Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. Good morning, I'm Nathan Hager.
Speaker 1: I want to get a fuller view of what's been
Speaker 1: happening in the market over the last several days. Joining
Speaker 1: us now live Mike Wilson, Chief US equity strategist at
Speaker 1: Morgan Stanley. Mike, it is great to speak with you
Speaker 1: on this what looks to be a turnaround Tuesday. Have
Speaker 1: we found bottom after the sell off or is this
Speaker 1: a dead cat bounce for you?
Speaker 2: Good morning, Good morning, Nathan. Look, I don't I mean,
Speaker 2: nobody knows if this is going to be it or not,
Speaker 2: but I will tell you that, you know, Friday look
Speaker 2: like that may have been it because we held the
Speaker 2: diner day moving average, you know, into the clothes, and
Speaker 2: then you know, kind of gave that back quickly on
Speaker 2: pretty good volume yesterday. So you know, look, we've been
Speaker 2: We've been pretty clear in our guidance this year. We
Speaker 2: felt like the first half was going to be tougher
Speaker 2: after the strong finish, mainly because we saw mostly growth
Speaker 2: negative features in the initial moves of the administration. But
Speaker 2: in addition to that, something that doesn't get talked about
Speaker 2: much is that earnings revisions have been you know, rolling
Speaker 2: over for several months and led by the you know,
Speaker 2: big tech gross stocks. So you know, that's the that's
Speaker 2: a story that gets buried in the you know, in
Speaker 2: the in the fine print for some reason, which is
Speaker 2: that you know, this AI capex story is decelerating. Obviously,
Speaker 2: the deep seek story that came out earlier this year
Speaker 2: and and all of that is really what's what's weighed
Speaker 2: on the kind of you know, US indices as much
Speaker 2: as say doze the immigration enforcement in terraces and the like. So, look,
Speaker 2: the growth story has been deteriorating, markets have quickly adjusted.
Speaker 2: We've been using fifty five hundred as a low end
Speaker 2: of our range for the first half. We're almost there.
Speaker 2: You know, it's hard to predict things to the dollar obviously,
Speaker 2: are what we're really focused on is the revision factors
Speaker 2: and when they could next turn up or at least stabilize.
Speaker 2: And we think there's a chance for that later this
Speaker 2: month because the dollar has been weaker and rates have
Speaker 2: come down a bunch, and those tend to work with
Speaker 2: a little bit of a lead. So by the end
Speaker 2: of this month we could see perhaps some of those
Speaker 2: revision factors stabilized and that's really the positive canalysts that
Speaker 2: we're looking for to kind of get buyers to come
Speaker 2: in here in the meantime. You know, look, I mean
Speaker 2: the markets have been very efficient in you know, focusing
Speaker 2: on the areas which have had positive earning revisions, and
Speaker 2: those areas being financial, software, consumer services, and media and entertainment,
Speaker 2: and likewise punishing those areas with bad revisions like materials, energy,
Speaker 2: some of the lower quality small cap areas, consumer goods, etc.
Speaker 1: Is some of that bounce back that you're calling for
Speaker 1: in earnings revisions going to be driven by tax cuts?
Speaker 1: I only asked because we heard from the National Economic
Speaker 1: Council Director Kevin Hassett saying that the economy is going
Speaker 1: to take off in the second quarter with tax cuts.
Speaker 1: Is that what your view?
Speaker 2: No, we're not anticipating tax cuts packed estimates anytime soon.
Speaker 2: I mean maybe later this year, once the legislative process continues.
Speaker 2: But you know, the way we're the way we understand
Speaker 2: it is is that these are not incremental tax cuts.
Speaker 2: These are an extension of existing tax cuts. So I
Speaker 2: don't I don't anticipate revision factors to increase because of that. Now,
Speaker 2: of course, if the tax cuts don't get extended, that
Speaker 2: would be a real negative that that's not our expectation
Speaker 2: at the moment.
Speaker 1: The President has talked about this as a period of transition.
Speaker 1: If that's the case, what are we transitioning to and
Speaker 1: can it support stocks?
