Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keene along
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Speaker 1: a joy with Futures up twenty because she has a
Speaker 1: courage to be in the market. You're never going to
Speaker 1: hear her say go to cash. Alicia Lavine joins us
Speaker 1: bny mellon. Right now, I want you to talk to
Speaker 1: the people. The boats left the dock. They're not on
Speaker 1: the boat. How do you catch up into February?
Speaker 2: So my line would be, never get out of the boat,
Speaker 2: and it's never too late to get in the boat.
Speaker 2: We had a sluggish start to the year, which is
Speaker 2: great because we digested the move of the fourth quarter
Speaker 2: of twenty twenty three, and I think the market's telling
Speaker 2: you that we're normalizing or have a more normalized rate situation,
Speaker 2: normalized growth situation. You got to be in.
Speaker 1: There's quiet skew, there's a quiet within the internal dynamics.
Speaker 1: But the bottom line is it's a wall of money
Speaker 1: looking for a warm spot.
Speaker 2: Is that six trillion in money market fund? Six trillion?
Speaker 1: People are saying, oh, never go to equities. I'm like,
Speaker 1: are you kidding me? Yeah? It is. In what way
Speaker 1: will it go to equities?
Speaker 2: It'll go to equities in several ways. The first is
Speaker 2: that there was a rush to money market because of
Speaker 2: the banking crisis in March, and you had folks who
Speaker 2: stayed there because they could sleep at night and it
Speaker 2: was the easiest place to be. We've been telling our
Speaker 2: clients all last year, get out of cash. It's set
Speaker 2: to underperform over the next twelve months. So we think
Speaker 2: a lot of that angst that happens about a year
Speaker 2: ago comes into equity markets, and it should be coming
Speaker 2: to the bond market as well, because you're in a
Speaker 2: world where the Fed's not hiking and it's either going
Speaker 2: to be the same or lower going forward, and that's
Speaker 2: very positive for risk assets, bonds and equities and you
Speaker 2: got to get in. I can't tell you how much
Speaker 2: of that six trillion is coming out, but a lot
Speaker 2: of that six trillion is the expression of angst over
Speaker 2: the last year of the raid environment.
Speaker 3: So alsha, if I do want to stay in that boat,
Speaker 3: if you will, do I try to chase those be
Speaker 3: kept tech stocks that work so well in twenty twenty three,
Speaker 3: or do I say miss that boat? Let me try
Speaker 3: to find some value in other sectors. What are some
Speaker 3: of the sectors you guys like?
Speaker 2: So we have said for you know, I was here
Speaker 2: a month ago talking about about our outlook and I
Speaker 2: had this phrase, dance with the one that brought you,
Speaker 2: meaning everybody wants to go to small cap or to
Speaker 2: go or to go to international em And I say,
Speaker 2: you know what, that's probably a great trade and it'll
Speaker 2: work for three to six months, but ultimately, if you're
Speaker 2: building wealth, I want to be were Capital's street the best,
Speaker 2: and I want to be in the companies that throw
Speaker 2: off cash and don't need to borrow.
Speaker 1: All first grade Insight of the Week Alicia Levine b
Speaker 1: n Y Melon. I'm going to talk my book, folks.
Speaker 1: I can't say enough how the similarity to twenty three
Speaker 1: is there. You gotta find cash flow quality, cash slow.
Speaker 1: However you determine that. To me, it's a triple leverage
Speaker 1: all cash flo something more optimistic for you.
Speaker 3: So Alisha on the fixed income business, they actually are
Speaker 3: friends to fixing them. Actually made some returns last year
Speaker 3: after getting crushed, just crushed in twenty twenty two. What
Speaker 3: do you think about this year? We're going to go
Speaker 3: in the fix income space. I was shocked that last
Speaker 3: year the best performance was high yield.
Speaker 2: That's right, and we had no recession.
Speaker 3: Yes, I guess that's the point, but no real recession.
Speaker 2: So look, we like the belly of the curve. We're
Speaker 2: not saying go out to tenure yet. We think that's
Speaker 2: just too long in duration. We like the five to
Speaker 2: seven year range for Gouviy's right here. We do like
Speaker 2: investment grade here, that's sort of a sweet spot. We
Speaker 2: don't expect a recession, and with that you're going to have,
Speaker 2: you know, a more normalized year of returns in these
Speaker 2: asset classes.
Speaker 3: So, I mean, it's interesting. We've seen a lot of
Speaker 3: issuance this year. I mean, companies are coming to the market.
