Speaker 1: Welcome to the Bloomberg Penl Podcast. I'm Paul swing you,
Speaker 1: along with my co host Lisa Brahma wits. Each day
Speaker 1: we bring you the most noteworthy and useful interviews for
Speaker 1: you and your money. Whether at the grocery store or
Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple
Speaker 1: podcast or wherever you listen to podcasts, as well as
Speaker 1: at Bloomberg dot com. We are seeing a broad based
Speaker 1: rally in US equity markets and here to talk with
Speaker 1: us about it. Patrick Palfrey. He is Director Senior Equity
Speaker 1: Strategistic Credit sweez Um. So, Patrick, I want to just
Speaker 1: get your sense on whether we're actually seeing fundamental strength
Speaker 1: in the earnings as we head into the final week
Speaker 1: of three Q earning season or are we just seeing
Speaker 1: a very low bar that has been stepped over. I mean,
Speaker 1: when we take a look at the third quarter earning season,
Speaker 1: I think your point on a low bar that's been
Speaker 1: stepped over, I think that's a fair way of putting it.
Speaker 1: I mean, in reality, the backdrop is still in NMIC
Speaker 1: and it's likely to be anemic in the fourth quarter.
Speaker 1: And when I say we're talking about EPO growth, that
Speaker 1: is somewhere between one. So once you strip out the
Speaker 1: benefits of buybacks, earnings are essentially flat. Now, there's some
Speaker 1: unique dynamics that are are going on, and when you
Speaker 1: take a look at the median company trends will of
Speaker 1: a lot better. But but nevertheless it is an anemic
Speaker 1: backdrop for for growth. So Patrick on the flip side
Speaker 1: sets up for maybe some decent growth numbers in Do
Speaker 1: you think the markets too optimistic about earnings growth? Well?
Speaker 1: I think if you take a step back, I mean,
Speaker 1: analysts typically start out optimistic and estimates historically fall. So
Speaker 1: if you ask me, do those expectations need to come down,
Speaker 1: the answer is yes. Do I think we are going
Speaker 1: to see anything other than what we typically see? The
Speaker 1: answer is no. And when I say that, we expect
Speaker 1: EPs growth to come in around five So that's a
Speaker 1: significant improvement from the numbers that we saw in the
Speaker 1: current quarter and the numbers that we are likely to
Speaker 1: see again in the fourth quarter. What do you make
Speaker 1: of the volatility that we've seen in The response in
Speaker 1: share is two earnings beats and conversely two misses. The
Speaker 1: reaction has been more extreme this earning season and then
Speaker 1: than it has been historically. How do you interpret that? Well,
Speaker 1: I think investors have been looking for a way to
Speaker 1: get positive and maybe maybe let me take a step
Speaker 1: back here. You know, several months ago we turned more
Speaker 1: cautious than we've been in a while, and it was
Speaker 1: really around the deceleration in the industrial data and the
Speaker 1: fact that the yield curve was inverted. Over the past
Speaker 1: couple of weeks. Both of those appear to be dissipating,
Speaker 1: so we have a yel curve that is much healthier
Speaker 1: than we had historically. In the industrial data appears to
Speaker 1: be bottoming. So what we are seeing this earning season
Speaker 1: is really a confirmation that the trends aren't that bad,
Speaker 1: and that's why we're seeing the positive response to results,
Speaker 1: more positive sponsored results than we typically see. Alright, So, Patrick,
Speaker 1: if I'm in the equity markets, am I just in
Speaker 1: the defensive stocks utilities, reads, consumer stables, or can I
Speaker 1: afford maybe take some more risk with some cyclicals or
Speaker 1: even some growth stocks. Well, we we think now at
Speaker 1: the time to make that sort of procyclical shift. So
Speaker 1: if you have been in the market, it's likely that
Speaker 1: you probably wore in those more defensive sectors and that
Speaker 1: has been the leadership really up until about the past
Speaker 1: three or four weeks. But with and I had mentioned
Speaker 1: this earlier, with the beginning of the bottoming and the
Speaker 1: data in the fact that they curbs uninverted, we believe
Speaker 1: now is the time for investors to make that pro
Speaker 1: cyclical shift in their portfolios and in a way from
Speaker 1: those more growth in defensive sectors. I'm trying to understand
Speaker 1: what's changed for people to be trying to get positive,
Speaker 1: I mean, other than just a lot of negativity for
Speaker 1: a really long time and everyone's just kind of sick
Speaker 1: of it at this point. So what has changed? Yeah,
Speaker 1: So I think in reality we're beginning to get through.
