1 00:00:02,640 --> 00:00:05,320 Speaker 1: Welcome to the Bloomberg Penl Podcast. I'm Paul swing you, 2 00:00:05,360 --> 00:00:07,640 Speaker 1: along with my co host Lisa Brahma wits. Each day 3 00:00:07,720 --> 00:00:10,240 Speaker 1: we bring you the most noteworthy and useful interviews for 4 00:00:10,280 --> 00:00:12,520 Speaker 1: you and your money. Whether at the grocery store or 5 00:00:12,560 --> 00:00:15,480 Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple 6 00:00:15,520 --> 00:00:17,959 Speaker 1: podcast or wherever you listen to podcasts, as well as 7 00:00:17,960 --> 00:00:20,720 Speaker 1: at Bloomberg dot com. We are seeing a broad based 8 00:00:20,800 --> 00:00:23,439 Speaker 1: rally in US equity markets and here to talk with 9 00:00:23,520 --> 00:00:26,800 Speaker 1: us about it. Patrick Palfrey. He is Director Senior Equity 10 00:00:26,840 --> 00:00:30,280 Speaker 1: Strategistic Credit sweez Um. So, Patrick, I want to just 11 00:00:30,320 --> 00:00:34,239 Speaker 1: get your sense on whether we're actually seeing fundamental strength 12 00:00:34,320 --> 00:00:36,200 Speaker 1: in the earnings as we head into the final week 13 00:00:36,479 --> 00:00:39,560 Speaker 1: of three Q earning season or are we just seeing 14 00:00:39,840 --> 00:00:44,199 Speaker 1: a very low bar that has been stepped over. I mean, 15 00:00:44,240 --> 00:00:46,400 Speaker 1: when we take a look at the third quarter earning season, 16 00:00:46,720 --> 00:00:48,400 Speaker 1: I think your point on a low bar that's been 17 00:00:48,400 --> 00:00:51,320 Speaker 1: stepped over, I think that's a fair way of putting it. 18 00:00:51,520 --> 00:00:55,120 Speaker 1: I mean, in reality, the backdrop is still in NMIC 19 00:00:55,400 --> 00:00:57,520 Speaker 1: and it's likely to be anemic in the fourth quarter. 20 00:00:57,600 --> 00:01:00,480 Speaker 1: And when I say we're talking about EPO growth, that 21 00:01:00,560 --> 00:01:04,280 Speaker 1: is somewhere between one. So once you strip out the 22 00:01:04,319 --> 00:01:07,880 Speaker 1: benefits of buybacks, earnings are essentially flat. Now, there's some 23 00:01:07,959 --> 00:01:10,880 Speaker 1: unique dynamics that are are going on, and when you 24 00:01:10,920 --> 00:01:12,920 Speaker 1: take a look at the median company trends will of 25 00:01:12,959 --> 00:01:15,720 Speaker 1: a lot better. But but nevertheless it is an anemic 26 00:01:15,760 --> 00:01:18,839 Speaker 1: backdrop for for growth. So Patrick on the flip side 27 00:01:19,440 --> 00:01:23,640 Speaker 1: sets up for maybe some decent growth numbers in Do 28 00:01:23,680 --> 00:01:27,839 Speaker 1: you think the markets too optimistic about earnings growth? Well? 29 00:01:28,080 --> 00:01:29,640 Speaker 1: I think if you take a step back, I mean, 30 00:01:29,680 --> 00:01:34,160 Speaker 1: analysts typically start out optimistic and estimates historically fall. So 31 00:01:34,560 --> 00:01:37,559 Speaker 1: if you ask me, do those expectations need to come down, 32 00:01:37,959 --> 00:01:41,000 Speaker 1: the answer is yes. Do I think we are going 33 00:01:41,000 --> 00:01:43,840 Speaker 1: to see anything other than what we typically see? The 34 00:01:43,880 --> 00:01:46,880 Speaker 1: answer is no. And when I say that, we expect 35 00:01:46,959 --> 00:01:50,040 Speaker 1: EPs growth to come in around five So that's a 36 00:01:50,120 --> 00:01:53,000 Speaker 1: significant improvement from the numbers that we saw in the 37 00:01:53,000 --> 00:01:55,000 Speaker 1: current quarter and the numbers that we are likely to 38 00:01:55,000 --> 00:01:57,480 Speaker 1: see again in the fourth quarter. What do you make 39 00:01:57,480 --> 00:01:59,600 Speaker 1: of the volatility that we've seen in The response in 40 00:01:59,720 --> 00:02:04,520 Speaker 1: share is two earnings beats and conversely two misses. The 41 00:02:04,560 --> 00:02:07,800 Speaker 1: reaction has been more extreme this earning season and then 42 00:02:07,880 --> 00:02:11,960 Speaker 1: than it has been historically. How do you interpret that? Well, 43 00:02:12,160 --> 00:02:15,320 Speaker 1: I think investors have been looking for a way to 44 00:02:15,360 --> 00:02:17,320 Speaker 1: get positive and maybe maybe let me take a step 45 00:02:17,320 --> 00:02:21,959 Speaker 1: back here. You know, several months ago we turned more 46 00:02:22,000 --> 00:02:24,040 Speaker 1: cautious than we've been in a while, and it was 47 00:02:24,120 --> 00:02:27,000 Speaker 1: really around the deceleration in the industrial data and the 48 00:02:27,040 --> 00:02:30,360 Speaker 1: fact that the yield curve was inverted. Over the past 49 00:02:30,400 --> 00:02:33,639 Speaker 1: couple of weeks. Both of those appear to be dissipating, 50 00:02:33,840 --> 00:02:36,360 Speaker 1: so we have a yel curve that is much healthier 51 00:02:36,360 --> 00:02:39,239 Speaker 1: than we had historically. In the industrial data appears to 52 00:02:39,240 --> 00:02:42,120 Speaker 1: be bottoming. So what we are seeing this earning season 53 00:02:42,440 --> 00:02:45,720 Speaker 1: is really a confirmation that the trends aren't that bad, 54 00:02:46,080 --> 00:02:49,160 Speaker 1: and that's why we're seeing the positive response to results, 55 00:02:49,600 --> 00:02:53,239 Speaker 1: more positive sponsored results than we typically see. Alright, So, Patrick, 56 00:02:53,280 --> 00:02:55,600 Speaker 1: if I'm in the equity markets, am I just in 57 00:02:55,639 --> 00:02:59,519 Speaker 1: the defensive stocks utilities, reads, consumer stables, or can I 58 00:02:59,560 --> 00:03:02,240 Speaker 1: afford maybe take some more risk with some cyclicals or 59 00:03:02,240 --> 00:03:06,360 Speaker 1: even some growth stocks. Well, we we think now at 60 00:03:06,360 --> 00:03:09,040 Speaker 1: the time to make that sort of procyclical shift. So 61 00:03:09,320 --> 00:03:11,400 Speaker 1: if you have been in the market, it's likely that 62 00:03:11,480 --> 00:03:13,760 Speaker 1: you probably wore in those more defensive sectors and that 63 00:03:13,800 --> 00:03:16,560 Speaker 1: has been the leadership really up until about the past 64 00:03:16,560 --> 00:03:19,360 Speaker 1: three or four weeks. But with and I had mentioned 65 00:03:19,360 --> 00:03:21,760 Speaker 1: this earlier, with the beginning of the bottoming and the 66 00:03:21,840 --> 00:03:24,519 Speaker 1: data in the fact that they curbs uninverted, we believe 67 00:03:24,600 --> 00:03:27,480 Speaker 1: now is the time for investors to make that pro 68 00:03:27,639 --> 00:03:32,080 Speaker 1: cyclical shift in their portfolios and in a way from 69 00:03:32,160 --> 00:03:36,760 Speaker 1: those more growth in defensive sectors. I'm trying to understand 70 00:03:36,880 --> 00:03:40,880 Speaker 1: what's changed for people to be trying to get positive, 71 00:03:41,280 --> 00:03:43,560 Speaker 1: I mean, other than just a lot of negativity for 72 00:03:43,560 --> 00:03:45,360 Speaker 1: a really long time and everyone's just kind of sick 73 00:03:45,360 --> 00:03:49,480 Speaker 1: of it at this point. So what has changed? Yeah, 74 00:03:49,480 --> 00:03:53,280 Speaker 1: So I think in reality we're beginning to get through. 