Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: So markets got very over sold last week with the
Speaker 2: S and P touching correction territory. That's from Morgan Stanley saying, well,
Speaker 2: we don't think investors should view a relief rally from
Speaker 2: over sold levels as a sign that volatility is subsiding
Speaker 2: in a durable manner to speed. An uncertainty around the
Speaker 2: new policy introduction is denting investor, consumer and corporate confidence.
Speaker 2: For more on this notice, the author himself, Mike Wilson,
Speaker 2: Chief Investment Officer over at Morgan Stanley, is this. So
Speaker 2: where are we right now within the market.
Speaker 1: So good afternoon and thanks for having me on. Look,
Speaker 1: I think so far the markets have played out I
Speaker 1: guess the way we thought they might have, which is
Speaker 1: that the growth expectations are coming down for all the
Speaker 1: reasons you mentioned, in addition to the fact that we had,
Speaker 1: you know, kind of a euphoric state at the end
Speaker 1: of last year. The Fed stop cutting interest rates in December,
Speaker 1: and we have this sort of questions around you know,
Speaker 1: the sustainability of AI cap back, you know, growth acceleration.
Speaker 1: So the market had to absorb all these different things
Speaker 1: and that they're all pretty much growth negative in the
Speaker 1: short term, and that's how we saw it kind of
Speaker 1: playing out this year. That's fifty five hundred. That was
Speaker 1: a low end of our range. We got there. Now,
Speaker 1: the question Alex as you you know we're kind of
Speaker 1: going through, is you know, we don't really know yet
Speaker 1: how this is going to play through into the second
Speaker 1: and third quarter. So I think it's about time now.
Speaker 1: Maybe we don't have to take out fifty five hundred.
Speaker 1: Maybe we do, depending on if the government recession, if
Speaker 1: you want to call it a government recession, turns into
Speaker 1: something more broad across the broader economy. And then of course,
Speaker 1: the Fed yesterday you know, kind of showed their hand.
Speaker 1: I would say, you know, they reduced the balance sheet
Speaker 1: reduction by twenty billion a month and that was unexpected.
Speaker 1: There was also some concern they might take you know,
Speaker 1: a hike out of their dot plot. They didn't do that. So,
Speaker 1: as we wrote last week, we think, you know, maybe
Speaker 1: there's not a Trump put here as people were kind
Speaker 1: of hoping for, but the Fed is still there, and
Speaker 1: if we do have you know, worse growth outcome, I
Speaker 1: think the FED will react pretty pretty quickly. Like last fall.
Speaker 2: So when you mentioned waiting for the good side, right.
Speaker 2: We tend to think we just got to get past April. Second,
Speaker 2: is it actually going to be later in the year
Speaker 2: we actually have to get to tax cuts and deregulation
Speaker 2: and what that looks like before anything can really be solved.
Speaker 1: Yeah, I would suspect that, you know, earning your vision breath,
Speaker 1: and that's something we track closely as well as maybe
Speaker 1: economic surprises maybe don't start to turn up until you know,
Speaker 1: the fourth quarter, and in fact, the administration is sort
Speaker 1: of even targeting that. But remember stocks are forward thinking,
Speaker 1: so it doesn't mean that that, you know, stocks have
Speaker 1: to languish all the way until the fourth quarter. We
Speaker 1: could see things sort of you know, probably drop out
Speaker 1: either now in certain certain circumstances where stocks have really
Speaker 1: been hit hard, or it may take until the summer
Speaker 1: or the fall, but it's going to be kind of
Speaker 1: we had a rolling, kind of rolling correction. This is
Speaker 1: going to be a rolling recovery, is my best guess.
Speaker 3: Okay, rolling recovery where you see some so called low
Speaker 3: quality stocks driving this short term rally. What what constitutes
Speaker 3: a low quality stock.
Speaker 1: Like, well, I mean a bad balance sheet, you know,
Speaker 1: too much leverage, low margins, not that profitable, so that
Speaker 1: those are the kinds of stocks that tend to do
Speaker 1: the best when it's sort of a relief rally. So
Speaker 1: we're not advocating that those should be core positions, but
Speaker 1: that you know, if in fact, it is a low
Speaker 1: quality rally kind of leading us for the next week
Speaker 1: or two, that would just inform us that we probably
Speaker 1: have more you know, wood to chop in terms of
Speaker 1: the broader market finding you know, finding it's footing and
Speaker 1: being able to make a march towards new highs. We
Speaker 1: think new highs are probably out of the question in
Speaker 1: the first half of this year, but this is but
Speaker 1: by the second half, it's very plausible as we look
Speaker 1: forward to twenty twenty six.
Speaker 3: In the anytime, we've seen the dollar come off its
Speaker 3: heights too from mid January, so lost a lot of
Speaker 3: ground recently. At some point that recent dollar weakness will
Speaker 3: help earnings for a lot of the S and P
Speaker 3: five hundred companies that rely on overseas sales, won't it.
Speaker 1: That's exactly right, and that was one of our concerns
Speaker 1: coming into this year, is that the dollar is very
Speaker 1: high and rates were high. So now that's reversed, right,
Speaker 1: you have lower rates and you have a lower dollar.
