WEBVTT - Stocks Rise to Record, Bonds Fall

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<v Speaker 1>Welcome to the Bloomberg Penl Podcast. I'm Paul swing you,

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<v Speaker 1>along with my co host Lisa Brahma wits. Each day

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<v Speaker 1>we bring you the most noteworthy and useful interviews for

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<v Speaker 1>you and your money. Whether at the grocery store or

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<v Speaker 1>the trading floor. Find a Bloomberg Penl podcast on Apple

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<v Speaker 1>podcast or wherever you listen to podcasts, as well as

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<v Speaker 1>at Bloomberg dot com. We are seeing a broad based

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<v Speaker 1>rally in US equity markets and here to talk with

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<v Speaker 1>us about it. Patrick Palfrey. He is Director Senior Equity

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<v Speaker 1>Strategistic Credit sweez Um. So, Patrick, I want to just

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<v Speaker 1>get your sense on whether we're actually seeing fundamental strength

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<v Speaker 1>in the earnings as we head into the final week

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<v Speaker 1>of three Q earning season or are we just seeing

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<v Speaker 1>a very low bar that has been stepped over. I mean,

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<v Speaker 1>when we take a look at the third quarter earning season,

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<v Speaker 1>I think your point on a low bar that's been

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<v Speaker 1>stepped over, I think that's a fair way of putting it.

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<v Speaker 1>I mean, in reality, the backdrop is still in NMIC

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<v Speaker 1>and it's likely to be anemic in the fourth quarter.

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<v Speaker 1>And when I say we're talking about EPO growth, that

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<v Speaker 1>is somewhere between one. So once you strip out the

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<v Speaker 1>benefits of buybacks, earnings are essentially flat. Now, there's some

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<v Speaker 1>unique dynamics that are are going on, and when you

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<v Speaker 1>take a look at the median company trends will of

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<v Speaker 1>a lot better. But but nevertheless it is an anemic

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<v Speaker 1>backdrop for for growth. So Patrick on the flip side

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<v Speaker 1>sets up for maybe some decent growth numbers in Do

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<v Speaker 1>you think the markets too optimistic about earnings growth? Well?

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<v Speaker 1>I think if you take a step back, I mean,

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<v Speaker 1>analysts typically start out optimistic and estimates historically fall. So

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<v Speaker 1>if you ask me, do those expectations need to come down,

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<v Speaker 1>the answer is yes. Do I think we are going

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<v Speaker 1>to see anything other than what we typically see? The

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<v Speaker 1>answer is no. And when I say that, we expect

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<v Speaker 1>EPs growth to come in around five So that's a

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<v Speaker 1>significant improvement from the numbers that we saw in the

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<v Speaker 1>current quarter and the numbers that we are likely to

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<v Speaker 1>see again in the fourth quarter. What do you make

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<v Speaker 1>of the volatility that we've seen in The response in

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<v Speaker 1>share is two earnings beats and conversely two misses. The

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<v Speaker 1>reaction has been more extreme this earning season and then

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<v Speaker 1>than it has been historically. How do you interpret that? Well,

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<v Speaker 1>I think investors have been looking for a way to

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<v Speaker 1>get positive and maybe maybe let me take a step

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<v Speaker 1>back here. You know, several months ago we turned more

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<v Speaker 1>cautious than we've been in a while, and it was

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<v Speaker 1>really around the deceleration in the industrial data and the

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<v Speaker 1>fact that the yield curve was inverted. Over the past

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<v Speaker 1>couple of weeks. Both of those appear to be dissipating,

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<v Speaker 1>so we have a yel curve that is much healthier

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<v Speaker 1>than we had historically. In the industrial data appears to

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<v Speaker 1>be bottoming. So what we are seeing this earning season

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<v Speaker 1>is really a confirmation that the trends aren't that bad,

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<v Speaker 1>and that's why we're seeing the positive response to results,

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<v Speaker 1>more positive sponsored results than we typically see. Alright, So, Patrick,

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<v Speaker 1>if I'm in the equity markets, am I just in

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<v Speaker 1>the defensive stocks utilities, reads, consumer stables, or can I

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<v Speaker 1>afford maybe take some more risk with some cyclicals or

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<v Speaker 1>even some growth stocks. Well, we we think now at

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<v Speaker 1>the time to make that sort of procyclical shift. So

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<v Speaker 1>if you have been in the market, it's likely that

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<v Speaker 1>you probably wore in those more defensive sectors and that

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<v Speaker 1>has been the leadership really up until about the past

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<v Speaker 1>three or four weeks. But with and I had mentioned

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<v Speaker 1>this earlier, with the beginning of the bottoming and the

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<v Speaker 1>data in the fact that they curbs uninverted, we believe

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<v Speaker 1>now is the time for investors to make that pro

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<v Speaker 1>cyclical shift in their portfolios and in a way from

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<v Speaker 1>those more growth in defensive sectors. I'm trying to understand

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<v Speaker 1>what's changed for people to be trying to get positive,

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<v Speaker 1>I mean, other than just a lot of negativity for

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<v Speaker 1>a really long time and everyone's just kind of sick

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<v Speaker 1>of it at this point. So what has changed? Yeah,

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<v Speaker 1>So I think in reality we're beginning to get through.