75 00:03:53,400 --> 00:03:56,080 Speaker 1: I think the most difficult part of the data. We 76 00:03:56,160 --> 00:03:58,640 Speaker 1: haven't officially bottomed yet in the US in terms of 77 00:03:58,640 --> 00:04:02,240 Speaker 1: industrial activity. That's likely going to be in the around 78 00:04:02,240 --> 00:04:04,080 Speaker 1: the end of the fourth quarter. So as we move 79 00:04:04,120 --> 00:04:07,640 Speaker 1: into twenty nineteen, the pace of indust activity is set 80 00:04:07,680 --> 00:04:10,360 Speaker 1: to improve, and I think investors want to get ahead 81 00:04:10,360 --> 00:04:12,280 Speaker 1: of that. And that's why I think that pro cyclical 82 00:04:12,360 --> 00:04:17,080 Speaker 1: move in terms of shifting portfolios is the right move. Uh, 83 00:04:17,520 --> 00:04:19,880 Speaker 1: by the time you see that balance in the data, 84 00:04:19,920 --> 00:04:22,080 Speaker 1: it will likely be too late. So it's one of 85 00:04:22,120 --> 00:04:25,920 Speaker 1: those environments where if it's there on the horizon and 86 00:04:26,279 --> 00:04:29,039 Speaker 1: we start to see the green shoots that we are seeing, 87 00:04:29,279 --> 00:04:31,520 Speaker 1: now is the time to get into it. So Patrick, 88 00:04:31,520 --> 00:04:33,960 Speaker 1: part of the support for equity markets over the last 89 00:04:34,400 --> 00:04:37,640 Speaker 1: certainly a couple of weeks has been an expectation that 90 00:04:37,920 --> 00:04:40,960 Speaker 1: some type of trade deal will get done, people calling 91 00:04:40,960 --> 00:04:43,320 Speaker 1: it a phase one type of deal. But as we know, 92 00:04:43,440 --> 00:04:46,320 Speaker 1: that can just turn on a dime or a tweet. 93 00:04:46,360 --> 00:04:49,080 Speaker 1: What happens if you know, we don't get a trade 94 00:04:49,120 --> 00:04:51,080 Speaker 1: deal on both sides to say, let's kick it down 95 00:04:51,080 --> 00:04:54,560 Speaker 1: the road to after the election. I think if we 96 00:04:55,040 --> 00:04:56,960 Speaker 1: get to a point in the discussion where the trade 97 00:04:57,000 --> 00:04:59,000 Speaker 1: deal looks like it's getting further and further away from 98 00:04:59,000 --> 00:05:02,720 Speaker 1: being reached, it will likely cause a spike in volatility 99 00:05:02,760 --> 00:05:06,400 Speaker 1: and we will likely see stock sell off broadly. Now, 100 00:05:06,440 --> 00:05:10,920 Speaker 1: what's interesting is over the past uh several months, those 101 00:05:11,080 --> 00:05:14,760 Speaker 1: in those situations haven't been nearly as severe as what 102 00:05:14,800 --> 00:05:18,360 Speaker 1: we're experiencing even twelve to eighteen months ago. And I 103 00:05:18,440 --> 00:05:21,720 Speaker 1: think part of the discussion is the deal is is 104 00:05:21,800 --> 00:05:25,000 Speaker 1: somewhere in the future, uh, if it's if it's not 105 00:05:25,080 --> 00:05:28,400 Speaker 1: this meeting, it's next meeting. The shape and