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Speaker 1: It's risk gone right now joining us to discuss black Rocks,

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Speaker 1: Kate more Bank for Americas Wooded, Kate, Are there any

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Speaker 1: bears left?

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Speaker 2: There are still a few holdouts, I think, John, I

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Speaker 2: think there are a number of people who looked at

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Speaker 2: the phenomenal move in the equity markets last week and

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Speaker 2: risk assets kind of broadly and said this is not sustainable.

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Speaker 2: But no one wants to stand in front of his

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Speaker 2: train going into your end. I think we'll see a

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Speaker 2: lot of adjustment of positioning in January, however, and some

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Speaker 2: of those bears will be a little bit bolder, especially

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Speaker 2: if we rally over the next two weeks.

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Speaker 1: The best is sound in bullish this morning, Mike Wilson

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Speaker 1: and Molkan Stanley a bullish outcome for stocks off the

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Speaker 1: back of what we heard from Chairman Powell, Jared Wooded,

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Speaker 1: Are we setting go south up for disappointment? How high

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Speaker 1: is the bar now gone into twenty twenty four?

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Speaker 3: Yeah, I think it's fair to say, John, that the

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Speaker 3: gains from this pivot by the Fed are fully reflected

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Speaker 3: in the market. I mean, never mind the Santa Claus rally,

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Speaker 3: this market, bonds and stocks alike have trimmed the tree,

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Speaker 3: they popped the champagne court for New Year's they booked

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Speaker 3: a ticket for summer vacation. They're so far ahead of

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Speaker 3: what the economic fundamentals would suggest. If anything, this is

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Speaker 3: a great point to start taking profits and look for

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Speaker 3: alternative positioning for next year.

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Speaker 1: Joe, as you'd pull back, why would you pull back?

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Speaker 3: Well, I take gains in you know, unprofitable tech. That's

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Speaker 3: been one of the things that's rallied the most in

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Speaker 3: this short covering rally, and the most shorted stocks have

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Speaker 3: been huge beneficiaries, as Kate menhe as bears pull back.

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Speaker 4: But when you have low quality rallying.

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Speaker 3: And when you have fundamentals that haven't really improved, you know,

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Speaker 3: sharply in the last several weeks. If anything, we think

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Speaker 3: the risk of inflation in the second half of next

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Speaker 3: year is still a big concern. So investing in things

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Speaker 3: that are going to be robust to inflation and to

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Speaker 3: things that are higher up in quality seemed like a

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Speaker 3: great way to position for next year at a time

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Speaker 3: when everyone else is just scrambling for any kind of

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Speaker 3: junk they can find.

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Speaker 5: It.

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Speaker 1: Truly has been an everthing rally. Breadth has improved, Okay,

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Speaker 1: I just wanted from your perspective, is that's the real

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Speaker 1: deal or whether that's a head fake.

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Speaker 5: Yeah.

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Speaker 2: Look, I think there's a little bit of real deal

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Speaker 2: and a little bit of headfeach actually mixed in here.

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Speaker 2: Don And on the one hand, you have seen a

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Speaker 2: lot of people reposition and kind of invest in the laggards, rotate,

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Speaker 2: try and neutralize some of their underweights. And on the

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Speaker 2: other hand, there's this acknowledgment that, let's say, particularly in

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Speaker 2: the small cap space that had been under tremendous amount

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Speaker 2: of pressure as rates continued to rise, that if the

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Speaker 2: worst is behind us in terms of policy tightening, there

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Speaker 2: is potential for some of these companies to perform Okay,

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Speaker 2: I'm not going to say phenomenal, but okay in twenty

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Speaker 2: twenty four, so the earning story has a little bit

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Speaker 2: less downward pressure, I would say in the small cap space.

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Speaker 2: So there's both the repositioning, I think, and an acknowledgment

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Speaker 2: the fundamentals could improve.

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Speaker 1: Okay, talk to me about a sect that you do like,

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Speaker 1: tech and discretion rate are the winner is of this year?

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Speaker 1: The win is the next year?

