1 00:00:03,240 --> 00:00:06,640 Speaker 1: Global business news twenty four hours a day. It's Bloomberg 2 00:00:06,680 --> 00:00:09,760 Speaker 1: dot Com, the Radio plus Mobile Act and on your radio, 3 00:00:10,039 --> 00:00:14,320 Speaker 1: this is a Bloomberg business flag BROM Bloomberg World Handquarters. 4 00:00:14,360 --> 00:00:16,720 Speaker 1: I'm Charlie Pellett. U S stocks are climbing for a 5 00:00:16,800 --> 00:00:19,479 Speaker 1: third day. We've got the SMP five hundred index and 6 00:00:19,600 --> 00:00:22,720 Speaker 1: the down Jones Industrial Average both trading at a record 7 00:00:23,400 --> 00:00:25,920 Speaker 1: one fifty one right now. On the SMP five hundred 8 00:00:25,960 --> 00:00:29,600 Speaker 1: index up fourteen points again of seven tenths of one percent. 9 00:00:30,000 --> 00:00:33,680 Speaker 1: Down Industrial is up one hundred eighteen points to eighteen thousand, 10 00:00:33,760 --> 00:00:36,240 Speaker 1: three hundred forty five. That's a gain of seven tenths 11 00:00:36,280 --> 00:00:39,040 Speaker 1: of one percent. Naz Stack is up seven tenths of 12 00:00:39,040 --> 00:00:43,080 Speaker 1: one percent, up thirty three points to five thousand, twenty two. 13 00:00:43,440 --> 00:00:45,960 Speaker 1: The tenure down twenty five thirty seconds, the yield on 14 00:00:46,120 --> 00:00:49,040 Speaker 1: the ten year one point five one percent. Gold down 15 00:00:49,080 --> 00:00:51,400 Speaker 1: the most in seven weeks. That is down twenty two 16 00:00:51,560 --> 00:00:54,480 Speaker 1: sixty the ounce at thirteen thirty four, a drop there 17 00:00:54,520 --> 00:00:57,920 Speaker 1: of one point seven percent. And crude oil West Texas 18 00:00:57,960 --> 00:01:01,480 Speaker 1: Intermediate Crude now trading higher by two oh five. The 19 00:01:01,520 --> 00:01:04,679 Speaker 1: barrel eighty one on w t I. That is a 20 00:01:04,680 --> 00:01:08,640 Speaker 1: gain of four point six. I'm Charlie Pellett and that's 21 00:01:08,760 --> 00:01:14,479 Speaker 1: a Bloomberg business flash. This is taking stock with Pim 22 00:01:14,560 --> 00:01:20,360 Speaker 1: Box and Kathleen Hayes on Bloomberg Radio Earnings and Equities. 23 00:01:20,440 --> 00:01:23,399 Speaker 1: Do they actually follow each other? Let's find out more 24 00:01:23,440 --> 00:01:26,320 Speaker 1: from Jonathan Golob. He is the chief US market strategist 25 00:01:26,360 --> 00:01:29,679 Speaker 1: for RBC Capital Markets, and he joins me here in 26 00:01:29,760 --> 00:01:33,080 Speaker 1: the studio. Jonathan, always a pleasure tell me about the 27 00:01:33,160 --> 00:01:36,880 Speaker 1: earning season. You say, weaker earnings, higher multiples. Everyone's going 28 00:01:36,959 --> 00:01:39,240 Speaker 1: to pay more for the same dollar of earnings. You know, 29 00:01:39,240 --> 00:01:41,480 Speaker 1: it's it's amazing, Pimen. When I put this note out 30 00:01:41,480 --> 00:01:44,880 Speaker 1: on on Monday, you almost get these hateful looks from 31 00:01:44,920 --> 00:01:48,240 Speaker 1: investors because they always think the only way markets go 32 00:01:48,400 --> 00:01:50,760 Speaker 1: higher is because of of of a pickup in in 33 00:01:50,880 --> 00:01:55,120 Speaker 1: your earnings growth. But in reality, when earnings weekend, there's 34 00:01:55,160 --> 00:01:57,320 Speaker 1: about a fifty fifty shot that the multiple is gonna 35 00:01:57,320 --> 00:02:00,880 Speaker 1: go higher or lower. And it's really about very different 36 00:02:00,920 --> 00:02:04,000 Speaker 1: things that drive one or the other, especially over recently 37 00:02:04,040 --> 00:02:06,280 Speaker 1: short periods like you know, like we're seeing in the 38 00:02:06,360 --> 00:02:09,520 Speaker 1: last several days, well, the last several days could turn 39 00:02:09,600 --> 00:02:12,639 Speaker 1: people into a bull if they haven't already bought stocks, 40 00:02:12,720 --> 00:02:16,519 Speaker 1: right if you know, it's there's this reluctance to believe. 