the size 106 00:05:28,400 --> 00:05:30,960 Speaker 1: of the deal continues to shift. But I think we're 107 00:05:31,040 --> 00:05:34,240 Speaker 1: getting more and more likely that something will be reached 108 00:05:34,320 --> 00:05:37,440 Speaker 1: in some kind of form, and I think investors are 109 00:05:37,440 --> 00:05:40,800 Speaker 1: taking comfort in that. I'm wondering when it comes to bonds, 110 00:05:40,839 --> 00:05:44,120 Speaker 1: they are selling off in tandem with this risk on feeling, 111 00:05:44,520 --> 00:05:47,040 Speaker 1: at what point will they sell off too much and 112 00:05:47,040 --> 00:05:49,760 Speaker 1: will yields rise so much that it provides sort of 113 00:05:49,839 --> 00:05:56,200 Speaker 1: a negative headwind for for stocks. Well, Historically throughout this recovery, 114 00:05:56,320 --> 00:05:59,679 Speaker 1: that threshold has been around three and a half percent 115 00:05:59,800 --> 00:06:03,000 Speaker 1: on US tenure. So right now what we're seeing is 116 00:06:03,320 --> 00:06:07,839 Speaker 1: as interest rates rise, it's a signal that the backdrop 117 00:06:07,960 --> 00:06:10,960 Speaker 1: for risk assets is improving. So I think we have 118 00:06:11,240 --> 00:06:14,039 Speaker 1: a fair amount of distance to go before we have 119 00:06:14,120 --> 00:06:18,440 Speaker 1: a headwind from let's say, evaluation call or or some 120 00:06:18,520 --> 00:06:22,400 Speaker 1: other relative opportunity improvement. We still have a fair way 121 00:06:22,480 --> 00:06:25,200 Speaker 1: to go before we get there. Any sectors, Patrick, you're 122 00:06:25,240 --> 00:06:27,160 Speaker 1: just staying away from right here, given that you're getting 123 00:06:27,160 --> 00:06:30,719 Speaker 1: a little bit more cyclical. I mean, we want to 124 00:06:31,320 --> 00:06:35,120 Speaker 1: continue to de emphasize those defensive sectors, the the reads, 125 00:06:35,200 --> 00:06:40,880 Speaker 1: the utilities, UH telecom and and also UH certain certain 126 00:06:40,880 --> 00:06:43,800 Speaker 1: portions of stables that that's areas where you are not 127 00:06:43,960 --> 00:06:46,760 Speaker 1: likely to participate in the rally that's likely going to 128 00:06:46,800 --> 00:06:49,479 Speaker 1: happen here. Patrick Palfrey, thank you so much for joining us, 129 00:06:49,520 --> 00:06:53,640 Speaker 1: Patrick as a US equity strategist for Credit SWEE giving 130 00:06:53,640 --> 00:06:55,840 Speaker 1: a sense that the credit sweet is turning a little 131 00:06:55,880 --> 00:06:58,640 Speaker 1: bit more I guess aggressive, little bit more cyclical, away 132 00:06:58,640 --> 00:07:00,679 Speaker 1: from some of those defensive things which have been such 133 00:07:01,040 --> 00:07:03,359 Speaker 1: good performers this year, some of the best performers that 134 00:07:03,360 --> 00:07:22,440 Speaker 1: we've seen. Well, Investors are certainly have a risk on field. 