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Speaker 2: Yeah, we like t tech discretionary, but we're looking for

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Speaker 2: opportunities down across all sectors. At this point, I might

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Speaker 2: take a little bit more of a bullish look and

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Speaker 2: a little bit more constructive than Derek right now and say, yes,

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Speaker 2: it's true that we've started to price in a lot

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Speaker 2: of the best news from the monetary policy front, but

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Speaker 2: there's a lot of good fundamental stories across all of

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Speaker 2: sectors at this point. Companies have done the work in

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Speaker 2: terms of reducing their expenses, they continue to manage to

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Speaker 2: the bottom line, and I think they're going to deliver

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Speaker 2: actually solid earnings across consumer, across technology, technology enablers, in

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Speaker 2: even some cyclical parts in twenty twenty four.

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Speaker 1: Charge would you agree with that?

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Speaker 4: Yeah?

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Speaker 3: Look, when I mentioned going into higher quality, I'm thinking

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Speaker 3: of companies and sectors where you have strong free cash

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Speaker 3: flow with solid balance sheets that have already endured a

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Speaker 3: lot of pain over the past decade.

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Speaker 4: To me, that's financials, that's energy.

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Speaker 3: We think about Asia equities in particular Korea, Japan, India,

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Speaker 3: even where you've got decent or even compelling valuation, lots

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Speaker 3: of corporate reform, a positive macro environment, and if the

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Speaker 3: consensus view is right that you have a weaker dollar

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Speaker 3: next year, a friendly fed those Asian stocks really poised

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Speaker 3: to benefit from a weeker dollar as well.

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Speaker 1: Jorge, you mentioned the banks. Let's talk about them. On

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Speaker 1: the S and P five hundred. They are higher by

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Speaker 1: twenty six percent, not yet today, but since the end

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Speaker 1: of October. It's not just off the back of the

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Speaker 1: bond market move. Something sustainable in your mind that we're

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Speaker 1: all missing.

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Speaker 4: Well, I think it's a few things.

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Speaker 3: There's a taking out of some of the risk around

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Speaker 3: real estate and some of those tail rist scenarios that

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Speaker 3: have dogged the market this year. There's understanding that a

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Speaker 3: friendlier fed, friendlier you know, cost of capital is going

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Speaker 3: to boost multiple lines of businesses across banks.

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Speaker 4: And positioning here matters too.

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Speaker 3: When people have been so bearish on especially larger cat

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Speaker 3: banks all year, when you have a rally of this type,

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Speaker 3: you expected.

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Speaker 4: Some of those most short of names to get an uplift.

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Speaker 1: Okay, what is it to like about the financials from

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Speaker 1: your perspective?

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Speaker 2: I got to be honest, John, I'm not overly excited

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Speaker 2: about the financials at this point. I'd be putting my

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Speaker 2: incremental risk in maybe some different places. You know, I

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Speaker 2: mentioned discretionary before. We've had you know, a constructive view

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Speaker 2: on the sector. But I could see a broadening out

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Speaker 2: in terms of retail in particular, if we continue to

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Speaker 2: have what we've seen, which is like strong wage growth

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Speaker 2: but not so strong, inflation continuing to cool. But I'm

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Speaker 2: not talking that outrate, aggressive deplation, stable monetary policy and

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Speaker 2: sentiment settling. You know, you can see a broadening out

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Speaker 2: in the discretionary space and across retail. And so that's

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Speaker 2: a place I'm doing a little bit of work and

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Speaker 2: getting more excited about the banks. I just don't see

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Speaker 2: a huge outperformance catalyst in twenty twenty four.

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Speaker 1: John, what are we missing? I last night twice, what

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Speaker 1: are we missing?

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Speaker 4: Well?

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Speaker 3: I think the most important thing for investors think about

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Speaker 3: right now is what's priced. Then, what's reflected in the

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Speaker 3: market today, and the consensus view on a perfect landing,

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Speaker 3: slower growth, friendly and disinflation and a FED that's very

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Speaker 3: happy to cut is I think fully reflected in the market.

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Speaker 3: So my point earlier about being tactically a bit cautious

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Speaker 3: reflects the fact that the market's already well ahead of

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Speaker 3: the FED. That's why you have folks coming out in

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Speaker 3: the days after saying maybe people who need to reconsider.