41 00:02:16,560 --> 00:02:18,400 Speaker 1: And you and I were talking about before we you know, 42 00:02:18,480 --> 00:02:21,560 Speaker 1: we uh we which went live here about how this 43 00:02:21,720 --> 00:02:25,280 Speaker 1: just almost seems like it's defying gravity. But there's a 44 00:02:25,320 --> 00:02:28,440 Speaker 1: couple of things that I think are really forcing the 45 00:02:28,919 --> 00:02:31,119 Speaker 1: market higher. And the first one is if you look 46 00:02:31,120 --> 00:02:33,240 Speaker 1: at the yield on stocks, if you look at dividends 47 00:02:33,240 --> 00:02:37,359 Speaker 1: plus buy backs, it's yielding four point seven percent at 48 00:02:37,360 --> 00:02:39,200 Speaker 1: a time where treasury is right now, I think, according 49 00:02:39,240 --> 00:02:42,880 Speaker 1: to Bloomberger about one point five, and you know, there's 50 00:02:42,919 --> 00:02:45,720 Speaker 1: just two wide a gap between those, and it forces 51 00:02:45,800 --> 00:02:48,960 Speaker 1: people in the The other thing is companies are doing 52 00:02:49,040 --> 00:02:53,600 Speaker 1: a brilliant job of managing in a low revenue environment 53 00:02:53,960 --> 00:02:57,200 Speaker 1: of squeezing out more profits, more cash flow as returning 54 00:02:57,200 --> 00:03:00,480 Speaker 1: it to shareholders. So companies get the game right now 55 00:03:00,560 --> 00:03:02,960 Speaker 1: that this economy is not going to do it for them, 56 00:03:03,360 --> 00:03:06,000 Speaker 1: and they're they're really managing well against that. All right, 57 00:03:06,080 --> 00:03:08,040 Speaker 1: let's take those two things, because you talk about in 58 00:03:08,040 --> 00:03:10,519 Speaker 1: a sense relative yield, right, you're looking at the yield 59 00:03:10,520 --> 00:03:14,280 Speaker 1: on a treasury bond versus the yield from stocks. Do 60 00:03:14,320 --> 00:03:19,399 Speaker 1: you really believe that they're the same group of investors. Um, 61 00:03:19,440 --> 00:03:21,840 Speaker 1: maybe not the exact same group of investors, but if 62 00:03:21,880 --> 00:03:25,000 Speaker 1: you think about um, you know, I think about my mom, 63 00:03:25,080 --> 00:03:27,000 Speaker 1: who's thinking that she needs to live off of a 64 00:03:27,080 --> 00:03:30,840 Speaker 1: yield and if she can get more on a uh, 65 00:03:30,880 --> 00:03:32,960 Speaker 1: you know, more in a stock portfolio. She has a 66 00:03:32,960 --> 00:03:36,680 Speaker 1: dividend portfolio, she can easily get over three percent, and 67 00:03:36,720 --> 00:03:39,320 Speaker 1: if she's putting money in ammuni bond or a government bond, 68 00:03:39,680 --> 00:03:41,680 Speaker 1: she's not going to get that. And so yes, there's 69 00:03:41,680 --> 00:03:44,320 Speaker 1: a little more volatility. And she also knows that the 70 00:03:44,360 --> 00:03:46,520 Speaker 1: likeliders over time, that that dividend is going to grow 71 00:03:46,520 --> 00:03:48,560 Speaker 1: on her portfolio. So it may not be the exact 72 00:03:48,640 --> 00:03:51,480 Speaker 1: same group of investors, but they are looking at alternatives, 73 00:03:51,480 --> 00:03:53,240 Speaker 1: you know, between