WEBVTT - Mike Wilson Talks Dollar Strength, Market Rally

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news. Bringing in now Mike Wilson,

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<v Speaker 1>the chief US equity strategist at Morgan Stanley, as we

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<v Speaker 1>continue to monitor a market that shows no sign of

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<v Speaker 1>stopping when it comes to setting records at the index level. Mike,

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<v Speaker 1>good morning. We just heard from Karen forty sixth record

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<v Speaker 1>of the year for the S and P five hundred.

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<v Speaker 1>Despite all the risks that we talk about throughout the year.

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<v Speaker 1>What are you looking at this morning as we watch

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<v Speaker 1>this market continue to trade at record highs.

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<v Speaker 2>Yeah, good morning, Nathan, Well look at me.

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<v Speaker 3>This, This, I guess was our bulcase and we laid

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<v Speaker 3>it out back in May and our meteor update. You know,

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<v Speaker 3>this isn't necessarily a popular view, but you know, we remain,

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<v Speaker 3>we believe we remain in this fiscally dominant world where

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<v Speaker 3>you know, fiscal policy remains very generous, and you know,

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<v Speaker 3>they found ways to finance that in a way that

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<v Speaker 3>does not disrupt the bond market, so that you know,

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<v Speaker 3>liquidity is very robust and multiples continue to expand. I

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<v Speaker 3>think one thing that doesn't get discussed much is that

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<v Speaker 3>almost all of the you know, return in the last

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<v Speaker 3>year has been driven by multiple expansion as opposed to

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<v Speaker 3>higher earning revisions. Now we've rolled forward earning revisions. But

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<v Speaker 3>you know generally that the earning sesspice for twenty twenty

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<v Speaker 3>four have come down this year, and they're starting to

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<v Speaker 3>come down after twenty twenty five.

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<v Speaker 2>But hey, who am I to say that the market's overvalued?

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<v Speaker 3>And you know, the thing that's really going on now

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<v Speaker 3>is we have coordinated or I don't know it's coordinated,

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<v Speaker 3>but we have basically most major central banks are now

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<v Speaker 3>easing policy. Even the Bank of Japan has kind of

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<v Speaker 3>backed off it's tightening campaign after the wobble we had

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<v Speaker 3>this summer, and now we have China joining the party

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<v Speaker 3>with its own policy initiatives, both on the monetary and

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<v Speaker 3>the fiscal side.

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<v Speaker 2>So it's a it's a.

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<v Speaker 3>Policy driven rally, and it's very robust, and it's even

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<v Speaker 3>riddening out now. So multiples are now twenty two times

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<v Speaker 3>at the index level, which you've only seen a couple

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<v Speaker 3>of times in history. But that will continue until basically

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<v Speaker 3>either you get something a real shock on the economic

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<v Speaker 3>front or you know, fundamentally speaking, or you get a

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<v Speaker 3>restriction on the liquidity front.

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<v Speaker 2>And just one last statistic there.

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<v Speaker 3>So we look at money supply growth globally in US dollars,

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<v Speaker 3>so US dollar liquidity, and that bottomed, you know, almost

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<v Speaker 3>two years ago and is now growing again very robustly

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<v Speaker 3>at about eight percent. And it's really shot up in

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<v Speaker 3>the last month and a half. And that's mostly due

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<v Speaker 3>to China and Japan starting to expand their bannl sheet

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<v Speaker 3>and the weaker dollar. So one other thing that could

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<v Speaker 3>cause them the rally to you know, kind of slow

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<v Speaker 3>down is that the dollar where to strengthen again, and

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<v Speaker 3>that's starting to happen. That's probably the one thing that

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<v Speaker 3>we're watching now that could kind of throw a wrench

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<v Speaker 3>into this pace of of the new records every day.

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<v Speaker 1>To take your point, Mike about whether this is a

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<v Speaker 1>fiscally driven rally, does that raise a question for you

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<v Speaker 1>about whether things could change depending on the outcome of

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<v Speaker 1>the election next month, whether fiscal policy could change depending

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<v Speaker 1>on Kamala Harris or Donald Trump becoming the next president,

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<v Speaker 1>or a change in power on Capitol Hill.