Speaker 3: So when you markets are open. Markets are open. So
Speaker 3: when the one of the first calls is to you
Speaker 3: guys at the Bank of a New York Mellon, I mean,
Speaker 3: what are you looking for in some of the new
Speaker 3: issue market here for your credit teams.
Speaker 2: Look, we're looking for cash flow, We're looking for sustainability
Speaker 2: of business. We'd like to see the debt that's been
Speaker 2: termed out and not floating rate. I just think that's
Speaker 2: just a better setup. But we like the quality businesses
Speaker 2: and the fact that the market's open for issuance is
Speaker 2: really important because it's telling you investors know that the
Speaker 2: rate fear is over. Like it's done.
Speaker 1: Let's go there. I mean, I mean, to me, the
Speaker 1: ft article over the weekend of the huge issuance coming
Speaker 1: into the market in the first two three weeks of
Speaker 1: the year is valid? Does that sustain to me? I
Speaker 1: look at these big tech companies and it's, you know,
Speaker 1: on a z V body Boston University basis, they're like
Speaker 1: breaking the rule book. I mean, they have to do
Speaker 1: debt issuance. Am I wrong?
Speaker 2: The large companies don't have to do debt issuance. They
Speaker 2: could just you know, to keep themselves floating around. But
Speaker 2: I don't think it's a necessity. I think it's just
Speaker 2: an expression that nobody wants it an issue dead Last
Speaker 2: year the markets were so tight and getting while you can,
Speaker 2: and if you have the debt then of course you're
Speaker 2: going to have M and A and they're also going
Speaker 2: to have private equity deals finally getting monetized this year.
Speaker 2: So overall it's a very good setup for markets in
Speaker 2: all parts of the capital markets. I mean a lot
Speaker 2: of things can go wrong. Yes, it's starting to smell
Speaker 2: like nineteen ninety five, right, It just it has that
Speaker 2: feel of, you know, if the Fed's cutting and QT
Speaker 2: gets tapered, okay, you have the setup for liquidity in
Speaker 2: the market, and you could have a nice bull run here.
Speaker 2: And I'll say this. You know, the market's up seventy
Speaker 2: five percent of the time since World War Two. In
Speaker 2: the years where it's up double digits, the following year
Speaker 2: seventy five percent of the time is also up double
Speaker 2: digitsank you Yeah, So you know, just because we had
Speaker 2: a great year last year doesn't mean we have aversion
Speaker 2: to the meme this year.
Speaker 3: So are you you know I'm looking at the earnings
Speaker 3: for next year because I'm an old equity analyst, and
Speaker 3: I do look at earnings. I think earnings matter. I
Speaker 3: see twelve percent, eleven twelve percent earnings growth for twenty
Speaker 3: twenty four over twenty three. Does that seem like a
Speaker 3: reasonable number. Two, we're lower.
Speaker 2: We're about eight to nine percent of earnings growth. And
Speaker 2: we've done that from bottoms up analysis with our equity team.
Speaker 2: We think that's a fair place to be. I'd rather
Speaker 2: come in estimating that than come in at twelve percent,
Speaker 2: which I think is a heavy lift. Right, it's a
Speaker 2: heavy lift. But look in the end, you know, large
Speaker 2: cab tech can pull it out. All I have to
Speaker 2: do is cut, cut some headcount and all of a sudden,
Speaker 2: earnings in the SMP is up ten to eleven percent.
Speaker 2: So they can they can really affect the metrics on this.
Speaker 2: The structure of the market and the power of the
Speaker 2: top ten companies is really without precedent. And how they
Speaker 2: they can affect the entire index.
Speaker 1: Right, How the hedgephones do this year? I mean, I'm
Speaker 1: seeing bar charts that they had their most profitable year
Speaker 1: and all that. I don't buy a lot long short
Speaker 1: shorting year is brutal.
Speaker 2: It's brutal, It's brutal. It's brutal last year because even
Speaker 2: like you probably had a great year on the short
Speaker 2: side the first ten months of the year, and then
Speaker 2: you got taken out the last two months, and that's
Speaker 2: your year, and everybody's judged every twelve months and you've
Speaker 2: got to repeat it January one. So I think it
Speaker 2: was a tough year on the short side.
Speaker 1: Yeah, I mean they're going, you know, like twenty companies
Speaker 1: guests right on Macro or whatever. Great, but everybody else
Speaker 1: got hammered.