Speaker 2: Yeah, I mean that's the that's just kind of the
Speaker 2: bull case. You know, Secretary best And talked about this
Speaker 2: last week and that there's no sort of Trump put,
Speaker 2: but there may be a Trump call, meaning, you know,
Speaker 2: the short term pain of some of the things that
Speaker 2: need to do to rebalance the economy, which I think
Speaker 2: is a good idea, could lead to benefits later. And
Speaker 2: the most simplistic way of kind of explained that would
Speaker 2: be that we shrink the size of government and that
Speaker 2: sort of liberates the private economy ultimately via deregulation and
Speaker 2: some of the crowding out that's been going on now
Speaker 2: for several years. I mean, this is, by the way,
Speaker 2: that's not a new phenomenon. The government has been growing
Speaker 2: for the better part of my adult life. And so
Speaker 2: you know, the fact that we're finally talking about maybe
Speaker 2: shrinking the government, I'm not really sure you know who's
Speaker 2: against that, because we know that's a that's an inefficient
Speaker 2: way to allocate capital. And if you can get the
Speaker 2: private sector doing that job instead, that's the payoff down
Speaker 2: the road. We'll see how long it takes to get there,
Speaker 2: but that's I think the explanation for what they're talking about.
Speaker 1: Speaking with Mike Wilson, chief US equity strategist at Morgan
Speaker 1: Stanley in your start to the week, note Mike, of
Speaker 1: course you talked about putting your bottom for the S
Speaker 1: and P five hundred at fifty five hundred, we're pretty
Speaker 1: close to there. Now, what's the risk it could go
Speaker 1: even lower than that?
Speaker 2: Well, the risk is that this, you know, turns into
Speaker 2: a hard landing. That's not our view at the moment.
Speaker 2: I think, you know, we need to see more more
Speaker 2: damage here. But it also becomes somewhat reflexive, meaning the
Speaker 2: more the stock market goes down, the risk that that
Speaker 2: turns into you know, consumer spending at the high end
Speaker 2: coming down as well, so it becomes kind of self fulfilling.
Speaker 2: So we're in we're just in that reflective period right now.
Speaker 2: I would say, you know, as I mentioned earlier, there's
Speaker 2: no quote unquote Trump put If you want to put
Speaker 2: it that way, I think there is a FED put,
Speaker 2: and I you know, I think if growth were to
Speaker 2: deteriorate meaningfully, and you know Chair Powell talked about this
Speaker 2: last week. I mean, they have a lot of firepower
Speaker 2: to respond, So it's going to be, you know, one
Speaker 2: of these one of these years where you just got
Speaker 2: to be really paying attention minutes to minute, day to day,
Speaker 2: week to week, kind of to the to the changes
Speaker 2: here at the margin. The good news is that the
Speaker 2: markets have quickly adjusted to kind of what we've been forecasting,
Speaker 2: which is, you know, growth is disappointing in the first half.
Speaker 2: And look at me. While the S and P is
Speaker 2: only down eight percent, I mean a lot of stocks
Speaker 2: are down twenty thirty, forty percent. So, like you know,
Speaker 2: when these corrections happen, they happen quickly. And my guess
Speaker 2: is that we're already seeing bargains in some areas that
Speaker 2: you know probably will end up being being good entry
Speaker 2: points right here right now.
Speaker 1: Well, Mike, if you're looking for a FED put, do
Speaker 1: you think we could get one this half?
Speaker 2: Well, like I said, the downside, you know, the risk
Speaker 2: is that we have a you know, the growth scare
Speaker 2: turns into a recession scare, and and we're not there yet,
Speaker 2: right And I think you know, Terry poul said that,
Speaker 2: he said the economy's fine at the moment. What I'm
Speaker 2: saying is is if it deteriorates quickly, I think the
Speaker 2: FED will respond quickly. But that's a you know, they'll
Speaker 2: respond to growth. Uh, then that they probably won't respond
Speaker 2: to the stock market. So I think there's a there's
Speaker 2: a put as it relates to the growth risk.
Speaker 1: So in our last minute, where are you advising your
Speaker 1: clients to reposition? If you are advising that, where should
Speaker 1: people be putting their money to work at this moment?
Speaker 2: Well, we're pretty comfortable right now. I mean, we we
Speaker 2: have a focused list that's actually up on the year
Speaker 2: close to seven percent, so you know, and that's that's
Speaker 2: really a large cap quality somewhat defensive bid to it,
Speaker 2: you know, And so we feel like we've been positioned
Speaker 2: for this. And now the question is when do we
Speaker 2: pivot to get more aggressive and get you know, kind
Speaker 2: of go higher beta, maybe even go down the cap curve.