eight versus big all right, which is 74 00:03:53,240 --> 00:03:55,000 Speaker 1: what the Federal Reserve seems to want. They want you 75 00:03:55,040 --> 00:03:57,000 Speaker 1: to take a little bit more risk, not only in 76 00:03:57,160 --> 00:03:59,800 Speaker 1: what you're investing in, but what companies are investing in. 77 00:04:00,400 --> 00:04:06,160 Speaker 1: You mentioned also, um, the earnings picture, right, give me 78 00:04:06,200 --> 00:04:07,920 Speaker 1: your give me your best estimate, what we what do 79 00:04:08,000 --> 00:04:10,600 Speaker 1: we go through? Alca, fifteen cents versus the estimate of 80 00:04:10,680 --> 00:04:13,760 Speaker 1: nine cents made people happy yesterday, right, So I think 81 00:04:13,800 --> 00:04:16,560 Speaker 1: we have to look at what's happening near term or 82 00:04:16,600 --> 00:04:19,440 Speaker 1: in in the last you know, year or so, we've 83 00:04:19,440 --> 00:04:21,440 Speaker 1: have what a lot of folks have called an earnings recession. 84 00:04:21,480 --> 00:04:24,520 Speaker 1: What you really have is a weak earnings trend where 85 00:04:24,520 --> 00:04:27,680 Speaker 1: earnings are growing three percent, four percent, something like that, 86 00:04:28,000 --> 00:04:31,480 Speaker 1: and in the last year the energy sector has collapsed 87 00:04:31,520 --> 00:04:33,280 Speaker 1: and made it look like there was an earning session 88 00:04:33,400 --> 00:04:36,560 Speaker 1: of recession. The reality is is if normally earnings grow 89 00:04:36,600 --> 00:04:39,960 Speaker 1: at seven we're growing at half that pace. So when 90 00:04:39,960 --> 00:04:41,840 Speaker 1: you get rid of the head wind from energy, here's 91 00:04:41,880 --> 00:04:44,160 Speaker 1: the here's the bad story. You're not gonna get faster, 92 00:04:44,279 --> 00:04:47,159 Speaker 1: much faster earnings anyway, The trend is still a really 93 00:04:47,240 --> 00:04:51,280 Speaker 1: weak environment. The question for stock investors is can you 94 00:04:51,400 --> 00:04:54,599 Speaker 1: get more upside without the earnings? Because I don't think 95 00:04:54,600 --> 00:04:56,880 Speaker 1: that they're going to re accelerate. So can you get 96 00:04:56,920 --> 00:05:00,560 Speaker 1: more upside without those earnings? Are people gonna pay more 97 00:05:00,760 --> 00:05:03,440 Speaker 1: for the same thing that they could have bought let's say, 98 00:05:03,720 --> 00:05:05,800 Speaker 1: you know, a year ago. I think it gets back 99 00:05:05,839 --> 00:05:09,800 Speaker 1: to these these arguments, which is relative relative yield, this 100 00:05:09,880 --> 00:05:14,239 Speaker 1: efficiency of corporate management, and it's squeezing out more cash flow. 101 00:05:14,600 --> 00:05:17,839 Speaker 1: Companies right now, for example, are generating about more free 102 00:05:17,839 --> 00:05:20,040 Speaker 1: cash flow than normal for every DELA running. And there's 103 00:05:20,080 --> 00:05:22,680 Speaker 1: one more thing we we we talk about the market 104 00:05:22,760 --> 00:05:25,520 Speaker 1: being really vulnerable Breggs in and upcoming elections and all 105 00:05:25,600 --> 00:05:27,760 Speaker 1: these things, but there's a measure of altility you have. 106 00:05:28,240 --> 00:05:29,440 Speaker 1: You have, you have the VIX. You can look at 107 00:05:29,480 --> 00:05:31,600 Speaker 1: it every day on your on your Bloomberg screen. And 108 00:05:31,640 --> 00:05:34,240 Speaker 1: we are running right now at a VIX about thirty 109 00:05:34,320 --> 00:05:38,080 Speaker 1: percent or more below long term