Speaker 1: And quite frankly, this this relative trade versus Europe, I
Speaker 1: think could go the other way now as we go
Speaker 1: into earning season. I mean, you're benefited from the stronger dollar,
Speaker 1: you know, into first quarter you know period, and that
Speaker 1: was one of the big positive drivers for Europe. Now
Speaker 1: as they report first quarter earnings, it could be the
Speaker 1: exact opposite. So that trade, that relative trade, we think
Speaker 1: has kind of gone fully. So I would advocate sort
Speaker 1: of S and P five hundred over Europe now on
Speaker 1: a rebound trade that direction.
Speaker 2: Oh that's interesting, But then what about all the money
Speaker 2: that Germany is spending, Like you think that that doesn't
Speaker 2: hold enough water to really cycle through the market as much.
Speaker 1: Well, Germany's up seventeen percent this year, so I think
Speaker 1: you've discounted quite a bit of that. And once again,
Speaker 1: you know, just in the very near term, this is
Speaker 1: more tactically speaking that you know that the revision factors
Speaker 1: for Europe should look weaker relative to the US, just
Speaker 1: based on that currency factor that that Scarlett was asking about.
Speaker 2: When you take a look at the NASAC and mag
Speaker 2: seven say, in particular, is that sort of its own
Speaker 2: beast in essence, because there was that euphoria and that
Speaker 2: was you can make an argument and over evaluation. Is
Speaker 2: that a little different from what the mess of the
Speaker 2: market has to sort of manage right now with that headline.
Speaker 1: Risk, Well, we're seeing to bring up Max seven because
Speaker 1: that too is a situation where the earnings revisions have
Speaker 1: rolled over harder than the rest of the market, and
Speaker 1: that's why that group is underperformed. But we're starting to
Speaker 1: notice now in our data we look at this daily
Speaker 1: that that's flattening out now and that may actually pick up.
Speaker 1: And remember, the Max seven will benefit from that weeker
Speaker 1: dollar feature, So I think that there may be a
Speaker 1: trade there as well to maybe kind of buy back
Speaker 1: into the MAG seven relative to the four ninety three
Speaker 1: or kind of the equal weight where you know, we've
Speaker 1: seen pretty significant underperformance over the last couple of.
Speaker 3: Months, so we have this rally recovery rally, but it's
Speaker 3: not a durable rally as you've seen that suggests that
Speaker 3: there's more downside ahead. Do you anticipate next time around
Speaker 3: that there's going to be more force selling. I don't
Speaker 3: get the sense that we got that this last time
Speaker 3: and so as a result, we didn't really reach capitulation.
Speaker 1: Well I don't know about that. I mean, we got
Speaker 1: as over sold as we saw during twenty twenty two,
Speaker 1: and we did see some force selling from some of
Speaker 1: the systematic strategies and some of the more levered players
Speaker 1: out there. For sure, we definitely didn't see force selling
Speaker 1: in the retail community. But we may not see that.
Speaker 1: You know, the retail community, you know, has made a
Speaker 1: lot of money the last few years, and they have
Speaker 1: a lot of cash on the sidelines, so maybe they're
Speaker 1: in better shape. They don't, they don't get to that position.
Speaker 1: What we're looking for, quite frankly, is not so much technical. Uh,
Speaker 1: it's more on the on the revision side. We need
Speaker 1: to see Earning's revisions stabilize and then start to turn
Speaker 1: up again for this to become a rally that can
Speaker 1: lead to new highs. When I say it's not a
Speaker 1: durable rally, it doesn't mean we have to go lower.
Speaker 1: It just means we're going to chop around, yes, and
Speaker 1: that's a difficult environment. It's a trading environment, and it's
Speaker 1: fine if you're a trader, but as an investor, you
Speaker 1: know it's going to be noisy, and so don't you know,
Speaker 1: you don't need to be rash here thinking you're missing something.
Speaker 1: Either way, it is a trading environment. The ball is
Speaker 1: going to stay high, as we said, and we think
Speaker 1: it will work its way through over the next two quarters,
Speaker 1: and by the second half of the year we should
Speaker 1: see better visibility on twenty six grows getting better.
Speaker 3: So like, which sectors would you want to be in
Speaker 3: as sectors that may give guidance that you know moves
Speaker 3: to the upside.
Speaker 1: So I think you know, we've been very focused on
Speaker 1: four sectors where the revisions have been good, as financial, software, media, entertainment,
Speaker 1: and some of the consumer services sectors. Some of those
Speaker 1: are starting to flatten out a little bit. And then
Speaker 1: we've seen relative strength now lately in the defensive sectors,
Speaker 1: most notably utilities and some of the staples areas not
Speaker 1: on revisions but on price. So I think the Barbelle
Speaker 1: sort of between those four sectors I mentioned where revisions
Speaker 1: are good and a little bit of defensiveness in the
Speaker 1: portfolio still makes sense probably going into the second quarter.
Speaker 3: All right, really a pleasure to have you on, Mike.
Speaker 3: Thank you so much for joining us today. Mike Wilson
Speaker 3: over at Morgan Stanley talking about this tradable rally, A
Speaker 3: choppy rally here around the fifty five hundred level,