Speaker 1: I think the most difficult part of the data. We
Speaker 1: haven't officially bottomed yet in the US in terms of
Speaker 1: industrial activity. That's likely going to be in the around
Speaker 1: the end of the fourth quarter. So as we move
Speaker 1: into twenty nineteen, the pace of indust activity is set
Speaker 1: to improve, and I think investors want to get ahead
Speaker 1: of that. And that's why I think that pro cyclical
Speaker 1: move in terms of shifting portfolios is the right move. Uh,
Speaker 1: by the time you see that balance in the data,
Speaker 1: it will likely be too late. So it's one of
Speaker 1: those environments where if it's there on the horizon and
Speaker 1: we start to see the green shoots that we are seeing,
Speaker 1: now is the time to get into it. So Patrick,
Speaker 1: part of the support for equity markets over the last
Speaker 1: certainly a couple of weeks has been an expectation that
Speaker 1: some type of trade deal will get done, people calling
Speaker 1: it a phase one type of deal. But as we know,
Speaker 1: that can just turn on a dime or a tweet.
Speaker 1: What happens if you know, we don't get a trade
Speaker 1: deal on both sides to say, let's kick it down
Speaker 1: the road to after the election. I think if we
Speaker 1: get to a point in the discussion where the trade
Speaker 1: deal looks like it's getting further and further away from
Speaker 1: being reached, it will likely cause a spike in volatility
Speaker 1: and we will likely see stock sell off broadly. Now,
Speaker 1: what's interesting is over the past uh several months, those
Speaker 1: in those situations haven't been nearly as severe as what
Speaker 1: we're experiencing even twelve to eighteen months ago. And I
Speaker 1: think part of the discussion is the deal is is
Speaker 1: somewhere in the future, uh, if it's if it's not
Speaker 1: this meeting, it's next meeting. The shape and the size
Speaker 1: of the deal continues to shift. But I think we're
Speaker 1: getting more and more likely that something will be reached
Speaker 1: in some kind of form, and I think investors are
Speaker 1: taking comfort in that. I'm wondering when it comes to bonds,
Speaker 1: they are selling off in tandem with this risk on feeling,
Speaker 1: at what point will they sell off too much and
Speaker 1: will yields rise so much that it provides sort of
Speaker 1: a negative headwind for for stocks. Well, Historically throughout this recovery,
Speaker 1: that threshold has been around three and a half percent
Speaker 1: on US tenure. So right now what we're seeing is
Speaker 1: as interest rates rise, it's a signal that the backdrop
Speaker 1: for risk assets is improving. So I think we have
Speaker 1: a fair amount of distance to go before we have
Speaker 1: a headwind from let's say, evaluation call or or some
Speaker 1: other relative opportunity improvement. We still have a fair way
Speaker 1: to go before we get there. Any sectors, Patrick, you're
Speaker 1: just staying away from right here, given that you're getting
Speaker 1: a little bit more cyclical. I mean, we want to
Speaker 1: continue to de emphasize those defensive sectors, the the reads,
Speaker 1: the utilities, UH telecom and and also UH certain certain
Speaker 1: portions of stables that that's areas where you are not
Speaker 1: likely to participate in the rally that's likely going to
Speaker 1: happen here. Patrick Palfrey, thank you so much for joining us,
Speaker 1: Patrick as a US equity strategist for Credit SWEE giving
Speaker 1: a sense that the credit sweet is turning a little
Speaker 1: bit more I guess aggressive, little bit more cyclical, away
Speaker 1: from some of those defensive things which have been such
Speaker 1: good performers this year, some of the best performers that
Speaker 1: we've seen. Well, Investors are certainly have a risk on field.
Speaker 1: Today we have the SMP up a fourteen points. Investors
Speaker 1: are stepping back and are saying, when I look at
Speaker 1: the economy, I see a weak manufacturing sector, a weaker
Speaker 1: business investment sector. But that's the economy, which is the
Speaker 1: consumer continues to power on. To get a sense of
Speaker 1: where we go from here, we welcome Chris Rupkey, m
Speaker 1: u f G Union Bank Chief Financial Economists. Chris, thanks
Speaker 1: so much for joining us. Is it all just about
Speaker 1: the consumer right here? Well, the consumer is doing pretty well.