135 00:07:22,480 --> 00:07:25,920 Speaker 1: Today we have the SMP up a fourteen points. Investors 136 00:07:25,960 --> 00:07:27,640 Speaker 1: are stepping back and are saying, when I look at 137 00:07:27,640 --> 00:07:31,160 Speaker 1: the economy, I see a weak manufacturing sector, a weaker 138 00:07:31,280 --> 00:07:34,840 Speaker 1: business investment sector. But that's the economy, which is the 139 00:07:34,880 --> 00:07:37,560 Speaker 1: consumer continues to power on. To get a sense of 140 00:07:37,560 --> 00:07:39,840 Speaker 1: where we go from here, we welcome Chris Rupkey, m 141 00:07:39,920 --> 00:07:43,200 Speaker 1: u f G Union Bank Chief Financial Economists. Chris, thanks 142 00:07:43,200 --> 00:07:45,760 Speaker 1: so much for joining us. Is it all just about 143 00:07:45,920 --> 00:07:48,880 Speaker 1: the consumer right here? Well, the consumer is doing pretty well. 144 00:07:49,040 --> 00:07:52,200 Speaker 1: Some of the sentiment numbers are bouncing around, but there's 145 00:07:52,280 --> 00:07:57,840 Speaker 1: no worries. Consumers sees uh, no recession. It's and it's 146 00:07:57,840 --> 00:08:02,400 Speaker 1: not just the consumer. Remember it's also uh, new consumer 147 00:08:02,720 --> 00:08:07,280 Speaker 1: consumers being created. And with that strong jobs report we 148 00:08:07,360 --> 00:08:10,480 Speaker 1: got Friday, you know, we know basically there's about two 149 00:08:10,640 --> 00:08:13,440 Speaker 1: d and twenty three thousand more people with paychecks in 150 00:08:13,480 --> 00:08:18,200 Speaker 1: the US. So that's good. Yeah, there there's no recession. Certainly, 151 00:08:18,240 --> 00:08:22,680 Speaker 1: the only recession talk gets going, uh if the trade 152 00:08:22,720 --> 00:08:26,360 Speaker 1: war escalates. So at the moment, it looks like the 153 00:08:26,440 --> 00:08:30,240 Speaker 1: US and China are getting ready to at least sign 154 00:08:30,440 --> 00:08:32,720 Speaker 1: phase one. I mean a lot of people have doubts 155 00:08:32,760 --> 00:08:36,079 Speaker 1: about what is in phase one, how important that is. 156 00:08:36,520 --> 00:08:38,920 Speaker 1: Phase two and three are going to be much more difficult, 157 00:08:38,960 --> 00:08:41,680 Speaker 1: but you know, at least we're moving ahead and there's 158 00:08:41,720 --> 00:08:46,040 Speaker 1: no bad headlines out there for stocks and bond markets 159 00:08:46,080 --> 00:08:49,319 Speaker 1: today today. I love that that he added today. Right, 160 00:08:49,920 --> 00:08:53,000 Speaker 1: We'll see about tomorrow, but today we're holding in just fine. Chris, 161 00:08:53,080 --> 00:08:55,839 Speaker 1: I want to talk a little bit about something that 162 00:08:56,120 --> 00:08:59,040 Speaker 1: UBS analysts have called a two tier economy. When it 163 00:08:59,080 --> 00:09:02,280 Speaker 1: comes to the consumer. You have on one hand, upper 164 00:09:02,800 --> 00:09:06,840 Speaker 1: income and medium income individuals in the United States doing 165 00:09:06,880 --> 00:09:09,400 Speaker 1: pretty well or very well, and then you have the 166 00:09:09,520 --> 00:09:12,800 Speaker 1: lower income where you're seeing delinquency is picking up to 167 00:09:12,880 --> 00:09:15,400 Speaker 1: faults picking up on consumer loans, and I'm wondering how 168 00:09:15,440 --> 00:09:19,040 Speaker 1: big of a concern that is for you. Yeah, it 169 00:09:19,200 --> 00:09:22,360 Speaker 1: isn't right now. I mean, I'm, you know, always trying 170 00:09:22,360 --> 00:09:27,040 Speaker 1: to be a macro economist. I don't get into issues 171 00:09:27,160 --> 00:09:32,880 Speaker 1: like income inequality. I did notice that, you know, wages 172 00:09:32,920 --> 00:09:38,160 Speaker 1: are doing okay. If you look at non supervisory worker 173 00:09:38,240 --> 00:09:41,040 Speaker 1: wages in