Speaker 3: So when you talk to them, your clients here twenty
Speaker 3: twenty four, what did they say? Did they say, we
Speaker 3: kind of took too much performance into fourth quarter last
Speaker 3: year and so I need to be a little bit
Speaker 3: cautious in twenty four? Are you're trying to talk them
Speaker 3: off that sideline made?
Speaker 2: So that's always a question, ok. And then we'll say
Speaker 2: that does either market timing is impossible. If you're fundamentally positive,
Speaker 2: you should get it. And that's the first question. The
Speaker 2: second one really is always about what's going on with
Speaker 2: our political situation and the election, and a lot of
Speaker 2: our clients are angst about that.
Speaker 1: Okay, the clients do, but are you just quickly here,
Speaker 1: you really think politics plays into what I should be
Speaker 1: doing on a three and five year investment.
Speaker 2: Call, No, thank you, and that's my message, just don't
Speaker 2: let your politics get in the way of investing.
Speaker 1: Thank you so much with being Y Melton. I hope
Speaker 1: to see a lot of her in two thousand trying four.
Speaker 3: All right, let's check in with our good friend Scott Crohner.
Speaker 3: He's over there at City formerly Smith Barney and I
Speaker 3: don't know where else he was, but he's been around
Speaker 3: doing this equity thing for a long time. He's out
Speaker 3: in San Francisco. Hey, Scott, thanks so much for joining
Speaker 3: us here. Boy, what a end to twenty twenty three,
Speaker 3: And I kind of felt like boy, So we spoke
Speaker 3: to a lot of investors that maybe that really rip
Speaker 3: warring ending to twenty twenty three, maybe that took some
Speaker 3: of the performance away from twenty twenty four. How are
Speaker 3: you guys thinking about this early part of the year.
Speaker 4: So that's been our view.
Speaker 5: So you know, we thought that to your point, that
Speaker 5: the rally into the end of the year was early
Speaker 5: stages of what we think will be a bigger broadening
Speaker 5: theme for twenty twenty four away from that megacap growth
Speaker 5: leadership that looked to be unfolding, and our view had
Speaker 5: been that the Q four earnings reporting period would be
Speaker 5: your premise for that, whereby you get companies beating Q
Speaker 5: four expectations but probably being a little bit more cautionary
Speaker 5: on their full twenty three Q four expectations, but more
Speaker 5: cautionary on twenty four outlooks are still early to judge that,
Speaker 5: but what's happened in the meantime is that you've gotten
Speaker 5: to think some more generative AI support for the tech spase,
Speaker 5: which is kicked the NASDAQ one hundred into overdriving.
Speaker 3: Yeah, yeah, exactly right. And I'm wondering, you know, Scott,
Speaker 3: what are your tech guys saying over at City. I mean,
Speaker 3: how bullish are they on this AI thing? Is this
Speaker 3: really incremental? Can I really use this as an investment
Speaker 3: theme in twenty twenty four?
Speaker 4: Well, and to your point, it's a really good question.
Speaker 5: The way we're arguing it, it's consistent with what our
Speaker 5: analysts are saying is that it becomes more idiosyncratic. It's
Speaker 5: not a big seven or a magnificent seven this year
Speaker 5: as it was last year. I think you're going to
Speaker 5: see different components of that megacap growth cohort that's going
Speaker 5: to have a fundamental tail wind more directly or perhaps not.
Speaker 5: We've been arguing that software should show that semiconductors are
Speaker 5: beginning to show more signs of that, but that's not
Speaker 5: true for others of the Big seven that might be
Speaker 5: held up in let's say the auto is component of
Speaker 5: the market.
Speaker 4: So we think the point here is.
Speaker 5: That that the twenty four setup for many of these
Speaker 5: companies is one where you're.
Speaker 4: Getting the news flow.
Speaker 5: You're going to need to see it translate into fundamentals
Speaker 5: to keep these stocks working.
Speaker 1: What's interesting and Alicia Levine brought this up with bn
Speaker 1: y melon of an analog back in nineteen ninety five.
Speaker 1: It's got some of us of a certain vintage, I
Speaker 1: mean an old guy like you've seen it. Pall's too
Speaker 1: young to have seen it. But the answer is we
Speaker 1: partition into quarters, we partition into annual returns. And the
Speaker 1: reality is, you know, it's like longitude latitude on a map.
Speaker 1: They're just lines, they're just calendar dates. And the answers
Speaker 1: last year can extend into this year, can it?
Speaker 4: Well? I mean yes to that point.
