WEBVTT - Mike Wilson Talks Earnings and Government Shutdown

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, radio news. This is Bloomberg Daybreak.

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<v Speaker 1>I'm Nathan Hager with Karen Moscow's we get ready for

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<v Speaker 1>the first trading day in which the federal government will

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<v Speaker 1>be open in forty three days. We're joined by Mike Wilson,

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<v Speaker 1>chief US equity strategist at Morgan Stanley. Really great to

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<v Speaker 1>have you with us on this first day after the

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<v Speaker 1>government shut down. Mike, Now that it's over, now what

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<v Speaker 1>good morning.

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<v Speaker 2>Good morning, Nathan. Yeah, Well, I think most people probably

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<v Speaker 2>won't feel the effects. I'm sure the government employees are

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<v Speaker 2>happy to get back to work, and like I think

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<v Speaker 2>from our standpoint, from a market standpoint, I mean this,

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<v Speaker 2>you know, the longer that this kind of you know,

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<v Speaker 2>lagged into the holidays, it definitely became a risk factor

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<v Speaker 2>from both a growth standpoint and also from a financial

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<v Speaker 2>liquidity standpoint. So, you know, I think there is a

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<v Speaker 2>bit of a sigh of relief. You know, the markets

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<v Speaker 2>have traded better into this now that it's behind us.

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<v Speaker 2>But you know, let's be honest, I mean, I don't

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<v Speaker 2>think they've really solved some of the main issues. So

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<v Speaker 2>this is one that could pop up again in as

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<v Speaker 2>early as January, so you know, we'll keep an eye

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<v Speaker 2>on it, but I think we averted the worst of it.

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<v Speaker 1>Could there be a lag when it comes to releases

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<v Speaker 1>of government data. We heard the White House say that

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<v Speaker 1>October CPI and jobs might never come out. Could that

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<v Speaker 1>have a market impact?

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<v Speaker 2>Well, it's just more of the same, which is there

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<v Speaker 2>is this tension and we've written about this. We think

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<v Speaker 2>there is this tension between the markets expectation and what

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<v Speaker 2>the FED is doing. And part of that does relate

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<v Speaker 2>to the data itself. I would say that the issue

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<v Speaker 2>with the data is twofold number one. We may not

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<v Speaker 2>get it and so it's a further delay which will

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<v Speaker 2>delay the Fed's ability to you know, cut rates maybe

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<v Speaker 2>as much as the market wants. And also, you know,

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<v Speaker 2>I've made the case and I think other people have

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<v Speaker 2>two that you know, these data are somewhat they're very lagging,

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<v Speaker 2>and they're not they're not as accurate as they have

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<v Speaker 2>been you know pre COVID. You know, the since COVID,

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<v Speaker 2>some of these data the collection of themselves has been

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<v Speaker 2>a little bit erradic and a little less reliable in

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<v Speaker 2>that regard. So, you know, we do have a little

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<v Speaker 2>bit of a data problem with it without the shutdown,

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<v Speaker 2>and I think this all stems back from COVID, and

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<v Speaker 2>I think this is making the Fed's job harder.

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<v Speaker 1>Does it change your view on what the FED does

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<v Speaker 1>on interest rates? I think you were calling for something

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<v Speaker 1>like what six maybe seven interest rate cuts next year?

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<v Speaker 1>Does that change now?

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<v Speaker 2>Well, it's I think it's five to six now are

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<v Speaker 2>kind of kind of over the next year. But still

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<v Speaker 2>that's a that's that's more than what the market's anticipating. Uh,

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<v Speaker 2>you know, right now, the market's anticipating about three three

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<v Speaker 2>and a half cuts between now and the end of

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<v Speaker 2>next year. So I mean, look, I think that the issue,

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<v Speaker 2>it's not issue, but I think one of the concerns

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<v Speaker 2>that the market has had. One of the reasons why

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<v Speaker 2>it's been narrow is that, you know, the market kind

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<v Speaker 2>of wants more, said, in order to get the private

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<v Speaker 2>economy really moving, we do need kind of that base

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<v Speaker 2>rate a bit lower, and that's why we we've kind

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<v Speaker 2>of stayed at the quality curve and why the marketed

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<v Speaker 2>performance has been quite narrow. So, you know, look, I

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<v Speaker 2>think because of the effects of COVID, the kind of

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<v Speaker 2>the boom bust on inflation, itself. The feed is probably

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<v Speaker 2>going a little bit slower than they would normally, which

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<v Speaker 2>I don't think is necessarily, you know, the wrong decision,

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<v Speaker 2>but there is that tension, as I mentioned before, between

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<v Speaker 2>the market and how fast the feed is moving.

