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Speaker 1: Welcome to the Bloomberg PENL Podcast. I'm Paul swing you

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Speaker 1: along with my co host Lisa Brahma Waits. Each day

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Speaker 1: we bring you the most noteworthy and useful interviews for

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Speaker 1: you and your money. Whether at the grocery store or

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Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple

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Speaker 1: podcast or wherever you listen to podcasts, as well as

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Speaker 1: at Bloomberg dot com. Well. As we parse through the

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Speaker 1: economic data, what's become clear to most market participants I

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Speaker 1: believe is that the manufacturing, the business investment, that remains

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Speaker 1: an area of caution. We're seeing some contraction in manufacturing,

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Speaker 1: but the consumer, the consumer is still they're driving this

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Speaker 1: economy forward. To get the latest. Uh. Returned to our

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Speaker 1: good friend Neil Data Renaissance macrohead of US Economic Research. Neil,

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Speaker 1: thanks so much for joining us. So give us your

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Speaker 1: view of the economy. Is the consumer enough to continue

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Speaker 1: to drive this economy forward? UM? I mean I think

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Speaker 1: I think so, uh, you know, we have I think

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Speaker 1: the you know, baseline is for for decent consumers ending

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Speaker 1: growth over the next couple of quarters. I mean, we

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Speaker 1: have relatively benign inflation and UM and labor incomes arising

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Speaker 1: at a at a modest rate. I mean, you have

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Speaker 1: slower jobs growth at wages are are okay and UM,

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Speaker 1: and the work week is basically flat. So if you

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Speaker 1: look at jobs, hours and earnings, that's growing at about

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Speaker 1: four and a half percent with UM, with price inflation

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Speaker 1: below two uh. And at the same time, so in

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Speaker 1: other words, of the household's budget constraints still expanding. And

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Speaker 1: and at the same time, you know, you've had a

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Speaker 1: pretty sharp increase in UM mortgage roof financing, so you

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Speaker 1: know that's freeing up household cash flow. UM. So yeah,

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Speaker 1: I mean I think that consumers are doing okay UM.

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Speaker 1: And at the same time, you know, it's true that

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Speaker 1: investment spending has been weak, but it's also true that

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Speaker 1: housing has picked up. Inventories are a lean so UM.

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Speaker 1: You know, I think between consumer spending and housing, I

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Speaker 1: mean that that should offset the weakness we're seeing in

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Speaker 1: in the factory sector and investment. But you know that

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Speaker 1: doesn't necessarily mean that investment is going to be weak

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Speaker 1: next year. I mean, he's seen a pretty notable loosening

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Speaker 1: in financial conditions. Um. You know, potentially global growth is

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Speaker 1: sort of bottoming out, bottoming out here. So you know,

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Speaker 1: the drivers of weakness for investment this year um probably

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Speaker 1: won't be with us next year. I mean, it's not

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Speaker 1: just the global economy. Remember two thirds of the weakness

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Speaker 1: in uh in CAPEX in the third quarter was aircraft

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Speaker 1: equipment and mining structures. And you know, if global growth

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Speaker 1: is doing better, that should mean that oil prices reflate

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Speaker 1: a little bit, and that should you know, put some

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Speaker 1: of the juice back into things like oil rigs and

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Speaker 1: and the like mining structures. And do you think that

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Speaker 1: even industrials are going to get some lift here in

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Speaker 1: the near future. Well, I don't think that, Lisa, look

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Speaker 1: at the market. I know. That's why I'm saying what

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Speaker 1: you're saying that you know, they might end up getting

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Speaker 1: a little bit of support of from that, Yeah, I mean,

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Speaker 1: I mean, look, I mean, this is the thing. I mean,

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Speaker 1: the only thing that matters right now is whether you

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Speaker 1: believe I think for macro is if you believe price

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Speaker 1: leads data. Right, you either believe price leads data or

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Speaker 1: it doesn't. And if price leads data, that means that

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Speaker 1: the economy is going to look a little bit better

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Speaker 1: next year, you know, I mean, listening to the bear

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Speaker 1: is kind of tripper of themselves, you know, the stock

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Speaker 1: markets whistling past the graver. I mean, it's like cognitive dissonance.

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Speaker 1: I'm still well, that's changing, though, but that's actually shifting.