Speaker 5: If you look at the two year return on the SMP,
Speaker 5: it's not very meaningful. And that's true for the Nasdaq
Speaker 5: as well. So when you go back and look at
Speaker 5: the way we've come out of the pandemic lockdowns, you know,
Speaker 5: we had the big risk on rally in twenty one
Speaker 5: twenty two, big valuation reset as we were contending with
Speaker 5: an hawkish FED, and then you know, twenty three was
Speaker 5: a combination of general of AI promise kicking in as
Speaker 5: well as more evidence that you're getting at a peaking FED.
Speaker 5: Now we're about to shift at some point this year
Speaker 5: into a more dubbish FED, and for many investors this
Speaker 5: followed the FED mantra is an.
Speaker 4: Important point, I mean.
Speaker 5: And so so I think it all kind of sets
Speaker 5: up pretty well constructively as we look into full year
Speaker 5: twenty four, perhaps beyond.
Speaker 1: I mean, Lisa, to me, it's just really really crucial
Speaker 1: that people understand that we're not slaves to the calendar.
Speaker 1: And you know, you know, I look, Lisa, at the
Speaker 1: shock of November and December last year, Up up up,
Speaker 1: We continue up, up up, and everybody's sitting on the
Speaker 1: sidelines in cash. I mean, the Mateo families, they're they're
Speaker 1: charter members. When are you going to move out of cash, Lisa,
Speaker 1: never are you kidding me?
Speaker 5: No?
Speaker 3: Giving it on to the mattress. That's it.
Speaker 1: I mean, the whole keep under the mattress thing. Paul's
Speaker 1: a scar of all this.
Speaker 3: I know, and I think pandemic. It's it's one of
Speaker 3: the you know, the bullish calls out there for a
Speaker 3: lot of so Scott, you know, I know you guys
Speaker 3: you know speak of cash. I know you guys at
Speaker 3: City have been on the forefront of kind of ETF
Speaker 3: and ETF research here and just in the last few
Speaker 3: weeks we've had that Bitcoin ETF. When you're talking to
Speaker 3: your clients out there, well, where are we now and
Speaker 3: just thinking about ETFs as a as a real option.
Speaker 3: I mean I joke to Tom that we used to
Speaker 3: spend half my life up in Boston visiting the mutual
Speaker 3: funds up there. I'm not sure we do that anymore.
Speaker 3: Where are you guys with ETFs?
Speaker 5: Well, I mean, you know, we think there's a you know,
Speaker 5: an ongoing, brave new world that keeps unfolding via ETFs,
Speaker 5: and there's this sort of a new next big thing
Speaker 5: that keeps kicking in. Gone in the days where you're
Speaker 5: just simply passively, you know, replicating underlying indexes. And in
Speaker 5: are the days where almost all the new launches now
Speaker 5: have an active spind to them. So you're seeing many
Speaker 5: of the major mutual fund complexes move into ETFs. So,
Speaker 5: you know, we think that the ETF rapper continues to
Speaker 5: expand continues to reflect the underlying entrepreneurial sphere set the
Speaker 5: markets are about. And you know, we think that that's
Speaker 5: kicking into gear. When you look at the flow dynamic.
Speaker 5: It's been mostly out of mutual funds for the past
Speaker 5: year and to mostly to the benefit of ETFs.
Speaker 4: So you know, we think this is a big deal.
Speaker 5: But we think also what you have to keep in
Speaker 5: mind is that increasingly these are the tools that are
Speaker 5: being used for the model portfolios that more and more
Speaker 5: financial advisors are best in client assets.
Speaker 1: Huge, too massive, right up. I'm going to give credit
Speaker 1: to the ft you can't remember exactly Blackrock with a
Speaker 1: massive restructuring going on there, mister Fink driving just what
Speaker 1: you heard from mister cron and it just I wonder, Paul,
Speaker 1: is a death of traditional mutual funds.
Speaker 3: I tell you what.
Speaker 1: Yeah, well, I just people want this people and Eric
Speaker 1: Belchunas you know, we try to get Belchunas into seven
Speaker 1: o'clock hour.
Speaker 3: No, No, it's just too early.
Speaker 1: He's coming up.
Speaker 3: But I mean you even see mutual funds tom converting
Speaker 3: into ETFs. It's just really an extraordinary change. I know,
Speaker 3: the research folks at City have been all over this.
Speaker 3: So Scott's we step back here kind of what are
Speaker 3: some of the sectors that you guys and your team
Speaker 3: are focusing on here for twenty twenty four.
Speaker 4: Okay, so we're playing this broadening theme.