Speaker 2: We're not there yet, but I mean that so we're
Speaker 2: we think we're set up for it, and and and
Speaker 2: and our portfolios are performing as a result. The key
Speaker 2: question is, you know, when is the time to get
Speaker 2: more aggressive like we did last fall kind of going
Speaker 2: into the election and the FED cuts that we saw,
Speaker 2: and you know, well, we'll let you know, We'll let
Speaker 2: you know when we think it's time. We don't think
Speaker 2: it's time yet. We think it's going to remain choppy
Speaker 2: here at least for the next couple of weeks. And
Speaker 2: as you know, we publish every week, so you know,
Speaker 2: stay tuned.
Speaker 1: Really appreciate you coming on with us to give us
Speaker 1: your latest view. That's Mike Wilson, chief US equity strategist
Speaker 1: at Morgan Stanley. We are very pleased to be joined
Speaker 1: now by Mohammad Alarian, the chief economics advisor at Alliance,
Speaker 1: President of Queen's College, Cambridge, and columnist for Bloomberg Opinion. Muhammad,
Speaker 1: thanks so much for joining us this morning on Bloomberg Daybreak.
Speaker 1: As we do see futures bouncing back just a bit
Speaker 1: this morning from the broad sell off that we've seen
Speaker 1: over the last several days. Do you think this is
Speaker 1: as far as it's going? Could it go down further?
Speaker 1: Good morning, Good.
Speaker 3: Morning, Nathan. It's hard to tell it could go further
Speaker 3: or consolidate. And I don't want to sound wishy washy,
Speaker 3: but there are some really complex technicals here, and there's
Speaker 3: a lot of policy uncertainty. So these are One of
Speaker 3: these is a situation where the most important question is
Speaker 3: an investor that you need to ask yourself is what
Speaker 3: mistake can our fort to make? Because when the world
Speaker 3: is so unpredictable, the probability of a mistake goes up.
Speaker 3: No one wants to make a mistake, Nathan, but sometimes
Speaker 3: mistakes are forced on you, and people have to make
Speaker 3: sure that their mistakes are recoverable, because the good news is,
Speaker 3: with time, most investment mistakes are recoverable.
Speaker 1: Are you implying that it was a mistake to expect
Speaker 1: that we would see broad stimulus right away from President Trump?
Speaker 1: The market seemed to be pricing in after his election
Speaker 1: in November, So.
Speaker 3: I think, Nathan, the market understood that there were five
Speaker 3: policy areas that the president intended to pursue that would
Speaker 3: impact corporate profitability and financial markets. And you know them
Speaker 3: is trade and tariffs in particular, It's about public sector
Speaker 3: reform and what DOGE is doing. It's about energy, it's
Speaker 3: about deregulation, and the view was that we will get
Speaker 3: a big bang that the President would move on all
Speaker 3: five simultaneously, and the markets would benefit from deregulation, they
Speaker 3: would benefit from lower energy prices, and they would be
Speaker 3: able to absorb the little disturbances that comes from tariff
Speaker 3: and DOGE. As it turns out, we're getting the tariffs
Speaker 3: under DOGE first and the others will come later, including
Speaker 3: tax cuts. So the question that the market has to
Speaker 3: deal with today, Nathan, is can we manage this bumpy
Speaker 3: journey to a better destination? And that is what people
Speaker 3: are trying to figure out.
Speaker 1: As we try to figure this out, Muhammad, is US
Speaker 1: exceptionalism something you've been talking about for quite some time
Speaker 1: is that at risk?
Speaker 3: Now? I think what's that risk? Is one of the
Speaker 3: US's edges, And it's really important in financial markets, in
Speaker 3: global in the global economy to understand what your edge
Speaker 3: is is. And one of the US edges is predictability
Speaker 3: and the rule of law. And the more these two
Speaker 3: things are questioned, the more people are going to start
Speaker 3: questioning economic exceptionalisms. The other elements of economic exceptionalism are
Speaker 3: still sound. We have an incredibly entrepreneurial economy. We have
Speaker 3: one of the best private sectors. We are relatively closed,
Speaker 3: meaning that other countries can't force outcomes on us. So
Speaker 3: there's a lot that's still going well for the US economy,
Speaker 3: but there's a question about this edge of predictability, transparency,
Speaker 3: and the rule of law.