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Speaker 1: And I'm wondering at what point has that shifted to

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Speaker 1: such a degree that it's not you know, people are

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Speaker 1: just basically gloom and doom and they have been since

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Speaker 1: the financial crisis. And Okay, they're acknowledging the strength and

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Speaker 1: perhaps the prices accurately reflect the strength that we're seeing

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Speaker 1: in the economy. Yeah, I'm not sure we're there. You

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Speaker 1: I mean, I still think that. I mean, if you

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Speaker 1: look at most you know, sort of measures of market sentiment,

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Speaker 1: I mean, it doesn't look like there's a big euphoria

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Speaker 1: right now for equities. Still, um across a range of

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Speaker 1: different sentiment metrics. Um. You know, the one that I

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Speaker 1: look at is the sports survey. I mean, you still

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Speaker 1: have um, you know, more consumers being surveyed. Let's say

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Speaker 1: they think stock prices are going to fall in the

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Speaker 1: next six months than rise. I mean, historically that's been

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Speaker 1: a a sort of useful, kind of contrarian type indicator.

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Speaker 1: But basically it means that you know, uh, consumers aren't

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Speaker 1: really that builed up on equities. And if consumers um,

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Speaker 1: you know, aren't aren't built up, um, you know, that

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Speaker 1: could mean that there's still some room for equities to

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Speaker 1: keep going up. It's usually when when when retail investors

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Speaker 1: are built up on equities one time, when it's time

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Speaker 1: to get cautious and we're not really there yet. Neil,

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Speaker 1: do you have a recession in your forecast? No, it

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Speaker 1: seems like how about the one of the arguments or

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Speaker 1: one of them. I guess the arguments that we hear

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Speaker 1: from time to time from economists is that you know,

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Speaker 1: you better settle in for a lower for longer i e.

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Speaker 1: Lower GDP growth for longer the days of three plus

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Speaker 1: are over for the foreseeable futures. That's something that you

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Speaker 1: abscribe to. Yeah, I think that's probably more that's closer

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Speaker 1: to the mark. I mean, I do think that next

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Speaker 1: year you could see a sort of a modest inflection

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Speaker 1: and growth higher. Right, So a lot of the drags

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Speaker 1: on GDP growth this year probably fade off a little bit. Right. See,

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Speaker 1: you have seen some manufacturing weakness, Maybe you don't get

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Speaker 1: as much manufacturing weakness next year. The housing market kind

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Speaker 1: of follows do into consumer spending undrowable goods, you get

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Speaker 1: a little bit of inventory restocking. Right, So, um, yeah,

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Speaker 1: I mean I think that that's sort of good for

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Speaker 1: maybe two and a quarter or two and a half

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Speaker 1: percent growth. But you know, I generally agree that you know,

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Speaker 1: this sort of rapid, you know, kind of leg higher

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Speaker 1: and growth is unlikely absence some kind of pickup and

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Speaker 1: productivity which we haven't really seen yet. So uh, that's

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Speaker 1: good enough for equities, right, I mean, you know, for

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Speaker 1: what matters for markets? Right? I mean, the economic outlook

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Speaker 1: is the call. I mean, it's only useful in so

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Speaker 1: far as it as it's combined with a market call.

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Speaker 1: And um, and you know, the environment that I just described,

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Speaker 1: I think is still you know, one where you know,

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Speaker 1: equity prices grind higher agains. I'm trying to square the

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Speaker 1: idea that we're about to re accelerate with the idea

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Speaker 1: that the Federal Reserve just cut rates. Again, How does

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Speaker 1: that make sense? Well, isn't that what always happens that

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Speaker 1: cut rates in the economy picks up? Well, hold on

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Speaker 1: a second, you think that the economy is picking up

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Speaker 1: because they cut rates? No, I mean, honestly, that's ridiculous

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Speaker 1: to think that the that the like credit conditions were

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Speaker 1: too tight and that that was sort of what was

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Speaker 1: holding things back. I mean, the REFI I just did

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Speaker 1: lesa disagrees, Really did you? You just refined your mortgage?

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Speaker 1: Did okay, and just multiply that, I mean, okay, cut

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Speaker 1: over the last year. So you're telling me the set

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Speaker 1: isn't pushing on a scrap a stick. But we're pushing

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Speaker 1: on a stick. But Neil, with the money that you

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Speaker 1: saved from the REFI and your and your monthly payments

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Speaker 1: to your mortgage, are you using that money to go

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Speaker 1: out and buy sweaters and hats and skis and things? Uh?

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Speaker 1: Well yeah, I mean I mean, I mean it is Christmas. No,

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Speaker 1: But I just I just think that, Look, I mean

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Speaker 1: I think it's sort of um, it's to me, it's

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Speaker 1: a it's a bit misplaced to say that it's not

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Speaker 1: having an effect, right, I mean, you've seen refinancings obviously

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Speaker 1: pick up. That's freeing up household cash flow. We know

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Speaker 1: that home sales are also up, right, so um, you

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Speaker 1: know that, and uh, you know, we had a little

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Speaker 1: bit of sluggishness recently. I think because of the GM

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Speaker 1: strike and what's that, What's what that's doing to inventory?