Speaker 1: Some of the sentiment numbers are bouncing around, but there's
Speaker 1: no worries. Consumers sees uh, no recession. It's and it's
Speaker 1: not just the consumer. Remember it's also uh, new consumer
Speaker 1: consumers being created. And with that strong jobs report we
Speaker 1: got Friday, you know, we know basically there's about two
Speaker 1: d and twenty three thousand more people with paychecks in
Speaker 1: the US. So that's good. Yeah, there there's no recession. Certainly,
Speaker 1: the only recession talk gets going, uh if the trade
Speaker 1: war escalates. So at the moment, it looks like the
Speaker 1: US and China are getting ready to at least sign
Speaker 1: phase one. I mean a lot of people have doubts
Speaker 1: about what is in phase one, how important that is.
Speaker 1: Phase two and three are going to be much more difficult,
Speaker 1: but you know, at least we're moving ahead and there's
Speaker 1: no bad headlines out there for stocks and bond markets
Speaker 1: today today. I love that that he added today. Right,
Speaker 1: We'll see about tomorrow, but today we're holding in just fine. Chris,
Speaker 1: I want to talk a little bit about something that
Speaker 1: UBS analysts have called a two tier economy. When it
Speaker 1: comes to the consumer. You have on one hand, upper
Speaker 1: income and medium income individuals in the United States doing
Speaker 1: pretty well or very well, and then you have the
Speaker 1: lower income where you're seeing delinquency is picking up to
Speaker 1: faults picking up on consumer loans, and I'm wondering how
Speaker 1: big of a concern that is for you. Yeah, it
Speaker 1: isn't right now. I mean, I'm, you know, always trying
Speaker 1: to be a macro economist. I don't get into issues
Speaker 1: like income inequality. I did notice that, you know, wages
Speaker 1: are doing okay. If you look at non supervisory worker
Speaker 1: wages in the report we've got Friday, they're running three
Speaker 1: and a half percent year over year, which you know,
Speaker 1: it's better than a poke in the eye with a
Speaker 1: sharp stick. And the average hourly earnings that includes bosses,
Speaker 1: of course, that's only running three so they're getting a
Speaker 1: little bit more factory workers three and a half percent
Speaker 1: versus three percent. But you're right, I mean, but most
Speaker 1: of those issues, the income in quality issues so called,
Speaker 1: I don't think there ever enough to really drag us
Speaker 1: down into a recession on their own. So Christopher not
Speaker 1: heading into recession eminently. Um. You know, one of the
Speaker 1: concerns is, you know, I guess just this trade issue.
Speaker 1: It appears that a phase one type of trade negotiation
Speaker 1: and agreement could be in the offering. Is that pretty
Speaker 1: much what you think the markets discounting now? And is
Speaker 1: there an area of risk as it relates to this trade. Well,
Speaker 1: I'm a little bit concerned that what's happening with the
Speaker 1: December tariffs. Um, you know, it was scheduled to go
Speaker 1: to fIF tariffs on China imports of the final hunding
Speaker 1: sixty billion of goods key goods like video game consoles
Speaker 1: and cell phones and laptop can shuters and certain shoes
Speaker 1: and clothing. Uh, that would be big. I mean, if
Speaker 1: the us UH suspends that tariff, I don't know if
Speaker 1: they're going to agree to that as whatever they're going
Speaker 1: to sign in the days and weeks to come. Chris
Speaker 1: rop Key, thank you so much for being with us.
Speaker 1: It's important to get your insights on a day when
Speaker 1: things do look a lot rosy, or at least from
Speaker 1: the headline perspective and market action. Thanks for listening to
Speaker 1: the Bloomberg P and L podcast. You can subscribe and
Speaker 1: listen to interviews at Apple Podcasts or whatever podcast platform
Speaker 1: you prefer. Paul Sweeney, I'm on Twitter at pt Sweeney.
Speaker 1: I'm Lisa A. Bram Woy. It's I'm on Twitter at
Speaker 1: Lisa Bramwoits one before the podcast. You can always catch
Speaker 1: us worldwide on Bloomberg Radio.