WEBVTT - Mike Wilson Talks Markets

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news, joining.

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<v Speaker 2>Us tow Mike Wilson with Morgan Stanley with s exceptionally

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<v Speaker 2>intelligent views on the market. He has not been a

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<v Speaker 2>raging bull. He's been someone who has participated but done

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<v Speaker 2>it with a bit of angst and caution as well.

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<v Speaker 2>There's the Mike Wilson word. Mike Wilson nimble. If I'm

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<v Speaker 2>nimble after five days down in a row or whatever

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<v Speaker 2>it is, how nimble am I into Monday?

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<v Speaker 1>What do I do now? To reposition with confidence?

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<v Speaker 3>Welcome morning, Tom, Look, I think and happy New Year.

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<v Speaker 4>I you know, I think what you said earlier is

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<v Speaker 4>listening to your chatting about.

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<v Speaker 3>Do I get in now? Do I? What do I do?

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<v Speaker 4>And that's really not ever the right strategy. The right

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<v Speaker 4>strategy is to have something committed at all times and

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<v Speaker 4>be balanced in your portfolio so that you can ride

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<v Speaker 4>out turbulent times when they arrive.

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<v Speaker 3>And look, we've had a we've.

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<v Speaker 4>Had a little bit of a of a bad stretch

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<v Speaker 4>here since the beginning of December, which doesn't really surprise

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<v Speaker 4>me given the run that we had. You know, post

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<v Speaker 4>election is just a lot of euphoria. So we're having

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<v Speaker 4>a bit of correction here. I do think the first

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<v Speaker 4>half of twenty twenty five will probably be a bit

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<v Speaker 4>more challenging, and then the second half sets up pretty well,

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<v Speaker 4>assuming that you know, a forecast around the economy and

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<v Speaker 4>earnings come through. Everybody knows the market's expensive. Everybody knows that.

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<v Speaker 4>You know, we've had and sentiments crazy right now, and

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<v Speaker 4>that's just part of the game. I mean, you have

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<v Speaker 4>to you know, you have to deal with that, and

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<v Speaker 4>that's why you have diversification in your portfolio.

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<v Speaker 2>You look at factors. I think of lizzaone, Saunders over

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<v Speaker 2>Schwud as well. Which is the factor now with the

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<v Speaker 2>closest Mike Wilson's study.

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<v Speaker 4>Well, we look at all of them obviously, and I

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<v Speaker 4>would say it's been the you know, the factor that's

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<v Speaker 4>been most in favor has been quality and momentum, and

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<v Speaker 4>then recently both of those came off a bit because

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<v Speaker 4>that's where people were positioned. Okay, that doesn't mean that

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<v Speaker 4>those aren't still the places to be. It just means

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<v Speaker 4>that we're having a bit of a pullback in here.

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<v Speaker 4>And like I think, I think going into twenty twenty five,

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<v Speaker 4>there are some areas that got probably a little bit

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<v Speaker 4>overdone some of the you know, some of the growth areas.

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<v Speaker 4>Uh that that factor in particular, probably people are paying

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<v Speaker 4>up for that too much. I think some of the

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<v Speaker 4>size factors, you know, people are rotated probably a little

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<v Speaker 4>bit too much into the small cap area and they're

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<v Speaker 4>giving some of that back now too. So that's just

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<v Speaker 4>one sort of arrow in our in our quiver. And uh,

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<v Speaker 4>you know, but but it's definitely something we watch closely.

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<v Speaker 5>Hey, Mike, I'm reading your your more most recent note

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<v Speaker 5>about the breadth of the market. It gets gets me

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<v Speaker 5>to thinking, here, I got the s and P five

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<v Speaker 5>twenty four is up like twenty three twenty four percent,

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<v Speaker 5>Yet the equal weighted SMP up only like you know,

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<v Speaker 5>ten or eleven percent. A what does that tell you?

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<v Speaker 5>I mean, is and how can earning is that for you?

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<v Speaker 3>Well, I mean it's not really.

