Speaker 1: Bloomberg Audio Studios, podcasts, radio news, joining.
Speaker 2: Us tow Mike Wilson with Morgan Stanley with s exceptionally
Speaker 2: intelligent views on the market. He has not been a
Speaker 2: raging bull. He's been someone who has participated but done
Speaker 2: it with a bit of angst and caution as well.
Speaker 2: There's the Mike Wilson word. Mike Wilson nimble. If I'm
Speaker 2: nimble after five days down in a row or whatever
Speaker 2: it is, how nimble am I into Monday?
Speaker 1: What do I do now? To reposition with confidence?
Speaker 3: Welcome morning, Tom, Look, I think and happy New Year.
Speaker 4: I you know, I think what you said earlier is
Speaker 4: listening to your chatting about.
Speaker 3: Do I get in now? Do I? What do I do?
Speaker 4: And that's really not ever the right strategy. The right
Speaker 4: strategy is to have something committed at all times and
Speaker 4: be balanced in your portfolio so that you can ride
Speaker 4: out turbulent times when they arrive.
Speaker 3: And look, we've had a we've.
Speaker 4: Had a little bit of a of a bad stretch
Speaker 4: here since the beginning of December, which doesn't really surprise
Speaker 4: me given the run that we had. You know, post
Speaker 4: election is just a lot of euphoria. So we're having
Speaker 4: a bit of correction here. I do think the first
Speaker 4: half of twenty twenty five will probably be a bit
Speaker 4: more challenging, and then the second half sets up pretty well,
Speaker 4: assuming that you know, a forecast around the economy and
Speaker 4: earnings come through. Everybody knows the market's expensive. Everybody knows that.
Speaker 4: You know, we've had and sentiments crazy right now, and
Speaker 4: that's just part of the game. I mean, you have
Speaker 4: to you know, you have to deal with that, and
Speaker 4: that's why you have diversification in your portfolio.
Speaker 2: You look at factors. I think of lizzaone, Saunders over
Speaker 2: Schwud as well. Which is the factor now with the
Speaker 2: closest Mike Wilson's study.
Speaker 4: Well, we look at all of them obviously, and I
Speaker 4: would say it's been the you know, the factor that's
Speaker 4: been most in favor has been quality and momentum, and
Speaker 4: then recently both of those came off a bit because
Speaker 4: that's where people were positioned. Okay, that doesn't mean that
Speaker 4: those aren't still the places to be. It just means
Speaker 4: that we're having a bit of a pullback in here.
Speaker 4: And like I think, I think going into twenty twenty five,
Speaker 4: there are some areas that got probably a little bit
Speaker 4: overdone some of the you know, some of the growth areas.
Speaker 4: Uh that that factor in particular, probably people are paying
Speaker 4: up for that too much. I think some of the
Speaker 4: size factors, you know, people are rotated probably a little
Speaker 4: bit too much into the small cap area and they're
Speaker 4: giving some of that back now too. So that's just
Speaker 4: one sort of arrow in our in our quiver. And uh,
Speaker 4: you know, but but it's definitely something we watch closely.
Speaker 5: Hey, Mike, I'm reading your your more most recent note
Speaker 5: about the breadth of the market. It gets gets me
Speaker 5: to thinking, here, I got the s and P five
Speaker 5: twenty four is up like twenty three twenty four percent,
Speaker 5: Yet the equal weighted SMP up only like you know,
Speaker 5: ten or eleven percent. A what does that tell you?
Speaker 5: I mean, is and how can earning is that for you?
Speaker 3: Well, I mean it's not really.
Speaker 4: Remember, breath is a symptom, okay, of what's going on,
Speaker 4: not the cause. And so the weaker breath tells us that,
Speaker 4: you know, certain things are going and we think we've
Speaker 4: this is something we think we've gotten very right over
Speaker 4: the last several years, which is that it's a very
Speaker 4: government heavy, you know economy, right so if you actually
Speaker 4: look at the private economy, the private economy has been
Speaker 4: sort of languishing, whether it's manufacturing or housing. Some of
Speaker 4: the consumer goods areas, I mean, they're actually intercession. They've
Speaker 4: been intercession for two years. And the government, heavy handed
Speaker 4: former government, whether it be fiscal or monetary policy, has
Speaker 4: kind of kept things buoyed.
Speaker 3: And the market has figured that out.
Speaker 4: And of course you have things like AI, you know,
Speaker 4: maybe weight loss drugs, you know, certain themes that are
Speaker 4: very specific to certain areas, and those areas have carried
Speaker 4: the day.
Speaker 3: Okay, So I think I think the.
Speaker 4: Weak breath is symptomatic of this very unbalanced economy that
Speaker 4: we're dealing with.
Speaker 2: Now.