Speaker 1: We're speaking with Muhammad al Arian, columnists for Bloomberg Opinion
Speaker 1: and president of Queen's College, Cambridge. Muhammad what brings us
Speaker 1: exceptionalism back more strongly for the market as we continue
Speaker 1: to watch these policy uncertainties play out For investors.
Speaker 3: I'll quote a CEO friend of mine who simply said,
Speaker 3: I just want to know what operating environment I am
Speaker 3: in ore Tariff's going to stay and they're not going
Speaker 3: to stay. Is there going to be a massive layoff
Speaker 3: from the federal government or not? Is the federal government
Speaker 3: going to honor the commitments in terms of contracts or not.
Speaker 3: Clarity is what people want, Nathan, that you know, the
Speaker 3: US is agile enough to operate in many different environments,
Speaker 3: but what business leaders need is clarity. And you're starting
Speaker 3: to hear this phrase wait and see over and over
Speaker 3: again in corporate calls. Companies are just waiting to see
Speaker 3: what's happening before they commit to major expenditure. The problem
Speaker 3: is if they wait and see and if consumers not
Speaker 3: feeling income insecure, then we could easily walk ourselves or
Speaker 3: weigh ourselves into a recession.
Speaker 1: Our investors finding clarity outside the US. Is that something
Speaker 1: that could cause investors to think about putting more of
Speaker 1: their money into assets outside the US.
Speaker 3: That's happening, you know, There's been an enormous up ending
Speaker 3: of all the consensus trades that were in place at
Speaker 3: the beginning of the year. So in the beginning of
Speaker 3: the year, consensus was favor US equities over the rest
Speaker 3: of the world. It was usuels will go higher while
Speaker 3: Germany yels will stay low. It was the dollar with strengthen,
Speaker 3: especially against the Euro, which may reach parody. All those
Speaker 3: trades have been turned on their head. People are favoring
Speaker 3: foreign equities relative to US that massively outperformed the US.
Speaker 3: We've seen a significant compression in the yield differential between
Speaker 3: the US and Germany and the dollars weekend. It's another
Speaker 3: half a percent week of today, and the euro, which
Speaker 3: was expected to go to parody, is at one o nine.
Speaker 3: So the market has seen a reason to exploit what
Speaker 3: have been significant valuation difference is why not only because
Speaker 3: there's a growth sca in the US, but there's the
Speaker 3: hope for what's called the spot Nik moment in Germany,
Speaker 3: in particular the Germany. Will we sorry go ahead?
Speaker 1: Do you think we could see clarity from the Federal
Speaker 1: Reserve or do you think the FED is going to
Speaker 1: stay on the sidelines waiting for some of this policy
Speaker 1: uncertainty to get ironed out from the Trump administration.
Speaker 3: Chair Power made it very clear they do not see
Speaker 3: a reason to move. They will also be in a
Speaker 3: wait and see attitude.
Speaker 1: Is that the right move? I mean, what could get
Speaker 1: the FED off the sidelines?
Speaker 3: So, Nathan, you know that for a very long time
Speaker 3: of complaining that the FED is open reactive, that by
Speaker 3: being so reactive, whether it's data dependence with wait and see,
Speaker 3: it tends to add and accentuate volatility rather than act
Speaker 3: as an anank of stability and as a nose star.
Speaker 3: But this is the reality of the day's Fed, after
Speaker 3: the big mistake they made in twenty twenty one twenty
Speaker 3: two by cooling inflation transitory that become very reactive. So
Speaker 3: we should not expect the FED to take the lead here.
Speaker 1: We want to get into your latest column for Bloomberg Opinion.
Speaker 1: Talking about the FED, you are arguing that the fixation
Speaker 1: on the two percent inflation target is risky. Talk a
Speaker 1: little bit more about that view and why you see
Speaker 1: that risk, what the risk is.
Speaker 3: You know, the two percent target is a historic accident.
Speaker 3: It was something that in the Bank of New Zealand,
Speaker 3: the Reserve Bank of Newton and came up during an
Speaker 3: inflation targeting exercise and it stuck because the world entered
Speaker 3: a massive phase of disinflation. The entry of China into
Speaker 3: the global economy was a very positive supply shock. The
Speaker 3: dismantling of the Soviet Union was a very positive supply shock,
Speaker 3: and we didn't have to worry about inflation, and two
Speaker 3: percent seem fine. Now we are having not favorable supply shocks,
Speaker 3: but unfavorable supply shock. The global economy is fragmenting. Supply
Speaker 3: chains are being rewired, we're having tariffs, we're having trade ward,
Speaker 3: we have rapidization of investment tools. In a world like this,
Speaker 3: you have to ask you the question, is two percent
Speaker 3: still the right target? Because if you pursue the wrong target,
Speaker 3: then you will sacrifice growth, you will sacrifice employment and
Speaker 3: Ultimately you will undermine the independence of the FED.