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<v Speaker 3>I don't think so, you know, neither party has really

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<v Speaker 3>shown any you know, willingness or ability to slow the

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<v Speaker 3>freight train on fiscal spend. I think The bigger concern

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<v Speaker 3>is how do they fund it, you know, and they've

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<v Speaker 3>they've been very creative over the last year and a half.

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<v Speaker 3>Of course, people have talked about the reverse repo facility.

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<v Speaker 3>We've discussed that at length, and we think that was

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<v Speaker 3>a very creative way to.

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<v Speaker 2>Help fund the government.

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<v Speaker 3>They've funded it at the front end, and for now,

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<v Speaker 3>the bond market seems to be okay with that.

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<v Speaker 2>I don't know if the election is going to be

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<v Speaker 2>is going to be.

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<v Speaker 3>The trigger for a while, all of a sudden, the

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<v Speaker 3>bond market, you know, starts to worry about the sustainability

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<v Speaker 3>of these fiscal deficits.

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<v Speaker 2>Okay, I mean, I mean, I don't think there's a big.

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<v Speaker 3>Difference between the two candidates or congressional who's running Congress

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<v Speaker 3>to say that that's going to stop. I think the

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<v Speaker 3>big risk, as it typically is when the bond markets

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<v Speaker 3>starts pushing back on the size of these deficits, and

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<v Speaker 3>that you know, who knows what that will be. And

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<v Speaker 3>maybe they can pull it off, Maybe we can inflate

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<v Speaker 3>our way out, and we can we can get better

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<v Speaker 3>growth next year.

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<v Speaker 2>We'll see.

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<v Speaker 3>But that's the game that we're playing, and right now,

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<v Speaker 3>that's that's a bull market.

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<v Speaker 1>And the time we have left, Mike, I want to

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<v Speaker 1>get your view on earning season as well as the

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<v Speaker 1>focus is going to turn back to the big banks

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<v Speaker 1>and the idea of companies raising their guidance a lot

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<v Speaker 1>more than a lot of strategists, at least according to

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<v Speaker 1>Bloomberg Intelligence data, are predicting. Here is Wall Street underestimating

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<v Speaker 1>earnings or are the companies over promising? Got about a

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<v Speaker 1>minute left.

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<v Speaker 2>Probably somewhere in between.

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<v Speaker 3>I mean, you know, historically speaking, bottoms up estimates do

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<v Speaker 3>come down over time they manage those earnings. We're seeing

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<v Speaker 3>the same thing in the third cour order this. You know,

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<v Speaker 3>this season of earnings have come down significantly, but as

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<v Speaker 3>you roll forward, you know, the marketcount of.

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<v Speaker 2>Looks past that.

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<v Speaker 3>So you know we're probably slightly below you know, estimates

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<v Speaker 3>for the fourth quarter as well as for twenty twenty five.

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<v Speaker 3>I don't think that's wildly out of consensus, although I

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<v Speaker 3>think we're below the Street in terms of top down forecasts.

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<v Speaker 2>But look, I mean, as long as ournis are growing and.

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<v Speaker 3>There's liquidity, I don't think that necessarily derails us what

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<v Speaker 3>we think is the most interesting thing to be talking about.

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<v Speaker 2>Forget the index is what's going on under the surface.

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<v Speaker 3>We have been overweight defensive stocks most of the year

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<v Speaker 3>and that worked out extremely well. We downgraded that about

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<v Speaker 3>three months ago or three weeks ago, and then we

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<v Speaker 3>upgraded cyclicals a week ago, and that probably is where

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<v Speaker 3>we're spending most of our time is trying to find

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<v Speaker 3>out how to beat the S and P five hundred

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<v Speaker 3>rather than trying to figure out the direction of the

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<v Speaker 3>S and P five hundred.

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<v Speaker 2>And right now it's you know, cyclical stocks.

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<v Speaker 3>Are having a bit of a rebound, led by financials,

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<v Speaker 3>some of the industrial areas, and maybe even some of

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<v Speaker 3>the commodity space. So that to me is the story

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<v Speaker 3>now is like where do I own? Not how much

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<v Speaker 3>do I own?

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<v Speaker 2>And right now it looks to be the Cyffroult for

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<v Speaker 2>having a bit of a remap.

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<v Speaker 1>Really appreciate your time Mike this morning. Thanks so much

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<v Speaker 1>for being with us. Mike Wilson there a chief US

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<v Speaker 1>equity strategist at Morgan Stanley