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<v Speaker 4>Remember, breath is a symptom, okay, of what's going on,

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<v Speaker 4>not the cause. And so the weaker breath tells us that,

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<v Speaker 4>you know, certain things are going and we think we've

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<v Speaker 4>this is something we think we've gotten very right over

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<v Speaker 4>the last several years, which is that it's a very

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<v Speaker 4>government heavy, you know economy, right so if you actually

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<v Speaker 4>look at the private economy, the private economy has been

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<v Speaker 4>sort of languishing, whether it's manufacturing or housing. Some of

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<v Speaker 4>the consumer goods areas, I mean, they're actually intercession. They've

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<v Speaker 4>been intercession for two years. And the government, heavy handed

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<v Speaker 4>former government, whether it be fiscal or monetary policy, has

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<v Speaker 4>kind of kept things buoyed.

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<v Speaker 3>And the market has figured that out.

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<v Speaker 4>And of course you have things like AI, you know,

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<v Speaker 4>maybe weight loss drugs, you know, certain themes that are

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<v Speaker 4>very specific to certain areas, and those areas have carried

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<v Speaker 4>the day.

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<v Speaker 3>Okay, So I think I think the.

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<v Speaker 4>Weak breath is symptomatic of this very unbalanced economy that

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<v Speaker 4>we're dealing with.

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<v Speaker 2>Now.

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<v Speaker 4>One thing to point out, however, is the second and

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<v Speaker 4>half really since September, the breath improved tremendously, and actually

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<v Speaker 4>the breath in twenty twenty four is still way better

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<v Speaker 4>than it was in twenty twenty three. So it's not

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<v Speaker 4>all bad, but it is a like I said, it's

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<v Speaker 4>a symptom of what I think is a very unbalanced

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<v Speaker 4>kind of recovery that is ongoing.

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<v Speaker 5>So I guess you think about twenty twenty five, Mike,

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<v Speaker 5>I think a lot of folks are saying this, Really,

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<v Speaker 5>if there's gonna be any performance in twenty twenty five,

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<v Speaker 5>it really has to be driven by earnings growth, because

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<v Speaker 5>maybe the Fed's going to cut a couple of times,

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<v Speaker 5>but I'm not sure how much more than that. Are

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<v Speaker 5>you concerned that the earnings leg of this story is

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<v Speaker 5>maybe a little ahead of itself.

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<v Speaker 3>Well, I mean, look the markets are they get ahead

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<v Speaker 3>of that? Right?

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<v Speaker 4>So the markets, you know, multiple you know, rallied because

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<v Speaker 4>it anticipated in earnings recovery. Of course, this summer we

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<v Speaker 4>had some turbulence and then the fall things picked up again.

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<v Speaker 4>We think most of the of the rally in the

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<v Speaker 4>second half was driven by sort of liquidity factors and

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<v Speaker 4>you know, to send picking up around the election, just

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<v Speaker 4>hitting that behind us, you know, at the definitive outcome,

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<v Speaker 4>et cetera. And so now we're a little bit ahead

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<v Speaker 4>of ourselves. So multiples probably have to consolidate a bit.

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<v Speaker 4>The key for this year is are we going to

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<v Speaker 4>get a broadening out in the earnings participation? Okay, so

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<v Speaker 4>earnings have been pretty lousy for most companies over the

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<v Speaker 4>last two years for the reasons I mentioned earlier. Okay,

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<v Speaker 4>interest rates are too high, for most businesses, Government is

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<v Speaker 4>crowding out a lot of smaller businesses and even larger

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<v Speaker 4>businesses to some extent, the global economy is still kind

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<v Speaker 4>of stuck in the mud, so a lot of multinationals

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<v Speaker 4>are not doing well. So the key for next year

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<v Speaker 4>is can we see a broadening out of that earning recovery.

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<v Speaker 4>We think we can, and that's our job. Our job

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<v Speaker 4>is to figure out where is that earning is going

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<v Speaker 4>to pick up. Financials is one area where we've gotten

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<v Speaker 4>more constructive recently because of the earning story, specifically.

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<v Speaker 1>Mike Wilson with US with Morgan Stanley.