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Speaker 1: But you know, if you told someone this time last

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Speaker 1: year that auto sales will generally be running close to

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Speaker 1: seventeen millions are for the last five or six months,

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Speaker 1: you probably I mean, I know if I made that argument,

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Speaker 1: clients would have laughed me out of the room. But

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Speaker 1: that's exactly what's happened, right, So you have had some

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Speaker 1: follow through in two rate sensitive spending. I mean, so yeah.

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Speaker 1: And you know when Powell says the it's the market

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Speaker 1: implied path of lower rates and that's what's kept the

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Speaker 1: economy up. I think he's how do he's he there's

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Speaker 1: some support for that. Thank you so much. Good luck

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Speaker 1: with the sweater purchases and the ski purchases. Happy holidays,

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Speaker 1: and congratulations on refining your mortgage. Neil Dada, Renaissance Macro,

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Speaker 1: head of US Economic Research. We're just looking at the

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Speaker 1: SMP this year up almost twenty. Yes, we had a bad, bad,

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Speaker 1: bad fourth quarters we all can refer to. But what

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Speaker 1: a turnaround here in to get a sense of maybe

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Speaker 1: where there might be some legs left in this market.

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Speaker 1: Return to Sam Stovall, Chief Investment strategists for cf R A, Sam,

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Speaker 1: thanks so much for joining us. You know a lot

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Speaker 1: of folks will stepping back and saying, you know, year

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Speaker 1: every year, it's not obviously as as big as a ramp,

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Speaker 1: but boy at moving SMP in nineteen, what do I

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Speaker 1: do now? What do you say to those people? Well,

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Speaker 1: first off, the market pretty much told us that we

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Speaker 1: were going to get this kind of a return. We

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Speaker 1: were up in both January and February, and the twenty

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Speaker 1: eight times since World War Two that both months were positive.

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Speaker 1: We ended up posting a full year total return that averaged.

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Speaker 1: So in a sense, the market said, see, I told

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Speaker 1: you we did have a challenging made through October period,

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Speaker 1: but we're now back in the seasonally optimistic period November December,

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Speaker 1: when the market gains an average of almost three percent,

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Speaker 1: and we tend to see a gravitation away from the

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Speaker 1: defensive sectors and toward the more cyclical groups. Sam, it's

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Speaker 1: been quite a volatile year when it comes to the

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Speaker 1: narrative that is directing markets. For a while, it was uh,

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Speaker 1: the trade war will eventually resolve itself, will be fine.

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Speaker 1: Then people saying that just the uncertainty that has gone

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Speaker 1: on for so long, is impeding business plans and is

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Speaker 1: going to impede growth, and has impeded growth. And now

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Speaker 1: we seem to be back to a place where there

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Speaker 1: will be some trade trups and the economy will re accelerate.

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Speaker 1: What happened to the the narrative that we just left

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Speaker 1: behind UH that there already has been damage done that

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Speaker 1: could potentially deepen without some sort of resolution. That's significant. Well,

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Speaker 1: at least I think that the damage has been done,

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Speaker 1: and that's why we started the year thinking we would

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Speaker 1: see about a five percent growth in SMP five earnings,

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Speaker 1: but now the expectation is for a zero point seven

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Speaker 1: percent rise. But I think investors are pretty much dismissing

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Speaker 1: two thousand and nineteen and saying, you know that it's

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Speaker 1: so late in the year. Let's start focusing on two

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Speaker 1: thousand and twenty, and right now expectations are for about

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Speaker 1: a nine percent gain. And should we end up getting

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Speaker 1: the Phase one accord, should we start to see a

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Speaker 1: falling of relations UH and improvement in GDP growth, the

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Speaker 1: three interest rate reductions kicking in, I think investors are saying,

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Speaker 1: you know what, maybe we end up with even more

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Speaker 1: than the current estimate of close to ten percent. So, Sam,

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Speaker 1: given that we are ten plus years into this economic cycle,

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Speaker 1: we have had this big move up. Uh, so far

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Speaker 1: in what sectors are you favoring versus maybe not favoring

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Speaker 1: so much? Well, solid but sustainable is what I'm describing.