averages. And when volatility 110 00:05:38,160 --> 00:05:40,960 Speaker 1: is lower, you pay more of a multiple for things, 111 00:05:41,000 --> 00:05:44,480 Speaker 1: you pay more for a less risky asset, and investors 112 00:05:44,920 --> 00:05:47,440 Speaker 1: are more caught up in the headlines than the actual data. 113 00:05:47,520 --> 00:05:49,560 Speaker 1: So yeah, I think this upside. Well, here's the data 114 00:05:49,600 --> 00:05:51,440 Speaker 1: when it comes to the VIX. The VIX right now 115 00:05:51,560 --> 00:05:55,080 Speaker 1: is thirteen point five, and you're right, I mean that 116 00:05:55,240 --> 00:05:58,440 Speaker 1: is historically low. And if you take a look, just 117 00:05:58,520 --> 00:06:01,120 Speaker 1: going back to January, we have that big whip saw 118 00:06:01,120 --> 00:06:05,040 Speaker 1: action January February which was as much as thirty right 119 00:06:05,160 --> 00:06:07,440 Speaker 1: And I look at if I'm measuring it and without 120 00:06:07,480 --> 00:06:10,280 Speaker 1: looking day to day, over the last five years, it's 121 00:06:10,320 --> 00:06:12,800 Speaker 1: average probably thirteen to fourteen. And if you look at 122 00:06:12,839 --> 00:06:14,800 Speaker 1: it the last twenty years, it's average twenty. So we 123 00:06:14,839 --> 00:06:18,119 Speaker 1: are in a again, it doesn't feel this way. We're 124 00:06:18,160 --> 00:06:22,080 Speaker 1: in a very low volatile h you know, low vulatail environment, 125 00:06:22,160 --> 00:06:25,400 Speaker 1: and you have to pay more for socks in that environment, 126 00:06:25,400 --> 00:06:27,080 Speaker 1: and the market actually is doing that. So I think 127 00:06:27,080 --> 00:06:29,640 Speaker 1: there is upside, all right, upside in the United States, 128 00:06:29,760 --> 00:06:31,800 Speaker 1: or you want to look more broadly, I think the 129 00:06:31,880 --> 00:06:35,160 Speaker 1: United States is particularly attractive compared to the rest of 130 00:06:35,160 --> 00:06:38,200 Speaker 1: the world. In a slow growth environment, you want to 131 00:06:38,200 --> 00:06:42,080 Speaker 1: be in businesses that have low fixed overhead. And so 132 00:06:42,120 --> 00:06:45,839 Speaker 1: what does that mean? Service oriented companies, companies with intellectual property, 133 00:06:46,240 --> 00:06:49,040 Speaker 1: biotech technology. And if you look at the US compared 134 00:06:49,080 --> 00:06:52,800 Speaker 1: to Europe or Japan, we all the innovation, all these 135 00:06:52,839 --> 00:06:56,440 Speaker 1: service oriented companies are really centered in those industries in 136 00:06:56,440 --> 00:06:59,840 Speaker 1: the United States. In Europe, for example, very heavyweighting and 137 00:07:00,040 --> 00:07:03,320 Speaker 1: banks and autos and machinery companies. In the US you 138 00:07:03,440 --> 00:07:06,240 Speaker 1: have a whole different kind of group of companies. So 139 00:07:06,440 --> 00:07:08,800 Speaker 1: I think the US is much better. What's the biggest 140 00:07:08,800 --> 00:07:13,720 Speaker 1: trap for investors today? The biggest The biggest trap is 141 00:07:13,760 --> 00:07:16,360 Speaker 1: probably you know we talked about risk is professional investors. 