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<v Speaker 2>If I need breadth to go higher, Mike Wilson is

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<v Speaker 2>healthcare is so dominant that if healthcare doesn't perform, I

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<v Speaker 2>don't see an intelligent gain in the market.

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<v Speaker 3>No, I don't think so, Tom. I mean, healthcare has

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<v Speaker 3>been languishing for a while.

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<v Speaker 4>It's been you know, there's been some big home run winners,

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<v Speaker 4>and as I mentioned earlier, some of the weight loss

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<v Speaker 4>drug winners, et cetera. But healthcare has been languishing for

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<v Speaker 4>the better part of a year and a half in

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<v Speaker 4>a relative basis, and the market's been fine. So I

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<v Speaker 4>don't think it's necessary condition. It would be helpful. We'd

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<v Speaker 4>like to see it happen. I think for healthcare specifically,

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<v Speaker 4>you know, with the appointment of Bobby Kennedy, Well, let's

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<v Speaker 4>see how that goes. I mean, I think that the

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<v Speaker 4>sector is probably going to remain under pressure until that confirmation.

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<v Speaker 4>Hearing interesting, and then I think from there we might

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<v Speaker 4>get a bit of a bounce.

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<v Speaker 2>Yeah, Mike Wilson, tell me about the necessary condition for

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<v Speaker 2>breath to work. What is the single item that you're

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<v Speaker 2>studying with your team to say we have good breadth.

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<v Speaker 4>It's what you said earlier, Tom, we need we need

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<v Speaker 4>better breath of earnings revisions. I mean, this has been

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<v Speaker 4>a theme of ours for the last two years.

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<v Speaker 3>You know.

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<v Speaker 4>One of the reasons why we weren't maybe as enthusiastic

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<v Speaker 4>as others in terms of the rally we've had is

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<v Speaker 4>because we thought it would be narrow. In fact, our

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<v Speaker 4>forecast suggested that that the earnings recovery itself was driven

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<v Speaker 4>by heavy cost cutting in the mag seven and then

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<v Speaker 4>of course they had AI which helped a handful of companies.

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<v Speaker 4>You had a few of the themes that were driving

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<v Speaker 4>you know, growth, You had government support, for infrastructure, spend

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<v Speaker 4>things along those lines, and so it was very narrow.

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<v Speaker 4>So in order for the market breath the price breath

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<v Speaker 4>to get better, you need earnings breath to get better.

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<v Speaker 4>I don't think it's that complicated. And that's what we

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<v Speaker 4>think should happen in twenty twenty five, assuming once again

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<v Speaker 4>that you know, we don't get some policy changes that

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<v Speaker 4>are maybe negative for the market in the near term.

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<v Speaker 4>And that's really our concern the short term is that

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<v Speaker 4>we think some of the policy changes are probably going

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<v Speaker 4>to be more negative in the beginning and then more

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<v Speaker 4>positive in the second half.

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<v Speaker 5>Hey, Mike, as we all know, the S and P

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<v Speaker 5>five hundred over each of the last two years has

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<v Speaker 5>grown north of twenty percent. I'm not sure earnings have

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<v Speaker 5>grown to that extent, are we? What's the valuation call

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<v Speaker 5>right here?

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<v Speaker 3>As you think about the market here, Mike, it's expensive.

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<v Speaker 3>I mean, that's not a great insight.

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<v Speaker 4>I mean, this is probably the single biggest miss by

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<v Speaker 4>I think everybody in the last twelve months. I don't

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<v Speaker 4>I don't recall anyone saying they thought we would trade

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<v Speaker 4>to twenty three times earnings. But of course everybody rode

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<v Speaker 4>the wave, including us, and you're happy to take it.

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<v Speaker 4>And so now you're sitting here twenty two twenty three

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<v Speaker 4>times earnings and you're like, oh, you know, well, now

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<v Speaker 4>we need to see the earnings actually surprised to the upside.

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<v Speaker 4>And you're exactly correct on the fact that earnings have

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<v Speaker 4>not been the main driver of the returns. The main

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<v Speaker 4>driver of the returns has been equity evaluations, right. And

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<v Speaker 4>there's been some specific names that have done a great

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<v Speaker 4>job in earnings and those are unique, but overall, this

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<v Speaker 4>has been probably one of the biggest multiple expansions we've

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<v Speaker 4>ever seen x, you know, coming out of a recess.