Speaker 5: The argument has been, you know, most of last year's
Speaker 5: returns was a function of this megacap growth cohort.
Speaker 4: And the view is very simple. You can't continue to premise.
Speaker 5: A broader higher market on just that you need a
Speaker 5: broadening effect aligned with this gradual pivot in the FED
Speaker 5: and what we think is happening with fundamentals from an
Speaker 5: earning's growth perspective, our view pretty simply has been that
Speaker 5: the broadening effect has to be a key driver of
Speaker 5: future upside. We began to see that in November and December,
Speaker 5: as you saw ten year nominals come off of that
Speaker 5: five percent level. We're taking a little bit of a
Speaker 5: step back to start this year, but we think that's
Speaker 5: digesting that move. So from a sector perspective, we're saying
Speaker 5: hold growth. We're overweight tech and comfortably there, but we're
Speaker 5: suggesting other sectors such as industrials, which has been a
Speaker 5: long standing favorite of ours, and recently we went overweight financials.
Speaker 4: As ways of expressing this.
Speaker 1: Goat thirty seconds. Scut Cronner, What do you do with healthcare?
Speaker 1: It was supposed to be the darling last year. It
Speaker 1: wasn't as an ugly beginning of the year of hospital
Speaker 1: non earnings, non cash flows. What do you do with healthcare?
Speaker 4: You own it.
Speaker 5: We upgraded from an underweight which we had all last year,
Speaker 5: to market weight recently. So the fundamentals aren't perfectly there
Speaker 5: yet to get us really excited. But I got to
Speaker 5: tell you, when you look at the earnings growth setup
Speaker 5: going into twenty four, healthcare is set up to have
Speaker 5: one of the more aggressive mean reversions to the positive
Speaker 5: this year, and so we want to have healthcare exposure,
Speaker 5: no question about it.
Speaker 1: Scutt Croner, Thank you so much. With City Group, Jennifer
Speaker 1: Lee joins us. She's the beamon Capital Markets far more
Speaker 1: doing a holistic view on economics as well, Jennifer, what
Speaker 1: is your queue forour call? Mike McKee was fucking two wish?
Speaker 1: Can we do better than two wish?
Speaker 6: Ooh, I'm sorry. First of all, good morning and thanks
Speaker 6: for having me on. Actually we're a little bit lower.
Speaker 7: We're at one and a half ish for GP growth.
Speaker 6: We're actually a little bit of an upgrade for we
Speaker 6: had previously thanks to that starting of that expected retail
Speaker 6: sales number. But overall we're still seeing growth, which is
Speaker 6: pretty incredible given that we've had over five hundred basis
Speaker 6: points of great tights over the past play years. So hey,
Speaker 6: this is a good news story.
Speaker 7: I think in the.
Speaker 1: Formula, what's the distinction between say two point two two
Speaker 1: point three percent and your one point five percent A
Speaker 1: cause an investment? Is it a net export dynamic? What's
Speaker 1: the variable that gets you to be more quiet?
Speaker 6: I think it's going to be on the trade side
Speaker 6: as well, just like a little bit of a of
Speaker 6: a of a hit from net exports. Overall, Bucause investments
Speaker 6: has been a little bit lower, But I mean it's
Speaker 6: going to be all about the consumer, and that's obviously
Speaker 6: the biggest part of the US economy. So the US
Speaker 6: consumer has been driving all is momentum for now. How
Speaker 6: much they can continue doing that remains to be seen.
Speaker 6: But I mean, I feel like every quarter this year
Speaker 6: we have been bumping up our forecast. You know, it's like, oh,
Speaker 6: upgrade to grow to four to the growth pecast again
Speaker 6: with again, it's not a bad thing to do at all.
Speaker 1: And Paul, this is critical. Jennifer's nails in that it's
Speaker 1: a net export mystery. That's obviously a China mystery. Yeah,
Speaker 1: maybe a Germany flat in a back mystery. I'll let
Speaker 1: you decide. If it's an EV vehicle disaster mystery. I
Speaker 1: don't know, but she's dead on that we ignore NX
Speaker 1: on the back end of the equals.
Speaker 3: I think so. And I think Jennifer, one of the
Speaker 3: things here that I think just kind of surprises a
Speaker 3: lot of observers, including myself, is the strength of the
Speaker 3: US consumer. Here. Give us your sense of kind of
Speaker 3: where the consumer is these days and kind of what
Speaker 3: are your expectations here for twenty twenty four.