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Speaker 3: That's why my colleagues at Bank America just have the

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Speaker 3: rate forecast four cuts next year, but which is still

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Speaker 3: much less established than the market as a whole. If

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Speaker 3: you're an investment are approaching the market from a neutral

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Speaker 3: standing point today, I think you have to have a

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Speaker 3: vire belt of things that are tactically a little bit

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Speaker 3: more cautious, but with looking for cyclical value opportunities. For

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Speaker 3: the second half of this year, structural inflation, we think

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Speaker 3: is a really big theme. That means you need to

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Speaker 3: be in equities, You need to be in commodities and

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Speaker 3: assets that can benefit from a structurally higher stagflationary or

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Speaker 3: inflationary environment. That doesn't mean you need to load up

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Speaker 3: the vote at this moment, but it does mean that

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Speaker 3: the asset mix that most investors have in benchmarks and

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Speaker 3: model portfolios is ill suited to the world as we

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Speaker 3: see it today.

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Speaker 1: Jad you can't say stagflation then walk away. We've got

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Speaker 1: to come back to it. Stagflation. Can you build on

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Speaker 1: that a little bit more? Is that the kind of

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Speaker 1: environment you're looking for next year.

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Speaker 3: I think in the second half of next year there's

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Speaker 3: a very meaningful risk that you see a rebound in inflation.

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Speaker 3: And my colleagues and economics and across the firm, I think,

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Speaker 3: have written about this as well as one of their

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Speaker 3: risk scenarios. Because when you look at all the whole

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Speaker 3: economy doesn't matter. Households, corporates, or government, all the major

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Speaker 3: sectors are in an environment in which their sensitivity to

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Speaker 3: rate hikes is extremely low. There's still, you know, lots

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Speaker 3: of risk high inflation, and many of the metrics that

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Speaker 3: we watch are still one or two standard deviations above

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Speaker 3: the long term norm. I'll give you a couple quick examples.

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Speaker 3: The US federal budget deficit five percent of GDP. Unprecedented

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Speaker 3: to be spending this much money with unemployment your record lows,

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Speaker 3: and that's completely improvirious for the Fed. People will tell you, John, oh,

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Speaker 3: don't worry, Congress is going to pull back on spending

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Speaker 3: next year.

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Speaker 4: We think that's irrelevant.

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Speaker 3: Our analysts have told me that something like seventy seven

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Speaker 3: percent of the fiscal stimulus that's already been authorized by

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Speaker 3: Congress in the last several years hasn't even been spent yet.

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Speaker 3: That's going to still come through households and corporates. It's

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Speaker 3: the same story. Households are sitting on excess saving still

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Speaker 3: around nine hundred and fifty billion dollars. People very happy

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Speaker 3: to buy houses at any price. Corporates are facing private

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Speaker 3: credit dry powder to the tune of five hundred billion dollars,

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Speaker 3: very happy to step in and plug any gaps and

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Speaker 3: lending that might come about. And it's worth noting too

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Speaker 3: that high oield issuers still sitting on big cash piles.

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Speaker 3: The interest coverage ratio for high oield bond issuers is

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Speaker 3: still one standard deviation above the long term average. This

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Speaker 3: is something you see very early cycle, not end of cycle,

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Speaker 3: and it's the kind of thing that if the FED

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Speaker 3: does cut aggressively, you could see a rebound inflation. Given

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Speaker 3: wage growth and all the other parts of the economy,

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Speaker 3: they're still looking pretty hot.

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Speaker 1: Okay, what happens if Jarvis right?

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Speaker 2: I mean, if if inflation word of rebound, which I

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Speaker 2: would say we put as a pretty low probability event

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Speaker 2: in the second half of next year, because we do

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Speaker 2: think we're going to see a steady deceleration in overall

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Speaker 2: economic activity, perhaps not a big recession.

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Speaker 5: I think we're kind of a glide path here.

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Speaker 2: But if we were to see a rebound in inflation,

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Speaker 2: that certainly would be a big hit for risk appetite.