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<v Speaker 1>Now, it's been an interesting move in the market and

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<v Speaker 1>the lead up to this shutdown coming to an end.

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<v Speaker 1>While the broader market's been moving lower, we've seen the

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<v Speaker 1>Dow Jones Industrial Average hit new record highs. Does that

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<v Speaker 1>point to a new direction, a new narrative for the market, Yeah,

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<v Speaker 1>we think so.

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<v Speaker 2>I mean, we've kind of held back on trying to

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<v Speaker 2>make the kind of small cap, MidCap broadening call, but

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<v Speaker 2>now we think we're getting closer to that moment where

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<v Speaker 2>you know, we do think we're going to see you know,

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<v Speaker 2>broader performance in twenty twenty six, mainly because the earning

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<v Speaker 2>story now is improving. As we've been saying for quite

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<v Speaker 2>a while. You know, a good chunk of the private

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<v Speaker 2>economy has been in a recession for many years, and

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<v Speaker 2>we think that it's now emerging from that. Some of

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<v Speaker 2>that's due to some of the policy changes and quit

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<v Speaker 2>frankly just pent up the mand But the missing piece

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<v Speaker 2>there going back to the Fed again, not to put

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<v Speaker 2>too much pressure on them, but we do need lower

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<v Speaker 2>rates for that private economy to get moving. The good

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<v Speaker 2>news is, Nathan, is it in the third quarter so

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<v Speaker 2>far the reporting season, we are now seeing double digit

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<v Speaker 2>earnings grows on the year of the year basis for

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<v Speaker 2>the median stock and that's the first time we've seen

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<v Speaker 2>that kind of growth in four years. So I think

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<v Speaker 2>there are early signs that we're seeing a broadening of

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<v Speaker 2>the earning story and that's what ultimately will lead to

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<v Speaker 2>better broader performance in the stock market next year.

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<v Speaker 1>Are you starting to think about a number in terms

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<v Speaker 1>of where earnings revisions could go into next year?

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<v Speaker 2>Well, I mean, I think the consensus right now is

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<v Speaker 2>low double digits, and we think that's very achievable. We'll

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<v Speaker 2>leave it at that. We're actually working on our year

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<v Speaker 2>head piece that will come out at the end of

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<v Speaker 2>next week.

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<v Speaker 1>Is the is the need for interest rate cuts there

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<v Speaker 1>for the market or can the market continue to rally

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<v Speaker 1>higher even if it's expectations aren't met in terms of

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<v Speaker 1>monetary policy?

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<v Speaker 2>Well, I think, I mean, I don't think the market

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<v Speaker 2>essentially in trouble if they don't, you know, exceed expectations.

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<v Speaker 2>But I do think the broadening story requires the FED

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<v Speaker 2>to get ahead of the curve. As I'd like to

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<v Speaker 2>say it, I measure, you know, kind of the FED,

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<v Speaker 2>you know, in market terms, are they ahead or behind

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<v Speaker 2>the curve by looking at the two year treasury yield?

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<v Speaker 2>So right now, the set funds is still about forty

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<v Speaker 2>fifty basis points above the two year treasury yield, and

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<v Speaker 2>I would like to see the FED get below that

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<v Speaker 2>level and then you'll see that broadening out. But you know,

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<v Speaker 2>you know, the economy is not in bad shape at

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<v Speaker 2>this point. I think I think the worst of the economy,

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<v Speaker 2>you know, sort of slow down is behind us. And

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<v Speaker 2>that was you know, we priced all that in April.

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<v Speaker 2>We've written about this. That was the end of this

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<v Speaker 2>rolling recession in and we're into a new bowl market now.

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<v Speaker 2>So so but but you know, I mean markets like

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<v Speaker 2>to challenge uh authorities, uh, you know, monetary policy, et cetera.

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<v Speaker 2>And you know, if they're not happy, they'll they'll make

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<v Speaker 2>the they'll make that they'll make them know, uh and

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<v Speaker 2>and and then and then they'll get what they want,

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<v Speaker 2>you know. But right now, it seems like we've got

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<v Speaker 2>a decent balancing act that's going on,