142 00:07:16,520 --> 00:07:18,240 Speaker 1: There's a risk that you miss the upside because you 143 00:07:18,240 --> 00:07:20,480 Speaker 1: know you're not willing to buy into it. Um. When 144 00:07:20,480 --> 00:07:22,720 Speaker 1: I'm talking to even some of the smartest investors, they 145 00:07:22,720 --> 00:07:25,080 Speaker 1: can't get over the fact that stocks can go up 146 00:07:25,560 --> 00:07:29,360 Speaker 1: in a weak growth environment. And that's probably their biggest mistake, 147 00:07:29,560 --> 00:07:31,760 Speaker 1: the biggest risks. I mean, we know what the risk are. 148 00:07:31,800 --> 00:07:34,160 Speaker 1: I think that that the Brexit was a head fake. 149 00:07:34,240 --> 00:07:38,160 Speaker 1: But European risk might be real at some point in time. Um, 150 00:07:38,200 --> 00:07:41,280 Speaker 1: But the European banks like Italian Well yeah, I mean okay, 151 00:07:41,360 --> 00:07:44,240 Speaker 1: so for sure, Well again, well, I think that Brexit 152 00:07:44,440 --> 00:07:48,120 Speaker 1: was an overstated concern. I don't think that the European 153 00:07:48,160 --> 00:07:50,560 Speaker 1: banks are I think that that, you know, if we 154 00:07:50,640 --> 00:07:53,040 Speaker 1: learned anything for the financial crisis is when bad things 155 00:07:53,080 --> 00:07:56,040 Speaker 1: happen to banks, bad things happen to markets, and that 156 00:07:56,040 --> 00:07:59,360 Speaker 1: that matter is probably more than Brexit, and anything which 157 00:07:59,360 --> 00:08:03,080 Speaker 1: would threaten the common currency could have bigger ramifications. But 158 00:08:03,200 --> 00:08:05,880 Speaker 1: right now the market is telling you that none of 159 00:08:05,920 --> 00:08:08,760 Speaker 1: those bits in the rear end, and it's smooth sailing. 160 00:08:09,200 --> 00:08:11,360 Speaker 1: At the beginning of the year, you came out with 161 00:08:11,400 --> 00:08:13,920 Speaker 1: a call that said that the SMP would be up 162 00:08:14,600 --> 00:08:17,440 Speaker 1: for the year about nine percent. Right, right, We're about 163 00:08:17,440 --> 00:08:21,040 Speaker 1: halfway there, right, four and a half percent. How much 164 00:08:21,120 --> 00:08:24,280 Speaker 1: flak did you take for that call. I took a 165 00:08:24,360 --> 00:08:26,360 Speaker 1: lot of flak for that nine percent call, and I 166 00:08:26,440 --> 00:08:30,480 Speaker 1: didn't think it sounded like such a crazy outlier until 167 00:08:30,600 --> 00:08:34,280 Speaker 1: I saw what other people were forecasting, and until until 168 00:08:34,320 --> 00:08:37,120 Speaker 1: you live through the late January February decline. It was. 169 00:08:37,320 --> 00:08:39,400 Speaker 1: You know, there was a tremendous press amount of pressure 170 00:08:39,440 --> 00:08:41,520 Speaker 1: on meat. You know when when the market was down 171 00:08:41,559 --> 00:08:45,040 Speaker 1: ten eleven percent in February, John, your numbers are un realistic. 172 00:08:45,040 --> 00:08:46,959 Speaker 1: They were high, They were too high going in your 173 00:08:46,960 --> 00:08:49,760 Speaker 1: two polladis you know, take it down and get realistic. 174 00:08:50,320 --> 00:08:52,640 Speaker 1: And I believe that we were going to see a 175 00:08:52,640 --> 00:08:56,000 Speaker 1: bounce off of it. We we have um interestant when 176 00:08:56,040 --> 00:08:58,480 Speaker 1: we put this note out on Monday, you know lower, 177 00:08:58,559 --> 00:09:01,560 Speaker 1: you know, weaker earning stronger mole to Bowles. The debate 178 00:09:01,600 --> 00:09:03,600 Speaker 1: we're having is do we raise our number because I 179 00:09:03,600 --> 00:09:05,120 Speaker 1: think that this run is going to continue. We didn't 180 00:09:05,120 --> 00:09:07,000 Speaker 1: have the guts to do that, but I do think 181 00:09:07,000 --> 00:09:08,679 Speaker 1: that this run is going to continue. The other thing 182 00:09:08,760 --> 00:09:11,080 