04:47,520 Speaker 1: sensitive to the economic cycle will hold up even in 83 00:04:47,560 --> 00:04:50,880 Speaker 1: the midst of a recession in relative terms. As the 84 00:04:50,920 --> 00:04:54,560 Speaker 1: recovery approaches, then you move into the more cyclically sensitive 85 00:04:54,600 --> 00:04:59,000 Speaker 1: sectors of the market, consumer discretionary industrials, even to some 86 00:04:59,080 --> 00:05:02,600 Speaker 1: extent technology g as interest rates begin to move lower 87 00:05:03,080 --> 00:05:06,520 Speaker 1: and that improves the present value of earnings. There. The 88 00:05:06,880 --> 00:05:09,400 Speaker 1: energy complex has been a thorny issue, right I mean, 89 00:05:09,400 --> 00:05:12,960 Speaker 1: we're talking about even today the Keystone pipeline shut off 90 00:05:12,960 --> 00:05:16,120 Speaker 1: in Kansas after an oil spirit So this, this balance 91 00:05:16,200 --> 00:05:19,159 Speaker 1: between demand and supply has been tricky. There's the war 92 00:05:19,200 --> 00:05:23,400 Speaker 1: in Ukraine to contend with the movement toward green sources 93 00:05:23,480 --> 00:05:27,480 Speaker 1: of energy and how that may affect the outlook. Give 94 00:05:27,520 --> 00:05:30,040 Speaker 1: me your sense of where the energy complex should fit 95 00:05:30,080 --> 00:05:33,080 Speaker 1: into a portfolio right now or should be. We be 96 00:05:33,160 --> 00:05:38,960 Speaker 1: thinking of other technologies, not traditional fossil fuels, well, we 97 00:05:39,000 --> 00:05:42,760 Speaker 1: are focusing on fossil fuels. We uh. We feel that 98 00:05:43,680 --> 00:05:47,680 Speaker 1: a normally cyclically sensitive sector to some extent should be 99 00:05:47,720 --> 00:05:50,400 Speaker 1: a favorite sector in this environment, more because of a 100 00:05:50,400 --> 00:05:53,760 Speaker 1: fundamental tightness in the market which we don't expect to 101 00:05:53,800 --> 00:05:58,320 Speaker 1: see alleviated all that much over the course of our 102 00:05:59,120 --> 00:06:01,159 Speaker 1: real sector and all his fields that we're in the 103 00:06:01,160 --> 00:06:04,080 Speaker 1: midst of a supercycle, not only for oil but for 104 00:06:04,279 --> 00:06:08,400 Speaker 1: other commodities, reflecting under investment in the past several years, 105 00:06:08,880 --> 00:06:11,520 Speaker 1: in part due to the focus on renewables and the 106 00:06:11,600 --> 00:06:14,880 Speaker 1: uncertain environment that that created for some of the fossil 107 00:06:14,920 --> 00:06:17,680 Speaker 1: fuel companies. So even as we go through a moderate 108 00:06:17,720 --> 00:06:21,320 Speaker 1: slowdown here is something a bit deeper overseas, we think 109 00:06:21,360 --> 00:06:24,840 Speaker 1: the downside to oil prices will be more limited than 110 00:06:24,880 --> 00:06:28,279 Speaker 1: it has been during past global economic slowdowns. So what 111 00:06:28,320 --> 00:06:31,200 Speaker 1: about if you want a solid sort of income bond 112 00:06:31,200 --> 00:06:33,520 Speaker 1: part of your portfolio. I was looking at the to 113 00:06:33,560 --> 00:06:35,360 Speaker 1: your note today and thinking, we'll gores the yields four 114 00:06:35,360 --> 00:06:38,159 Speaker 1: point three. You could hold them to maturity and make 115 00:06:38,240 --> 00:06:40,520 Speaker 1: you know, almost four and a half percent, which is 116 00:06:40,880 --> 00:06:42,719 Speaker 1: more than you can make on some things nowadays. Is 117 00:06:42,760 --> 00:06:45,560 Speaker 1: there a what would be an equivalent way to for 118 00:06:45,560 --> 00:06:49,160 Speaker 1: people to invest in that kind of uh, you know, 119 00:06:49,400 --> 00:06:53,160 Speaker 1: with that kind of goal. Well, we're still cautious on 120 00:06:53,200 --> 00:06:56,000 Speaker 1: the intermediate portion of the yield curve, which includes the 121 00:06:56,080 --> 00:06:58,520 Speaker 1: two year all the way out to about five or 122 00:06:58,560 --> 00:07:02,599 Speaker 1: seven years securities. This maturity spectrum is most sensitive to 123 00:07:02,680 --> 00:07:05,200 Speaker 1: what the Federal Reserve with the market things the Federal 124 00:07:05,240 --> 00:07:08,640 Speaker 1: Reserve will be doing, and despite the optimism out there, 125 00:07:08,720 --> 00:07:11,280 Speaker 1: it's clear that the Federal Reserve will be raising interest 126 00:07:11,400 --> 00:07:16,400 Speaker 1: rates several more times into the first half of three. 127 00:07:16,520 --> 00:07:21,560 Speaker 1: Our focus is continuing on more of a barbell strategy, 128 00:07:21,680 --> 00:07:26,040 Speaker 1: focusing on very short term investments that will benefit from 129 00:07:26,080 --> 00:07:29,840 Speaker 1: the increases in yield on the by the Federal Reserve, 130 00:07:30,560 --> 00:07:33,440 Speaker 1: the ability to roll those investments over because they are 131 00:07:33,520 --> 00:07:37,200 Speaker 1: so short term. We're also extending and focusing a bit 132 00:07:37,240 --> 00:07:41,600 Speaker 1: more on longer duration securities. Those yields are are fairly 133 00:07:41,640 --> 00:07:45,040 Speaker 1: attractive at this point, not as attractive as short term 134 00:07:45,680 --> 00:07:48,680 Speaker 1: investments in an inverted yield curve, but we think we 135 00:07:48,720 --> 00:07:51,400 Speaker 1: are closed to a peak there, and with bond yields 136 00:07:51,400 --> 00:07:54,520 Speaker 1: expected to move lower during the latter part of next year, 137 00:07:54,560 --> 00:07:58,280 Speaker 1: if not sooner than that, that will provide price of appreciation, 138 00:07:58,440 --> 00:08:02,840 Speaker 1: which of course can be considerable at these low interest rates, 139 00:08:03,320 --> 00:08:05,840 Speaker 1: that's for sure. Well Gary Schlossburg, thank you so very 140 00:08:05,880 --> 00:08:08,119 Speaker 1: much for joining us, giving us some i'd say nice 141 00:08:08,160 --> 00:08:11,200 Speaker 1: sound prudent ideas as we go into a very uncertain 142 00:08:11,200 --> 00:08:15,640 Speaker 1: twenty twenty three. Gary is global strategist at Wells Fargo 143 00:08:15,760 --> 00:08:16,960 Speaker 1: Investment Institute.