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Speaker 2: If the FED had to talk about normalizing policy further,

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Speaker 2: that would be a big risk for the equity market.

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Speaker 2: But I do want to make a point here about

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Speaker 2: one of the risks for the second half of twenty

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Speaker 2: twenty four that we need to talk about, which is

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Speaker 2: twenty twenty four is an election year.

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Speaker 5: And during election years, especially if there's a chance.

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Speaker 2: Of a significant change in administration and policy. You know,

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Speaker 2: sometimes companies sit back a little bit and don't engage

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Speaker 2: in capital expendite are outside of necessary and maintenance capbex.

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Speaker 5: Right, they just sort of say.

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Speaker 2: We'll do what's necessary, but let's see if there's a

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Speaker 2: change in the tax regime or a change in regulation

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Speaker 2: that's going to impact my ability to do business. So

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Speaker 2: sometimes in the kind of the fourth year represidential cycle

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Speaker 2: are doing a big contested election, you will see a

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Speaker 2: change in spending so that I'm watching, which may lead

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Speaker 2: to some dampness in the economy. I'm not it's not

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Speaker 2: keeping me up at night, but it's something that's definitely

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Speaker 2: a risk.

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Speaker 1: Find a word with Kate Moore Police. Okay, let's go

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Speaker 1: there the Federer serve, who do I listen to? The

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Speaker 1: chairman pal that I heard from with the start December,

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Speaker 1: the one I heard from on Wednesday, the people I've

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Speaker 1: heard from subsequently, who do I listen to?

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Speaker 2: I think we listened to them all. Don That's not

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Speaker 2: a cop out answer. I mean, I think Powell was

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Speaker 2: right in indicating that we can start discussing the possibility

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Speaker 2: of rate cuts if the growth, inflation and employment data

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Speaker 2: suggests that's the right and appropriate move. But I think

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Speaker 2: you know, the other FED speakers who come out and

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Speaker 2: basically said, hey, we're not promising rate cuts in the

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Speaker 2: near term, that there's a lot of uncertainty in the

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Speaker 2: macro data, that we're still coming out of a very

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Speaker 2: unusual cycle from the pandemic, and like we have to

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Speaker 2: wait and see.

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Speaker 5: It's also worth paying attention to.

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Speaker 2: I mean, I think the message for markets is like,

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Speaker 2: don't get ahead of yourself and expecting a huge number

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Speaker 2: of rate cuts in the first half of twenty twenty four.

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Speaker 5: We still think growth is going to look quite good.

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Speaker 2: Some of the disinflationary pressures with the speed of disinflation

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Speaker 2: may ease.

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Speaker 5: A little bit in the first part of twenty twenty four.

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Speaker 5: But that doesn't mean, and I'm going to make another

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Speaker 5: pitch for this, that it's like.

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Speaker 2: Game over for equities. I still think there's a risk

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Speaker 2: on move to.

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Speaker 5: Be had John going into twenty twenty four.

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Speaker 1: Are there's some basic come to long assumptions you making

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Speaker 1: on the bond market though, Okay, to make that cool, Yeah.

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Speaker 5: That's right.

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Speaker 2: I mean, to Iyer's point, I would expect stability in

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Speaker 2: yields if we had a huge amount of bond of volatility.

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Speaker 5: If we ended up seeing let's say, sustainable.

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Speaker 2: Rise above four four ten and there was upward pressure,

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Speaker 2: there would be a little bit tougher case for equities.

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Speaker 2: But I do think we're going to be able to

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Speaker 2: move past the obsession with monetary policy and the obsession

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Speaker 2: with FED speed and focus a little bit more on fundamentals,

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Speaker 2: which I think are going to improve. And by fundamentals,

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Speaker 2: I mean specifically earnings next year.

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Speaker 1: Okay, I hope that is not just the dream that

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Speaker 1: is actually a cool materialize. You know. I think we're

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Speaker 1: all on the same page. We all want to stop

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Speaker 1: talking about this, Kay, Thank you always fantastic The Cats

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Speaker 1: Shop with the brilliant came more of Black Rock alongside

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Speaker 1: Jared Wood of Bank for America