Speaker 1: is this economic cycle, I think is going to be 183 00:09:11,120 --> 00:09:15,320 Speaker 1: longer than normal. So I think that when when you 184 00:09:15,400 --> 00:09:18,240 Speaker 1: have a weaker what what what causes the economic cycle 185 00:09:18,280 --> 00:09:20,840 Speaker 1: to ultimately come to an end is the fact that 186 00:09:20,880 --> 00:09:24,599 Speaker 1: you run out of spare capacity, the fact that, um 187 00:09:24,640 --> 00:09:28,120 Speaker 1: that you get inflationary pressures. Right now, inflation for seven 188 00:09:28,160 --> 00:09:31,959 Speaker 1: years into the cycle is still well contained. We still 189 00:09:32,240 --> 00:09:35,280 Speaker 1: appear to have some some slack in the system. So 190 00:09:35,480 --> 00:09:38,199 Speaker 1: in a slow growth environment, this is likely to continue 191 00:09:38,240 --> 00:09:41,640 Speaker 1: for longer than normal. Mind you, the last thirty years 192 00:09:41,679 --> 00:09:44,920 Speaker 1: we've had a recession once every ten years um. And 193 00:09:45,720 --> 00:09:48,880 Speaker 1: in a slower environment we could take that potentially even longer. 194 00:09:49,840 --> 00:09:53,000 Speaker 1: What do you say to people that look at corporate 195 00:09:53,040 --> 00:09:56,800 Speaker 1: bonds treasuries and they say, look, they've done really well 196 00:09:56,840 --> 00:09:59,080 Speaker 1: this year. You know the long bond you had bought 197 00:09:59,160 --> 00:10:00,679 Speaker 1: that at the beginning of the Here you're looking at 198 00:10:00,679 --> 00:10:08,280 Speaker 1: a return of anywhere from capital return. I'm not overleak, 199 00:10:08,480 --> 00:10:11,800 Speaker 1: you know. Do I think interest rates will edge higher? Yes, 200 00:10:11,920 --> 00:10:14,000 Speaker 1: so I think that they're going to run away and 201 00:10:14,120 --> 00:10:18,559 Speaker 1: squash bond investors. Probably not. And people have been screaming 202 00:10:18,679 --> 00:10:21,320 Speaker 1: that that you know that, you know that, you know 203 00:10:21,360 --> 00:10:23,400 Speaker 1: that the interest rates are gonna rise and kill bond 204 00:10:23,480 --> 00:10:25,760 Speaker 1: investors for the last five years and and and it 205 00:10:25,840 --> 00:10:30,080 Speaker 1: hasn't happened. The futures market, So what the markets prediction 206 00:10:30,080 --> 00:10:31,439 Speaker 1: of where things are going to be a year or 207 00:10:31,440 --> 00:10:33,360 Speaker 1: two year, three years out is saying that we don't 208 00:10:33,360 --> 00:10:36,560 Speaker 1: get to two percent interest rates until now? Do I 209 00:10:36,600 --> 00:10:38,920 Speaker 1: think the market is a little bit too I don't 210 00:10:39,200 --> 00:10:41,920 Speaker 1: want to say complacent, but but that we that we 211 00:10:42,000 --> 00:10:45,000 Speaker 1: get something higher than that sooner. I think so. But 212 00:10:45,440 --> 00:10:49,800 Speaker 1: I think the bond investors maybe better shape than perhaps 213 00:10:49,800 --> 00:10:53,839 Speaker 1: the fearmongers would say, well, thanks very much for spending time. 214 00:10:53,880 --> 00:10:57,760 Speaker 1: It's always Jonathan Gollum, he is the chief strategist for 215 00:10:58,040 --> 00:11:01,880 Speaker 1: RBC Capital Markets. With that guts he called nine return 216 00:11:02,280 --> 00:11:06,440 Speaker 1: to the SMP. We are halfway there. You're listening to 217 00:11:06,480 --> 00:11:09,360 Speaker 1: taking stock will take you through to the clothes and 218 00:11:09,520 --> 00:11:13,280 Speaker 1: this is Bloomberg h