Speaker 4: One thing to point out, however, is the second and
Speaker 4: half really since September, the breath improved tremendously, and actually
Speaker 4: the breath in twenty twenty four is still way better
Speaker 4: than it was in twenty twenty three. So it's not
Speaker 4: all bad, but it is a like I said, it's
Speaker 4: a symptom of what I think is a very unbalanced
Speaker 4: kind of recovery that is ongoing.
Speaker 5: So I guess you think about twenty twenty five, Mike,
Speaker 5: I think a lot of folks are saying this, Really,
Speaker 5: if there's gonna be any performance in twenty twenty five,
Speaker 5: it really has to be driven by earnings growth, because
Speaker 5: maybe the Fed's going to cut a couple of times,
Speaker 5: but I'm not sure how much more than that. Are
Speaker 5: you concerned that the earnings leg of this story is
Speaker 5: maybe a little ahead of itself.
Speaker 3: Well, I mean, look the markets are they get ahead
Speaker 3: of that? Right?
Speaker 4: So the markets, you know, multiple you know, rallied because
Speaker 4: it anticipated in earnings recovery. Of course, this summer we
Speaker 4: had some turbulence and then the fall things picked up again.
Speaker 4: We think most of the of the rally in the
Speaker 4: second half was driven by sort of liquidity factors and
Speaker 4: you know, to send picking up around the election, just
Speaker 4: hitting that behind us, you know, at the definitive outcome,
Speaker 4: et cetera. And so now we're a little bit ahead
Speaker 4: of ourselves. So multiples probably have to consolidate a bit.
Speaker 4: The key for this year is are we going to
Speaker 4: get a broadening out in the earnings participation? Okay, so
Speaker 4: earnings have been pretty lousy for most companies over the
Speaker 4: last two years for the reasons I mentioned earlier. Okay,
Speaker 4: interest rates are too high, for most businesses, Government is
Speaker 4: crowding out a lot of smaller businesses and even larger
Speaker 4: businesses to some extent, the global economy is still kind
Speaker 4: of stuck in the mud, so a lot of multinationals
Speaker 4: are not doing well. So the key for next year
Speaker 4: is can we see a broadening out of that earning recovery.
Speaker 4: We think we can, and that's our job. Our job
Speaker 4: is to figure out where is that earning is going
Speaker 4: to pick up. Financials is one area where we've gotten
Speaker 4: more constructive recently because of the earning story, specifically.
Speaker 1: Mike Wilson with US with Morgan Stanley.
Speaker 2: If I need breadth to go higher, Mike Wilson is
Speaker 2: healthcare is so dominant that if healthcare doesn't perform, I
Speaker 2: don't see an intelligent gain in the market.
Speaker 3: No, I don't think so, Tom. I mean, healthcare has
Speaker 3: been languishing for a while.
Speaker 4: It's been you know, there's been some big home run winners,
Speaker 4: and as I mentioned earlier, some of the weight loss
Speaker 4: drug winners, et cetera. But healthcare has been languishing for
Speaker 4: the better part of a year and a half in
Speaker 4: a relative basis, and the market's been fine. So I
Speaker 4: don't think it's necessary condition. It would be helpful. We'd
Speaker 4: like to see it happen. I think for healthcare specifically,
Speaker 4: you know, with the appointment of Bobby Kennedy, Well, let's
Speaker 4: see how that goes. I mean, I think that the
Speaker 4: sector is probably going to remain under pressure until that confirmation.
Speaker 4: Hearing interesting, and then I think from there we might
Speaker 4: get a bit of a bounce.
Speaker 2: Yeah, Mike Wilson, tell me about the necessary condition for
Speaker 2: breath to work. What is the single item that you're
Speaker 2: studying with your team to say we have good breadth.
Speaker 4: It's what you said earlier, Tom, we need we need
Speaker 4: better breath of earnings revisions. I mean, this has been
Speaker 4: a theme of ours for the last two years.
Speaker 3: You know.
Speaker 4: One of the reasons why we weren't maybe as enthusiastic
Speaker 4: as others in terms of the rally we've had is
Speaker 4: because we thought it would be narrow. In fact, our
Speaker 4: forecast suggested that that the earnings recovery itself was driven
Speaker 4: by heavy cost cutting in the mag seven and then
Speaker 4: of course they had AI which helped a handful of companies.
Speaker 4: You had a few of the themes that were driving
Speaker 4: you know, growth, You had government support, for infrastructure, spend
Speaker 4: things along those lines, and so it was very narrow.
Speaker 4: So in order for the market breath the price breath
Speaker 4: to get better, you need earnings breath to get better.
Speaker 4: I don't think it's that complicated. And that's what we
Speaker 4: think should happen in twenty twenty five, assuming once again
Speaker 4: that you know, we don't get some policy changes that
Speaker 4: are maybe negative for the market in the near term.