Speaker 2: Now.
Speaker 3: I don't think the FED will change its inflation target
Speaker 3: anytime soon, but it certainly needs to be thinking about
Speaker 3: whether two percent is the right target.
Speaker 1: Well, what would the market impact be if the FED
Speaker 1: did decide to change its two percent inflation target move
Speaker 1: things higher? How would the market react to that?
Speaker 3: And that's the argument that's being used that if you
Speaker 3: change it, then you will destabilize inflation expectations. I think
Speaker 3: that argument has been taken to an extreme. Most of
Speaker 3: us who believe that the FED should think about this
Speaker 3: suggesting two things. One, the change wouldn't be massive. It
Speaker 3: would include going to a band, not a point estimate,
Speaker 3: and the lower end of that band would be either
Speaker 3: two and a quarter in two and a half, so
Speaker 3: call it a two and a half to three percent
Speaker 3: inflation target. That is not something that will fundamentally decibilized market.
Speaker 3: And on second thing that we argue is it can
Speaker 3: be done in a phase manner that doesn't de stabilized markets.
Speaker 1: I wonder if inflation expectations are starting to get unanchored
Speaker 1: now when we're seeing a lot of survey data showing
Speaker 1: three percent inflation expectations in the short to medium term
Speaker 1: and a lot of worry as we've been talking about
Speaker 1: that tariffs could raise prices longer term.
Speaker 3: Yes, and we saw another one at four point eight
Speaker 3: two weeks ago. So inflation expectations have moved up as
Speaker 3: people have realized that we're having all these disruptions. I
Speaker 3: think people have also realized that if the FED was
Speaker 3: truly pursuing a two percent inflation target, we would be
Speaker 3: speculating in the marketplace not about how many cuts are
Speaker 3: we going to get next this year, but we'd be
Speaker 3: speculating about when is the first hike. And we will
Speaker 3: get the CPI report tomorrow, and my hope is that
Speaker 3: it's not hot. But there was a sense in the
Speaker 3: marketplace right now that actually two percent is not the
Speaker 3: target being pursued, but no one quite knows what is
Speaker 3: being pursued, and that's the danger that they right now
Speaker 3: in this environment.
Speaker 1: So with this idea that we could see inflation start
Speaker 1: to get unanchored, what does that mean for the growth outlook?
Speaker 1: When we're seeing so much concern in the market with
Speaker 1: this sell off, that we could be heading into, if
Speaker 1: not a slowdown or recession.
Speaker 3: So let's speak numbers, Nathan. The US economy grew by
Speaker 3: two point eight percent last year. Coming into this year,
Speaker 3: the consensus forecast was two point five. I strongly believe
Speaker 3: that we're going to have a massive round of revisions
Speaker 3: to these forecasts, and that the consensus forecast will fall
Speaker 3: from two and a half the somewhere between one and
Speaker 3: a half and two. It's not recession. In fact, my
Speaker 3: properlity of recession is twenty five to thirty percent. But it
Speaker 3: is close to this notion of stall speed, which is
Speaker 3: about one percent. So the US is looking right now
Speaker 3: at slower growth, and the US is looking right now
Speaker 3: at higher inflation than what was expected a few months ago.
Speaker 3: It's the good old fashioned stackflation. It's the smell of stackfation.
Speaker 3: I want to stress those of us who lived through
Speaker 3: stackfas in the seventies and the early eighties think that
Speaker 3: this is nothing, but it is a whiff of stackflation.
Speaker 3: H an economy that has not had to deal with this.
Speaker 1: Really appreciate the extended time this morning. Muhammed, great to
Speaker 1: have you with us on daybreak this morning. That was
Speaker 1: Mohammad Alrian with us this morning. He is the chief
Speaker 1: Economics advisor at Alliance, President of Queen's College, Cambridge, and
Speaker 1: of course he is a columnist for Bloomberg Opinion. You
Speaker 1: can find his columns OPI, n GO on the Bloomberg
Speaker 1: terminal