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<v Speaker 1>Okay, so what does it do with cash?

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<v Speaker 2>For Mike Wilson, for Lisa Shallatt and Morgan Stanley Wealth Management?

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<v Speaker 1>Is cash your friend right now?

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<v Speaker 4>Well, I think you know, short duration fixed income in

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<v Speaker 4>general has been our friend for the last several years.

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<v Speaker 4>Being underweight you know duration, whether that's two years or

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<v Speaker 4>one year or cash, they're all doing the same thing

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<v Speaker 4>for your portfolio time but giving you a nice four

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<v Speaker 4>to five percent return with very little risk. And so

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<v Speaker 4>that's a great place to have some of your money.

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<v Speaker 4>Once again, not all of your money. You know, we're

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<v Speaker 4>probably five to seven percent coming in that cash rate region,

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<v Speaker 4>which is two years and end.

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<v Speaker 3>And and that's fine. That's a good place to be

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<v Speaker 3>when you're getting compensated. I mean, just recall two years

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<v Speaker 3>ago you were getting zero on that cash.

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<v Speaker 4>Now that's a bad deal, but today you're getting actually

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<v Speaker 4>a pretty positive return. And there's a place in every

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<v Speaker 4>portfolio for something like that. Just ask Warren Buffett.

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<v Speaker 5>Hey, Michael, it seems like the market's discounting too FED

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<v Speaker 5>rate cuts this year. Is the market okay with that

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<v Speaker 5>or do they need to think the market needs to

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<v Speaker 5>see a little bit more or do you think the

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<v Speaker 5>market is fairly discounting too it cuts.

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<v Speaker 4>Well, first of all, let me just make an opening

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<v Speaker 4>statement about that. I mean, if there's one thing that

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<v Speaker 4>the markets have been more wrong about than FED cuts

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<v Speaker 4>over the last four years, I like to know what

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<v Speaker 4>it is, so you know, I mean, this has been

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<v Speaker 4>probably the single biggest whipsaw, both on the upside and

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<v Speaker 4>the downside, that the markets have gotten wrong. So I

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<v Speaker 4>think looking at the bond market right now, what they're

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<v Speaker 4>pricing in is a waste of time because they don't know.

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<v Speaker 4>The FED doesn't even know what I would say However,

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<v Speaker 4>one of the reasons why the breath is deteriorated. I

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<v Speaker 4>talked about that as a symptom the cause of the

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<v Speaker 4>breath deterioration. One of them is the fact that rates

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<v Speaker 4>have gone up at the back end almost one hundred

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<v Speaker 4>basis points since the FED has cut one hundred basis points.

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<v Speaker 4>Think about that. That means the term premium has really

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<v Speaker 4>gone up sharply, and that's been something we've been focused on.

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<v Speaker 4>When the term premium kind of gets up into this range,

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<v Speaker 4>you actually now are at risk of having an equity

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<v Speaker 4>valuation correction. So we think that's probably the main reason

0:10:55.360 --> 0:10:58.480
<v Speaker 4>why the breath has deteriorated here recently, more so than earnings.

0:10:58.920 --> 0:11:01.559
<v Speaker 4>And I think, you know, two cuts, sure, why not?

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<v Speaker 4>Could we get zero cuts next this year? Possibly could

0:11:05.320 --> 0:11:07.800
<v Speaker 4>we get four or five cuts. Maybe it just depends

0:11:07.840 --> 0:11:09.880
<v Speaker 4>on how things play out, but I think right now

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<v Speaker 4>two cuts is kind of the best guess, and the

0:11:12.760 --> 0:11:15.360
<v Speaker 4>bomb market is probably a little bit suspicious about that

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<v Speaker 4>based on how the back end is training.

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<v Speaker 1>Mike Wilson, thank you so much. Chief.

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<v Speaker 2>You have secuity strategist Morgan Stanley generous to be with us.