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Speaker 1: The economic growth expectations for next year anywhere from two

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Speaker 1: point two to two point five GDP growth for each

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Speaker 1: of the four quoters. I'm leaning cyclically right now, overweight

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Speaker 1: recommendations on the technology communications services area. We recently upgraded

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Speaker 1: our outlook on financials and materials and downgraded our outlook

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Speaker 1: for some of the defensive groups, in particular consumer staples

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Speaker 1: and utilities. Utilities right now are trading at about a

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Speaker 1: thirty five premium to its average PE over the last

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Speaker 1: twenty years going forward. What could potentially happen that would

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Speaker 1: make you turn more bearish? Well, uh, I think bullmarkets

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Speaker 1: don't die of old age, they die of fright. But

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Speaker 1: they're most afraid of is a recession. Every recession since

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Speaker 1: was preceded by a double digit decline in housing starts

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Speaker 1: as well as a near double digit decline in consumer confidence.

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Speaker 1: I would have to see the consumer basically say, I

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Speaker 1: am very worried about my job. I am going to

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Speaker 1: be holding back on my spending UM, and I would

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Speaker 1: then expect to see an earnings recession to successive quarters

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Speaker 1: of earnings declines, mainly because since World War Two, sevent

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Speaker 1: of all earnings recessions have morphed into economic recessions. So

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Speaker 1: I would pretty much have to see a sliding off

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Speaker 1: the cliff of consumer confidence. Sam. It appears that when

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Speaker 1: you look at the futures market that the market's looking

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Speaker 1: for maybe one more rate cut in the next six

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Speaker 1: to nine months. If that is in fact the case,

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Speaker 1: is that enough to support your equities outlook? I think so.

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Speaker 1: UM History tells us that the market advances a little

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Speaker 1: more than ten percent on average six months after the

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Speaker 1: first rate cut, and then an average of more than

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Speaker 1: fourteen percent twelve months later. The dividend yield on the

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Speaker 1: SMP five hundred exceeds the yield on a ten year note.

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Speaker 1: Whenever that has happened since nineteen fifty three, the market

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Speaker 1: was up on average of I'm not expecting that kind

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Speaker 1: of growth, but basically, bonds are not really offering an

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Speaker 1: attractive substitution alternative. So right now, what is the one

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Speaker 1: thing you will not buy. Uh. I am uh not

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Speaker 1: a big buyer of bonds obviously at this point because

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Speaker 1: I think, um, they are pretty much as low as

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Speaker 1: they're likely to go. And Sam just on, we just

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Speaker 1: completed this earning site or we're pretty much done through

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Speaker 1: this earning cycle? Is there any key takeaway from you

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Speaker 1: coming out of this earning season here? Well, even though

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Speaker 1: this is likely to be the thirty first consecutive quarter

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Speaker 1: in which actual results exceeded end of quarter estimates, what

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Speaker 1: I'm not thrilled with is um that we basically had

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Speaker 1: been shaving fourth quarter estimates as well as two thousand

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Speaker 1: and twenty assumptions. Only one of the eleven sectors has

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Speaker 1: seen an increase in their two thousand and twenty estimates

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Speaker 1: as compared with what the forecast was on September, and

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Speaker 1: only one in three sub industries saw a ratcheting higher

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Speaker 1: of their two thousand and twenty earnings. So I would

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Speaker 1: like to see a turnaround in that before I feel

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Speaker 1: overly confident. Just real quick, here we are getting news.

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Speaker 1: Uber's loss currently has accepted nine percent, which means the

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Speaker 1: company's shares have sunk to a record intra day low.

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Speaker 1: Sam just just lastly, here to wrap it all up,

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Speaker 1: we are seeing a bunch of pain in specific company

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Speaker 1: stories in particular. Uh, these some unicorns that are disappointing

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Speaker 1: when it comes to profitability. Do you think that that's

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Speaker 1: just specific to these stories or endemic of something larger.

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Speaker 1: I don't think it's endemic of something larger. Um. I

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Speaker 1: think that these are embryonic companies that are going to

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Speaker 1: be going through uh, growing pains, if you will. I

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Speaker 1: mean most of them really just have no earnings whatsoever.

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Speaker 1: And so we're it's like we're back in the early

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Speaker 1: two thousands one of a lot of the web based

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Speaker 1: companies that we're trading on revenue, revenues and earnings of

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Speaker 1: such assumptions. Um. But so I think a lot of

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Speaker 1: these unicorns right now are just going through the metamorphosis pain.

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Speaker 1: Sam Stobo, thank you so much for being with us

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Speaker 1: c f R, a Chief investment strategist. Thanks for listening

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Speaker 1: to the Bloomberg P and L podcast. You can subscribe

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Speaker 1: and listen to interviews at Apple Podcasts or whatever podcast

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Speaker 1: platform you prefer. Paul Sweeney, I'm on Twitter at pt Sweeney.

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Speaker 1: And Lisa bram Woyds I'm on Twitter at Lisa bramw

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Speaker 1: wits one before the podcast. You can always catch us

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Speaker 1: worldwide on Bloomberg Radio