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<v Speaker 1>I think the most difficult part of the data. We

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<v Speaker 1>haven't officially bottomed yet in the US in terms of

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<v Speaker 1>industrial activity. That's likely going to be in the around

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<v Speaker 1>the end of the fourth quarter. So as we move

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<v Speaker 1>into twenty nineteen, the pace of indust activity is set

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<v Speaker 1>to improve, and I think investors want to get ahead

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<v Speaker 1>of that. And that's why I think that pro cyclical

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<v Speaker 1>move in terms of shifting portfolios is the right move. Uh,

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<v Speaker 1>by the time you see that balance in the data,

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<v Speaker 1>it will likely be too late. So it's one of

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<v Speaker 1>those environments where if it's there on the horizon and

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<v Speaker 1>we start to see the green shoots that we are seeing,

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<v Speaker 1>now is the time to get into it. So Patrick,

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<v Speaker 1>part of the support for equity markets over the last

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<v Speaker 1>certainly a couple of weeks has been an expectation that

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<v Speaker 1>some type of trade deal will get done, people calling

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<v Speaker 1>it a phase one type of deal. But as we know,

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<v Speaker 1>that can just turn on a dime or a tweet.

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<v Speaker 1>What happens if you know, we don't get a trade

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<v Speaker 1>deal on both sides to say, let's kick it down

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<v Speaker 1>the road to after the election. I think if we

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<v Speaker 1>get to a point in the discussion where the trade

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<v Speaker 1>deal looks like it's getting further and further away from

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<v Speaker 1>being reached, it will likely cause a spike in volatility

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<v Speaker 1>and we will likely see stock sell off broadly. Now,

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<v Speaker 1>what's interesting is over the past uh several months, those

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<v Speaker 1>in those situations haven't been nearly as severe as what

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<v Speaker 1>we're experiencing even twelve to eighteen months ago. And I

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<v Speaker 1>think part of the discussion is the deal is is

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<v Speaker 1>somewhere in the future, uh, if it's if it's not

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<v Speaker 1>this meeting, it's next meeting. The shape and the size

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<v Speaker 1>of the deal continues to shift. But I think we're

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<v Speaker 1>getting more and more likely that something will be reached

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<v Speaker 1>in some kind of form, and I think investors are

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<v Speaker 1>taking comfort in that. I'm wondering when it comes to bonds,

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<v Speaker 1>they are selling off in tandem with this risk on feeling,

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<v Speaker 1>at what point will they sell off too much and

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<v Speaker 1>will yields rise so much that it provides sort of

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<v Speaker 1>a negative headwind for for stocks. Well, Historically throughout this recovery,

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<v Speaker 1>that threshold has been around three and a half percent

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<v Speaker 1>on US tenure. So right now what we're seeing is

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<v Speaker 1>as interest rates rise, it's a signal that the backdrop

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<v Speaker 1>for risk assets is improving. So I think we have

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<v Speaker 1>a fair amount of distance to go before we have

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<v Speaker 1>a headwind from let's say, evaluation call or or some

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<v Speaker 1>other relative opportunity improvement. We still have a fair way

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<v Speaker 1>to go before we get there. Any sectors, Patrick, you're

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<v Speaker 1>just staying away from right here, given that you're getting

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<v Speaker 1>a little bit more cyclical. I mean, we want to

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<v Speaker 1>continue to de emphasize those defensive sectors, the the reads,

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<v Speaker 1>the utilities, UH telecom and and also UH certain certain

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<v Speaker 1>portions of stables that that's areas where you are not

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<v Speaker 1>likely to participate in the rally that's likely going to

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<v Speaker 1>happen here. Patrick Palfrey, thank you so much for joining us,

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<v Speaker 1>Patrick as a US equity strategist for Credit SWEE giving

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<v Speaker 1>a sense that the credit sweet is turning a little

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<v Speaker 1>bit more I guess aggressive, little bit more cyclical, away

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<v Speaker 1>from some of those defensive things which have been such

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<v Speaker 1>good performers this year, some of the best performers that

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<v Speaker 1>we've seen. Well, Investors are certainly have a risk on field.

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<v Speaker 1>Today we have the SMP up a fourteen points. Investors

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<v Speaker 1>are stepping back and are saying, when I look at

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<v Speaker 1>the economy, I see a weak manufacturing sector, a weaker

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<v Speaker 1>business investment sector. But that's the economy, which is the

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<v Speaker 1>consumer continues to power on. To get a sense of

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<v Speaker 1>where we go from here, we welcome Chris Rupkey, m

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<v Speaker 1>u f G Union Bank Chief Financial Economists. Chris, thanks

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<v Speaker 1>so much for joining us. Is it all just about

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<v Speaker 1>the consumer right here? Well, the consumer is doing pretty well.