the report we've got Friday, they're running three 174 00:09:41,080 --> 00:09:44,599 Speaker 1: and a half percent year over year, which you know, 175 00:09:44,760 --> 00:09:47,480 Speaker 1: it's better than a poke in the eye with a 176 00:09:47,559 --> 00:09:51,520 Speaker 1: sharp stick. And the average hourly earnings that includes bosses, 177 00:09:51,920 --> 00:09:55,439 Speaker 1: of course, that's only running three so they're getting a 178 00:09:55,520 --> 00:09:58,920 Speaker 1: little bit more factory workers three and a half percent 179 00:09:59,120 --> 00:10:02,680 Speaker 1: versus three percent. But you're right, I mean, but most 180 00:10:02,720 --> 00:10:07,079 Speaker 1: of those issues, the income in quality issues so called, 181 00:10:07,200 --> 00:10:10,440 Speaker 1: I don't think there ever enough to really drag us 182 00:10:10,880 --> 00:10:15,800 Speaker 1: down into a recession on their own. So Christopher not 183 00:10:15,880 --> 00:10:18,840 Speaker 1: heading into recession eminently. Um. You know, one of the 184 00:10:18,840 --> 00:10:22,640 Speaker 1: concerns is, you know, I guess just this trade issue. 185 00:10:23,080 --> 00:10:27,920 Speaker 1: It appears that a phase one type of trade negotiation 186 00:10:28,000 --> 00:10:30,679 Speaker 1: and agreement could be in the offering. Is that pretty 187 00:10:30,760 --> 00:10:33,199 Speaker 1: much what you think the markets discounting now? And is 188 00:10:33,200 --> 00:10:37,600 Speaker 1: there an area of risk as it relates to this trade. Well, 189 00:10:37,720 --> 00:10:41,600 Speaker 1: I'm a little bit concerned that what's happening with the 190 00:10:41,760 --> 00:10:46,760 Speaker 1: December tariffs. Um, you know, it was scheduled to go 191 00:10:46,840 --> 00:10:51,959 Speaker 1: to fIF tariffs on China imports of the final hunding 192 00:10:52,080 --> 00:10:57,040 Speaker 1: sixty billion of goods key goods like video game consoles 193 00:10:57,120 --> 00:11:01,760 Speaker 1: and cell phones and laptop can shuters and certain shoes 194 00:11:01,800 --> 00:11:05,160 Speaker 1: and clothing. Uh, that would be big. I mean, if 195 00:11:05,360 --> 00:11:09,560 Speaker 1: the us UH suspends that tariff, I don't know if 196 00:11:09,600 --> 00:11:13,280 Speaker 1: they're going to agree to that as whatever they're going 197 00:11:13,320 --> 00:11:18,280 Speaker 1: to sign in the days and weeks to come. Chris 198 00:11:18,360 --> 00:11:20,000 Speaker 1: rop Key, thank you so much for being with us. 199 00:11:20,280 --> 00:11:22,520 Speaker 1: It's important to get your insights on a day when 200 00:11:22,720 --> 00:11:25,079 Speaker 1: things do look a lot rosy, or at least from 201 00:11:25,080 --> 00:11:27,800 Speaker 1: the headline perspective and market action. Thanks for listening to 202 00:11:27,840 --> 00:11:30,240 Speaker 1: the Bloomberg P and L podcast. You can subscribe and 203 00:11:30,280 --> 00:11:33,440 Speaker 1: listen to interviews at Apple Podcasts or whatever podcast platform 204 00:11:33,480 --> 00:11:36,559 Speaker 1: you prefer. Paul Sweeney, I'm on Twitter at pt Sweeney. 205 00:11:36,600 --> 00:11:38,480 Speaker 1: I'm Lisa A. Bram Woy. It's I'm on Twitter at 206 00:11:38,520 --> 00:11:41,520 Speaker 1: Lisa Bramwoits one before the podcast. You can always catch 207 00:11:41,600 --> 00:11:43,400 Speaker 1: us worldwide on Bloomberg Radio.