Speaker 4: And that's really our concern the short term is that
Speaker 4: we think some of the policy changes are probably going
Speaker 4: to be more negative in the beginning and then more
Speaker 4: positive in the second half.
Speaker 5: Hey, Mike, as we all know, the S and P
Speaker 5: five hundred over each of the last two years has
Speaker 5: grown north of twenty percent. I'm not sure earnings have
Speaker 5: grown to that extent, are we? What's the valuation call
Speaker 5: right here?
Speaker 3: As you think about the market here, Mike, it's expensive.
Speaker 3: I mean, that's not a great insight.
Speaker 4: I mean, this is probably the single biggest miss by
Speaker 4: I think everybody in the last twelve months. I don't
Speaker 4: I don't recall anyone saying they thought we would trade
Speaker 4: to twenty three times earnings. But of course everybody rode
Speaker 4: the wave, including us, and you're happy to take it.
Speaker 4: And so now you're sitting here twenty two twenty three
Speaker 4: times earnings and you're like, oh, you know, well, now
Speaker 4: we need to see the earnings actually surprised to the upside.
Speaker 4: And you're exactly correct on the fact that earnings have
Speaker 4: not been the main driver of the returns. The main
Speaker 4: driver of the returns has been equity evaluations, right. And
Speaker 4: there's been some specific names that have done a great
Speaker 4: job in earnings and those are unique, but overall, this
Speaker 4: has been probably one of the biggest multiple expansions we've
Speaker 4: ever seen x, you know, coming out of a recess.
Speaker 1: Okay, so what does it do with cash?
Speaker 2: For Mike Wilson, for Lisa Shallatt and Morgan Stanley Wealth Management?
Speaker 1: Is cash your friend right now?
Speaker 4: Well, I think you know, short duration fixed income in
Speaker 4: general has been our friend for the last several years.
Speaker 4: Being underweight you know duration, whether that's two years or
Speaker 4: one year or cash, they're all doing the same thing
Speaker 4: for your portfolio time but giving you a nice four
Speaker 4: to five percent return with very little risk. And so
Speaker 4: that's a great place to have some of your money.
Speaker 4: Once again, not all of your money. You know, we're
Speaker 4: probably five to seven percent coming in that cash rate region,
Speaker 4: which is two years and end.
Speaker 3: And and that's fine. That's a good place to be
Speaker 3: when you're getting compensated. I mean, just recall two years
Speaker 3: ago you were getting zero on that cash.
Speaker 4: Now that's a bad deal, but today you're getting actually
Speaker 4: a pretty positive return. And there's a place in every
Speaker 4: portfolio for something like that. Just ask Warren Buffett.
Speaker 5: Hey, Michael, it seems like the market's discounting too FED
Speaker 5: rate cuts this year. Is the market okay with that
Speaker 5: or do they need to think the market needs to
Speaker 5: see a little bit more or do you think the
Speaker 5: market is fairly discounting too it cuts.
Speaker 4: Well, first of all, let me just make an opening
Speaker 4: statement about that. I mean, if there's one thing that
Speaker 4: the markets have been more wrong about than FED cuts
Speaker 4: over the last four years, I like to know what
Speaker 4: it is, so you know, I mean, this has been
Speaker 4: probably the single biggest whipsaw, both on the upside and
Speaker 4: the downside, that the markets have gotten wrong. So I
Speaker 4: think looking at the bond market right now, what they're
Speaker 4: pricing in is a waste of time because they don't know.
Speaker 4: The FED doesn't even know what I would say However,
Speaker 4: one of the reasons why the breath is deteriorated. I
Speaker 4: talked about that as a symptom the cause of the
Speaker 4: breath deterioration. One of them is the fact that rates
Speaker 4: have gone up at the back end almost one hundred
Speaker 4: basis points since the FED has cut one hundred basis points.
Speaker 4: Think about that. That means the term premium has really
Speaker 4: gone up sharply, and that's been something we've been focused on.
Speaker 4: When the term premium kind of gets up into this range,
Speaker 4: you actually now are at risk of having an equity
Speaker 4: valuation correction. So we think that's probably the main reason
Speaker 4: why the breath has deteriorated here recently, more so than earnings.
Speaker 4: And I think, you know, two cuts, sure, why not?
Speaker 4: Could we get zero cuts next this year? Possibly could
Speaker 4: we get four or five cuts. Maybe it just depends
Speaker 4: on how things play out, but I think right now
Speaker 4: two cuts is kind of the best guess, and the
Speaker 4: bomb market is probably a little bit suspicious about that
Speaker 4: based on how the back end is training.
Speaker 1: Mike Wilson, thank you so much. Chief.
Speaker 2: You have secuity strategist Morgan Stanley generous to be with us.