Speaker 6: So as long as the job market, i mean, Joe
Speaker 6: market is actually that it's all going to be going
Speaker 6: down with the job market and job in labor demand,
Speaker 6: you know, job growth has certainly cooled from you know,
Speaker 6: do you remember that one month which with over five
Speaker 6: hundred thousand jobs, which is obviously not sustainable. So we're
Speaker 6: going down to a slower pace of job growth, which
Speaker 6: is okay. We've got the job list rate still picking
Speaker 6: up at three point seven percent, I think is the
Speaker 6: last figure that we've had. We do have an inching higher.
Speaker 6: But overall, as long as you know, broader demand for labor,
Speaker 6: it remains strong. Consumers or workers continue to receive a
Speaker 6: decent wage, you know, to maintain their standards of living.
Speaker 6: Putting some aside for a rainy day, as I always say,
Speaker 6: is not a bad thing. That is what keeps the
Speaker 6: consumer moving forward. Of course, whether or not they're going
Speaker 6: to be resisting some of these price heights is.
Speaker 7: Another story again.
Speaker 6: But you know, as long as they have something in
Speaker 6: the bank, something tucked away for a rainy day, I
Speaker 6: think it keeps them in a very good position, all.
Speaker 3: Right, given that, I mean a solid backdrop for the
Speaker 3: US economy, not the same for China, and boy, if
Speaker 3: we were just flash you know, rewind a year ago,
Speaker 3: everybody's twenty twenty three outlook was kind of predicated upon
Speaker 3: a strong rebound in China and that did not take place.
Speaker 3: What's your read of what's going on there now and
Speaker 3: kind of how we should think about China over the
Speaker 3: next twelve eighteen months.
Speaker 6: So a year ago, this is when they were first
Speaker 6: coming out of that lockdown, so it looked like they're
Speaker 6: like the savior to the world with that really strong
Speaker 6: and I can't remember what the number was, key one
Speaker 6: GDP growth figure, and of course everything fizzled even before
Speaker 6: the first quarter came to an end.
Speaker 7: But it all boils down to, you know, a very
Speaker 7: weak property market.
Speaker 6: You know, it's no longer we're not seeing that scene
Speaker 6: kind of housing demands. Everything was overbuilt, so that the
Speaker 6: property market itself accounts for the biggest part of the
Speaker 6: China's for Chinese consumers or households wealth.
Speaker 7: So when you see your property.
Speaker 6: Losing value quickly, you know it's it hits confidence, it
Speaker 6: hits Chinese consumer spending, and that of course will hit
Speaker 6: business's ability to raise prices. So you're seeing that deflation there.
Speaker 6: So that's what the hardest part, that's what they're trying
Speaker 6: to overcome. They're also have major labor issues. You know,
Speaker 6: it's they're not only losing in numbers, but in age
Speaker 6: as well, rising age. The everyone's getting older. We saw
Speaker 6: last week about how it was at The birth rate
Speaker 6: was at the lowest ever. You know, the death rate
Speaker 6: rose to its highest since nineteen seventy four. Those aren't
Speaker 6: good stats and that's actually the population.
Speaker 1: Show is very disturbing, and this is really good analysis.
Speaker 1: Jennifer Lee. Then what is your run rate? Almost like
Speaker 1: potential GDP of China? Totally unfair question. Nobody has a clue,
Speaker 1: But are you going to frame out potential GDP that
Speaker 1: used to be seven eight nine percent is now below
Speaker 1: five percent?
Speaker 7: So we've got the right question.
Speaker 6: What we have the next couple of years, like this
Speaker 6: year and next year at about roughly four and a
Speaker 6: half percent. You know, whatever their growth target is, you
Speaker 6: know right now it's around five percent. You know that
Speaker 6: they met it last year. But you know, it looks
Speaker 6: like whatever the target is going to be, if they're
Speaker 6: going to have a target this year, is probably going
Speaker 6: to be below that, like I said, around four and
Speaker 6: a half percent. So this is why they're trying to,
Speaker 6: you know, work on their their up and coming I
Speaker 6: think they're calling it the New three.
Speaker 7: I read that somewhere.
Speaker 6: You've got evs of course AI as well, and of
Speaker 6: the renewal of energies, energy sources. That that's what they're
Speaker 6: trying to build up. Small part of the overall Chinese economy,
Speaker 6: but that's what they're trying to you know, create and
Speaker 6: to and to rely more on. And plus is it's
Speaker 6: all also very much less labor intensive than what there's
Speaker 6: there their strong sectors were in the past.