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<v Speaker 1>Some of the sentiment numbers are bouncing around, but there's

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<v Speaker 1>no worries. Consumers sees uh, no recession. It's and it's

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<v Speaker 1>not just the consumer. Remember it's also uh, new consumer

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<v Speaker 1>consumers being created. And with that strong jobs report we

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<v Speaker 1>got Friday, you know, we know basically there's about two

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<v Speaker 1>d and twenty three thousand more people with paychecks in

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<v Speaker 1>the US. So that's good. Yeah, there there's no recession. Certainly,

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<v Speaker 1>the only recession talk gets going, uh if the trade

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<v Speaker 1>war escalates. So at the moment, it looks like the

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<v Speaker 1>US and China are getting ready to at least sign

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<v Speaker 1>phase one. I mean a lot of people have doubts

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<v Speaker 1>about what is in phase one, how important that is.

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<v Speaker 1>Phase two and three are going to be much more difficult,

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<v Speaker 1>but you know, at least we're moving ahead and there's

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<v Speaker 1>no bad headlines out there for stocks and bond markets

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<v Speaker 1>today today. I love that that he added today. Right,

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<v Speaker 1>We'll see about tomorrow, but today we're holding in just fine. Chris,

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<v Speaker 1>I want to talk a little bit about something that

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<v Speaker 1>UBS analysts have called a two tier economy. When it

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<v Speaker 1>comes to the consumer. You have on one hand, upper

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<v Speaker 1>income and medium income individuals in the United States doing

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<v Speaker 1>pretty well or very well, and then you have the

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<v Speaker 1>lower income where you're seeing delinquency is picking up to

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<v Speaker 1>faults picking up on consumer loans, and I'm wondering how

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<v Speaker 1>big of a concern that is for you. Yeah, it

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<v Speaker 1>isn't right now. I mean, I'm, you know, always trying

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<v Speaker 1>to be a macro economist. I don't get into issues

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<v Speaker 1>like income inequality. I did notice that, you know, wages

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<v Speaker 1>are doing okay. If you look at non supervisory worker

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<v Speaker 1>wages in the report we've got Friday, they're running three

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<v Speaker 1>and a half percent year over year, which you know,

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<v Speaker 1>it's better than a poke in the eye with a

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<v Speaker 1>sharp stick. And the average hourly earnings that includes bosses,

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<v Speaker 1>of course, that's only running three so they're getting a

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<v Speaker 1>little bit more factory workers three and a half percent

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<v Speaker 1>versus three percent. But you're right, I mean, but most

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<v Speaker 1>of those issues, the income in quality issues so called,

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<v Speaker 1>I don't think there ever enough to really drag us

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<v Speaker 1>down into a recession on their own. So Christopher not

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<v Speaker 1>heading into recession eminently. Um. You know, one of the

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<v Speaker 1>concerns is, you know, I guess just this trade issue.

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<v Speaker 1>It appears that a phase one type of trade negotiation

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<v Speaker 1>and agreement could be in the offering. Is that pretty

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<v Speaker 1>much what you think the markets discounting now? And is

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<v Speaker 1>there an area of risk as it relates to this trade. Well,

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<v Speaker 1>I'm a little bit concerned that what's happening with the

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<v Speaker 1>December tariffs. Um, you know, it was scheduled to go

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<v Speaker 1>to fIF tariffs on China imports of the final hunding

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<v Speaker 1>sixty billion of goods key goods like video game consoles

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<v Speaker 1>and cell phones and laptop can shuters and certain shoes

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<v Speaker 1>and clothing. Uh, that would be big. I mean, if

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<v Speaker 1>the us UH suspends that tariff, I don't know if

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<v Speaker 1>they're going to agree to that as whatever they're going

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<v Speaker 1>to sign in the days and weeks to come. Chris

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<v Speaker 1>rop Key, thank you so much for being with us.

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<v Speaker 1>It's important to get your insights on a day when

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<v Speaker 1>things do look a lot rosy, or at least from

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<v Speaker 1>the headline perspective and market action. Thanks for listening to

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<v Speaker 1>the Bloomberg P and L podcast. You can subscribe and

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<v Speaker 1>listen to interviews at Apple Podcasts or whatever podcast platform

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<v Speaker 1>you prefer. Paul Sweeney, I'm on Twitter at pt Sweeney.

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<v Speaker 1>I'm Lisa A. Bram Woy. It's I'm on Twitter at

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<v Speaker 1>Lisa Bramwoits one before the podcast. You can always catch

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<v Speaker 1>us worldwide on Bloomberg Radio.