Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: We're back with Morgan Stanley, CIO and chief US equity
Speaker 2: strategist Mike Wilson. And Mike, you've been on a world tour.
Speaker 2: You've been traveling a lot for work to see clients.
Speaker 2: It's interesting to me that US strategists, even you, who
Speaker 2: are kind of a known bear, think we're going to
Speaker 2: still go up to sixty five hundred. All these European banks,
Speaker 2: Barkley's and Ubs cutting their targets HSBC double downgrade. Did
Speaker 2: they just see it differently than we do here?
Speaker 3: Well, I would say their path has been different, right,
Speaker 3: So once again, I think majority of strategists and clients
Speaker 3: came into the year probably too bullish about the kind
Speaker 3: of the trajectory. And look, we overshot all of our
Speaker 3: base case targets into last year. We talked about sixty
Speaker 3: one hundred as our bowlcase. We were bullish at first
Speaker 3: of all. We were bullish in the second fl last
Speaker 3: year for very different reasons than most people. Most people
Speaker 3: were bullish because everybody's saying, oh, the economy is great,
Speaker 3: earnings are wonderful. No, what was going on was the
Speaker 3: FED was cutting interest rates, Okay, there's an election that
Speaker 3: we had a clean result in which caused a lot
Speaker 3: of shortcovering and hedging coming off, and we had a
Speaker 3: recession getting priced out from the summer, so we just overshot,
Speaker 3: and then we have all these growth headwinds. So what
Speaker 3: I what I view is I think this that I
Speaker 3: think a lot of people are just catching up to
Speaker 3: what's happened, and so now of course they're marking themselves
Speaker 3: to market. We always had a fifty five hundred to
Speaker 3: sixty one hundred target for the first half of the range.
Speaker 3: For the first half of the year, we get the
Speaker 3: low end of that range. So we've got to be
Speaker 3: true to our original call. Once again. We can take
Speaker 3: out fifty five hundred in a hard landing. Okay, we're
Speaker 3: not there yet. I would say the risk of that
Speaker 3: has gone up. It's probably thirty thirty five percent now,
Speaker 3: is probably more like ten to twenty percent at the
Speaker 3: beginning of the year. So that's what we're watching. We're
Speaker 3: we're just being more tactical, I think than most people.
Speaker 3: Once again, you know, clients right now don't care about
Speaker 3: year end. They care about is making money in the
Speaker 3: next quarter or two. That's our job, and so we've
Speaker 3: been in the right sectors. We've been in the right
Speaker 3: you know, factors for the most part, really for the
Speaker 3: last year. And I'd like to say proof is in
Speaker 3: the pudding, right. The numbers don't lie. Like our focus
Speaker 3: list is up seven percent year to date, right, so
Speaker 3: I mean that's pretty good. And over the last seven
Speaker 3: years it's up eighty percent relative to the S and
Speaker 3: P five hundred, So you know, those are the numbers, right,
Speaker 3: The numbers don't lie, And because we had had the
Speaker 3: right call and that's just in the last twelve months,
Speaker 3: but really over the last seven years understanding what's really
Speaker 3: going on in the economy and earnings, and understand policy
Speaker 3: and the impact on valuation.
Speaker 1: You mentioned that you're being tactical, and I want to
Speaker 1: talk about how tactical you're actually being, because there was
Speaker 1: a really interesting noteut from Julian Emmanuel from Evercore overnight.
Speaker 1: He says, to buy options when the vix is low,
Speaker 1: stocks when the vix is high. Are you that short
Speaker 1: term that seems like a very specific narrow you have
Speaker 1: to be quick on your feet there or are you
Speaker 1: looking out when you say tactical maybe.
Speaker 3: A month or two? Well, It depends on the client, right,
Speaker 3: So most of our interaction now is with institutional clients
Speaker 3: who have you know, timeframes from one day to two months.
Speaker 3: You know, most people don't have month. I mean, they're
Speaker 3: not trading their portfolio turning it over that much, but
Speaker 3: they are looking to make money every month, and so
Speaker 3: that's how we gauge it. So it's usually a thirty
Speaker 3: day kind of window. And you know, we made this
Speaker 3: call two weeks ago when we hit fifty five hundred.
Speaker 3: Actually we got literally to the number, and since then
Speaker 3: we have rallied to I think we could maybe rally
Speaker 3: fifty nine hundred they or take. I don't think we
Speaker 3: can go to new highs. You know, we're on record
Speaker 3: saying it's going to be really hard for us to
Speaker 3: go to new highs until Earning's revision breath not only
Speaker 3: bottoms but actually gets in positive territory again. And I
Speaker 3: think that's going to be challenging in the first half
Speaker 3: of this year. Now, as I mentioned earlier, I think
Speaker 3: in the second half, as investors have to look forward
Speaker 3: to twenty twenty six, we could see revision factors start
Speaker 3: to reaccelerate, and that will be when we could potentially
Speaker 3: make new high sixty five hundred. Maybe it's the end
Speaker 3: of the year, maybe it's early next year. Timing is
Speaker 3: going to be uncertain, Mike.