Speaker 7: So this is what they're trying to work on.
Speaker 6: And then you know, at some point, you know there
Speaker 6: it's going to be you know, a big a bigger
Speaker 6: driver I think of the overall Chinese economy.
Speaker 3: All right, So if China is sub five percent growth
Speaker 3: and we've got economic weakness in Europe, particularly in Germany,
Speaker 3: as Tom's mentioning here, it just makes the US look
Speaker 3: that much more, I don't know, unusually strong. I guess,
Speaker 3: how do you think about the US relative to other
Speaker 3: parts of the world. How unusual is that for the
Speaker 3: US to be such an I guess, an outlier if
Speaker 3: you will.
Speaker 6: I don't know they'd bee hundred fully hundred percent unusual,
Speaker 6: But I mean, right now, it's it's certainly looking like
Speaker 6: it is the you know, the uh, the one big
Speaker 6: driver and the one big bright light in this whole
Speaker 6: in the world. I mean, everyone else is still growing,
Speaker 6: but it's just not as strong as the US dollar.
Speaker 6: And this is why I'm just going to switch this
Speaker 6: a little bit to on the currency front. This is
Speaker 6: you know, when we're trying to look at our currencies.
Speaker 6: You know, we're all we've been calling for a week
Speaker 6: or US dollar for some time now, just as the
Speaker 6: FED starts to cut rates. But I think that, you know,
Speaker 6: as long as it's all about perception, the global perception
Speaker 6: of the US economy.
Speaker 7: If the US.
Speaker 6: Economy is slowing but still perceived to be a lot
Speaker 6: stronger than what we're seeing in Germany, for example, and
Speaker 6: in China, it's going to still keep them, you know,
Speaker 6: some strength behind the US dollar. It won't weaken as
Speaker 6: much as you know, as one would assume in a
Speaker 6: period of FED rate cuts, which we're looking forward to
Speaker 6: start in the second half of this year.
Speaker 1: Jennifer Lee, thank you so much. In your free time
Speaker 1: at the Bank of Montreal, would you think some Montreal
Speaker 1: Canadians this is an important interview because there's a lot
Speaker 1: of people out there saying move away from the Magnificent seven,
Speaker 1: and one of the places to diversify into is mid
Speaker 1: caps and small caps. She's truly expertise on this with
Speaker 1: RBC Marcus Lori Calvacina owns a high ground as well.
Speaker 1: It's been a pretty good couple months from mid caps
Speaker 1: and small caps, Lorii, hasn't it?
Speaker 8: It has? You know, we've gone from when I go
Speaker 8: into meetings, my salespeople sort of whispering, Hey, Lourie, this
Speaker 8: is a large cap person. Don't talk about small caps
Speaker 8: to literally every meeting in the first you know, five
Speaker 8: ten minutes doesn't matter if your large caps, small cap,
Speaker 8: growth value, hedge, fun long only everyone wants to talk
Speaker 8: about them. I got a little crowded.
Speaker 1: Yeah, Are there a Magnificent seven in mid caps or
Speaker 1: dare I say small caps as well? Are there is
Speaker 1: like a focused overweight?
Speaker 8: It's a great question. I would say quality is the
Speaker 8: thing that you always hear day in day out, year
Speaker 8: in year out, that small cap pms are never going
Speaker 8: to really gravitate away from, and so you do tend
Speaker 8: to see certain names at the top of the Russell
Speaker 8: two thousand get concentrated. That's something though, I mean, we've
Speaker 8: been seeing that for a decade or at least, and
Speaker 8: you know, we don't see it nearly to the same extent.
Speaker 8: Even the crowded stocks in small calf there's still you know,
Speaker 8: a lot of diversification among what manager's own relative to
Speaker 8: what you see in the big cap space.
Speaker 3: See but Laurie, I just don't buy the small cap thing.
Speaker 3: I've just been burned so many times. Investors have been
Speaker 3: burned so many times over the last twenty years. Here,
Speaker 3: how do you think about the small to mid cap
Speaker 3: universe these days?
Speaker 8: So it is getting jerked around a lot more by
Speaker 8: ETFs and passive money than it has in the past.
Speaker 8: And so that's why I think that we are seeing
Speaker 8: very wild swings. And you know, we do see the
Speaker 8: hedge fund community in particular try to make trades. You
Speaker 8: often will see it when there's you know, sort of
Speaker 8: a domestic focus focus trade that they want to do.
Speaker 8: Trump's tax cuts back in twenty sixteen caught a lot
Speaker 8: of you know, small cap eyeballs. But I think what
Speaker 8: really did it this last time around was FED cuts.
