Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. This is Bloomberg Daybreak.
Speaker 1: I'm Nathan Hager with Karen Moscow's we get ready for
Speaker 1: the first trading day in which the federal government will
Speaker 1: be open in forty three days. We're joined by Mike Wilson,
Speaker 1: chief US equity strategist at Morgan Stanley. Really great to
Speaker 1: have you with us on this first day after the
Speaker 1: government shut down. Mike, Now that it's over, now what
Speaker 1: good morning.
Speaker 2: Good morning, Nathan. Yeah, Well, I think most people probably
Speaker 2: won't feel the effects. I'm sure the government employees are
Speaker 2: happy to get back to work, and like I think
Speaker 2: from our standpoint, from a market standpoint, I mean this,
Speaker 2: you know, the longer that this kind of you know,
Speaker 2: lagged into the holidays, it definitely became a risk factor
Speaker 2: from both a growth standpoint and also from a financial
Speaker 2: liquidity standpoint. So, you know, I think there is a
Speaker 2: bit of a sigh of relief. You know, the markets
Speaker 2: have traded better into this now that it's behind us.
Speaker 2: But you know, let's be honest, I mean, I don't
Speaker 2: think they've really solved some of the main issues. So
Speaker 2: this is one that could pop up again in as
Speaker 2: early as January, so you know, we'll keep an eye
Speaker 2: on it, but I think we averted the worst of it.
Speaker 1: Could there be a lag when it comes to releases
Speaker 1: of government data. We heard the White House say that
Speaker 1: October CPI and jobs might never come out. Could that
Speaker 1: have a market impact?
Speaker 2: Well, it's just more of the same, which is there
Speaker 2: is this tension and we've written about this. We think
Speaker 2: there is this tension between the markets expectation and what
Speaker 2: the FED is doing. And part of that does relate
Speaker 2: to the data itself. I would say that the issue
Speaker 2: with the data is twofold number one. We may not
Speaker 2: get it and so it's a further delay which will
Speaker 2: delay the Fed's ability to you know, cut rates maybe
Speaker 2: as much as the market wants. And also, you know,
Speaker 2: I've made the case and I think other people have
Speaker 2: two that you know, these data are somewhat they're very lagging,
Speaker 2: and they're not they're not as accurate as they have
Speaker 2: been you know pre COVID. You know, the since COVID,
Speaker 2: some of these data the collection of themselves has been
Speaker 2: a little bit erradic and a little less reliable in
Speaker 2: that regard. So, you know, we do have a little
Speaker 2: bit of a data problem with it without the shutdown,
Speaker 2: and I think this all stems back from COVID, and
Speaker 2: I think this is making the Fed's job harder.
Speaker 1: Does it change your view on what the FED does
Speaker 1: on interest rates? I think you were calling for something
Speaker 1: like what six maybe seven interest rate cuts next year?
Speaker 1: Does that change now?
Speaker 2: Well, it's I think it's five to six now are
Speaker 2: kind of kind of over the next year. But still
Speaker 2: that's a that's that's more than what the market's anticipating. Uh,
Speaker 2: you know, right now, the market's anticipating about three three
Speaker 2: and a half cuts between now and the end of
Speaker 2: next year. So I mean, look, I think that the issue,
Speaker 2: it's not issue, but I think one of the concerns
Speaker 2: that the market has had. One of the reasons why
Speaker 2: it's been narrow is that, you know, the market kind
Speaker 2: of wants more, said, in order to get the private
Speaker 2: economy really moving, we do need kind of that base
Speaker 2: rate a bit lower, and that's why we we've kind
Speaker 2: of stayed at the quality curve and why the marketed
Speaker 2: performance has been quite narrow. So, you know, look, I
Speaker 2: think because of the effects of COVID, the kind of
Speaker 2: the boom bust on inflation, itself. The feed is probably
Speaker 2: going a little bit slower than they would normally, which
Speaker 2: I don't think is necessarily, you know, the wrong decision,
Speaker 2: but there is that tension, as I mentioned before, between
Speaker 2: the market and how fast the feed is moving.
Speaker 1: Now, it's been an interesting move in the market and
Speaker 1: the lead up to this shutdown coming to an end.
Speaker 1: While the broader market's been moving lower, we've seen the
Speaker 1: Dow Jones Industrial Average hit new record highs. Does that
Speaker 1: point to a new direction, a new narrative for the market, Yeah,
Speaker 1: we think so.
Speaker 2: I mean, we've kind of held back on trying to
Speaker 2: make the kind of small cap, MidCap broadening call, but
Speaker 2: now we think we're getting closer to that moment where
Speaker 2: you know, we do think we're going to see you know,
Speaker 2: broader performance in twenty twenty six, mainly because the earning
Speaker 2: story now is improving. As we've been saying for quite
Speaker 2: a while. You know, a good chunk of the private
Speaker 2: economy has been in a recession for many years, and
Speaker 2: we think that it's now emerging from that. Some of
Speaker 2: that's due to some of the policy changes and quit
Speaker 2: frankly just pent up the mand But the missing piece
Speaker 2: there going back to the Fed again, not to put
Speaker 2: too much pressure on them, but we do need lower
Speaker 2: rates for that private economy to get moving. The good
Speaker 2: news is, Nathan, is it in the third quarter so
Speaker 2: far the reporting season, we are now seeing double digit
Speaker 2: earnings grows on the year of the year basis for
Speaker 2: the median stock and that's the first time we've seen
Speaker 2: that kind of growth in four years. So I think
Speaker 2: there are early signs that we're seeing a broadening of
Speaker 2: the earning story and that's what ultimately will lead to
Speaker 2: better broader performance in the stock market next year.
Speaker 1: Are you starting to think about a number in terms
Speaker 1: of where earnings revisions could go into next year?
Speaker 2: Well, I mean, I think the consensus right now is
Speaker 2: low double digits, and we think that's very achievable. We'll
Speaker 2: leave it at that. We're actually working on our year
Speaker 2: head piece that will come out at the end of
Speaker 2: next week.
Speaker 1: Is the is the need for interest rate cuts there
Speaker 1: for the market or can the market continue to rally
Speaker 1: higher even if it's expectations aren't met in terms of
Speaker 1: monetary policy?
Speaker 2: Well, I think, I mean, I don't think the market
Speaker 2: essentially in trouble if they don't, you know, exceed expectations.
Speaker 2: But I do think the broadening story requires the FED
Speaker 2: to get ahead of the curve. As I'd like to
Speaker 2: say it, I measure, you know, kind of the FED,
Speaker 2: you know, in market terms, are they ahead or behind
Speaker 2: the curve by looking at the two year treasury yield?
Speaker 2: So right now, the set funds is still about forty
Speaker 2: fifty basis points above the two year treasury yield, and
Speaker 2: I would like to see the FED get below that
Speaker 2: level and then you'll see that broadening out. But you know,
Speaker 2: you know, the economy is not in bad shape at
Speaker 2: this point. I think I think the worst of the economy,
Speaker 2: you know, sort of slow down is behind us. And
Speaker 2: that was you know, we priced all that in April.
Speaker 2: We've written about this. That was the end of this
Speaker 2: rolling recession in and we're into a new bowl market now.
Speaker 2: So so but but you know, I mean markets like
Speaker 2: to challenge uh authorities, uh, you know, monetary policy, et cetera.
Speaker 2: And you know, if they're not happy, they'll they'll make
Speaker 2: the they'll make that they'll make them know, uh and
Speaker 2: and and then and then they'll get what they want,
Speaker 2: you know. But right now, it seems like we've got
Speaker 2: a decent balancing act that's going on,