Speaker 4: My question is who's buying because the reality is s
Speaker 4: and P five hundred is still down more than three
Speaker 4: percent this year, the nasdack down almost six percent for
Speaker 4: the year. Hedge fund across the street have been clobbered
Speaker 4: through March, so I'm not quite sure what money they
Speaker 4: have to buy, and so is there really dry powder
Speaker 4: on the sidelines to buy into these dipths with conviction
Speaker 4: when you still could be worried that you break under
Speaker 4: that fifty five hundred.
Speaker 3: So asset owners remain very active, whether that's retail pension funds.
Speaker 3: In fact, there's a rebalancing going on this week. One
Speaker 3: of the drivers for this rally in the last two
Speaker 3: weeks has been rebalancing from bonds back towards stocks. So
Speaker 3: and of course corporates are probably been the single biggest
Speaker 3: buyer of stocks. And there hasn't been much supply, as
Speaker 3: you know, the IPO calendar, equity calendar has been pretty light,
Speaker 3: so we still have kind of a good supply and
Speaker 3: demand balance that will change, like when would the asset
Speaker 3: owners sell. The asset owners will sell when they think
Speaker 3: there's a major trajectory change ie recession. Okay, I e.
Speaker 3: The FED has to raise rates again because inflation is
Speaker 3: really coming back. Neither one of those conditions is in
Speaker 3: place yet. But those are your risks, right, That's what
Speaker 3: we'll get the asset owner client to sell stocks. Is
Speaker 3: you get hard landing or you get the AT having
Speaker 3: to raise rates again.
Speaker 2: By the way, so I always ask the same question
Speaker 2: shanally because we always talk about retail is fully invested.
Speaker 2: Foreign ownership of US stocks is at an all time high.
Speaker 2: But I think it's a good point that corporates will
Speaker 2: buy in this administration. They'll embrace that as opposed to
Speaker 2: the previous administration. And we were talking during the break
Speaker 2: about retail clients used to have sixty forty, right, forty
Speaker 2: being bonds and now you're seeing more like seventy thirty
Speaker 2: thirty being cash.
Speaker 3: Yeah, well it's not seventy, it's low sixties. It's like
Speaker 3: sixty two. The big loser has been bonds. So retail
Speaker 3: investors who get a bad wrap are not that dumb.
Speaker 3: I mean, they basically have been letting their long duration
Speaker 3: portfolio roll off, as bonds have been by far the
Speaker 3: worst asset for the last several years. Now, could they
Speaker 3: buy bonds again at some point, yeah, potentially, But.
Speaker 2: Or they can buy stocks. Right if you look at
Speaker 2: money market funds, we always pull up MMFA index on
Speaker 2: the Bloomberg terminal. It's up and to the right. And
Speaker 2: you know, any sucker can get four and a half
Speaker 2: percent now in a Marcus account or whatever.
Speaker 3: Right, So they have a barbelle they have. They are overweight,
Speaker 3: they're a little bit higher than normal on stocks, okay,
Speaker 3: and they're higher weight on short duration fixed income i e.
Speaker 3: Cash in two years and in that sounds pretty smart
Speaker 3: to me, like that that's been the right barbell high
Speaker 3: quality stocks, okay, and short duration fixed income because you're
Speaker 3: getting paid a real rate of return now for the
Speaker 3: first time in like what fifteen twenty years. I mean,
Speaker 3: it's not bad. It's not a bad barber. And then
Speaker 3: of course they're doing stuff in alternatives, whether it's private credit,
Speaker 3: which you're getting a pretty good return still, maybe some
Speaker 3: private equity, and of course they're in real estate.
Speaker 1: We don't really have time for another question, but I
Speaker 1: just don't understand the pitch to go out into bonds
Speaker 1: when cash you're earning four percent what the ten year
Speaker 1: treasure yield is at four and a half four point
Speaker 1: three percent. I just I don't It doesn't make sense
Speaker 1: why you would move out at all.
Speaker 3: Well, our strategies are bullish on bonds now because growth
Speaker 3: is slowing. The fat eventually will be cutting more and
Speaker 3: that will work its way in. So we could see
Speaker 3: we could see yields below four percent, maybe three and
Speaker 3: a half, even without or sent And of course if
Speaker 3: you get a recession, it's a great place to have
Speaker 3: some some duration.
Speaker 4: Mike, super nice to have you in studio today. That
Speaker 4: is Morgan Stanley's Mike Wilson