Speaker 8: And we've been telling people all last year. When people
Speaker 8: got ready to put on their FED rate cut playbooks,
Speaker 8: small caps were one of the first places they were
Speaker 8: going to. They were cheap, they were under owned, and
Speaker 8: they typically outperform when the FED starts to ease. And
Speaker 8: so sure enough, when ten year treasury yields peaked back
Speaker 8: in October, we saw really sentiment change. People were less,
Speaker 8: you know, had less of a desire to sort of
Speaker 8: cling to the pristine balance sheets and move back into
Speaker 8: small caps. And by the way, a lot of small
Speaker 8: cap companies have been out telling investors, hey, our balance
Speaker 8: sheets are not nearly as bad as feared. So it
Speaker 8: really just set up for a really awesome trade. Unfortunately,
Speaker 8: it just got consensus at the end of the year.
Speaker 8: That doesn't mean there's not still opportunity there, but I
Speaker 8: think you need something more than an interest rate trade
Speaker 8: to keep it going.
Speaker 3: So how about earnings. I'm an old equity analyst. Earnings
Speaker 3: still matter to me.
Speaker 4: You know.
Speaker 3: We still have SMP looking about I don't know, eleven
Speaker 3: twelve percent earnings growth in twenty twenty four. How do
Speaker 3: you feel about that? What's your comfort level?
Speaker 8: So with when we're looking at the large caps space, specifically,
Speaker 8: we're looking for something more like four to five percent
Speaker 8: earnings growth this year, and that's not to say that
Speaker 8: I think the year is going to be a disaster.
Speaker 8: We still have fifty one to fifty target on the SMP.
Speaker 8: We think multiples and expand a little bit more. That's
Speaker 8: a whole separate discussion, but I do think when you
Speaker 8: look at that eleven percent that's embedded in the market
Speaker 8: for earnings growth in the S and P. You look
Speaker 8: across every sector pretty much, you know, every single one,
Speaker 8: you see pretty robust margin expansion baked into consensus worcasts.
Speaker 8: And as I was talking to non US investors in
Speaker 8: particular coming into the new year, there was a lot
Speaker 8: of skepticism that those lofty profit margin expansion expectations were
Speaker 8: going to come to fruition. And I tell you I
Speaker 8: share that concern. I'm modeling basically flat margins versus twenty
Speaker 8: twenty two. In our model, what do.
Speaker 1: They do on a nominal GDP basis? Do they outperform
Speaker 1: or is the big companies so growthy they actually get
Speaker 1: a better revenue pup.
Speaker 8: So, you know, it's interesting. I haven't looked at the
Speaker 8: revenues too closely. I do think that large those you know,
Speaker 8: kind of bigger cap companies, they have much bigger cash piles,
Speaker 8: so I'm guessing that there's you know, sort of more
Speaker 8: buffer from that in terms of interest income. They've also
Speaker 8: just had much cleaner balance sheees in general, so there's
Speaker 8: less interest expense as well. But I do think, you know,
Speaker 8: the concept of motes is something that we always hear
Speaker 8: quite a lot about, and I think that is a
Speaker 8: very real consideration. But I'll tell you our chart of
Speaker 8: the week this week, and our weekly was actually looking
Speaker 8: at the forecasts for earnings growth in the top seven
Speaker 8: versus the rest of the S and P, and we
Speaker 8: pulled this data from Bloomberg. It's on the terminal was
Speaker 8: this were not my numbers, and it was remarkable to
Speaker 8: me that that gap between the top seven and the
Speaker 8: rest of the S and P it's still there, but
Speaker 8: it's shrinking over the next few years. And I'm really
Speaker 8: excited to take this chart out on the road and
Speaker 8: really understand how investors are going to react to that,
Speaker 8: that kind of shrinking earnings buffer. I'm not quite sure
Speaker 8: what people are going to make of it, and it's
Speaker 8: gonna be interesting to see if people view it as hey,
Speaker 8: you know, it's a tailwind that's dissipating, or it's still stronger.
Speaker 8: We just don't care.
Speaker 3: So when you do go out on the road, lord
Speaker 3: and you talk to institutional investor clients, here, are you
Speaker 3: getting the sense that maybe they felt like they missed
Speaker 3: out on that big move at the end of the
Speaker 3: year and so they're playing ketchup here or are they
Speaker 3: trying to find some value where we are they looking
Speaker 3: these days?
Speaker 8: So you know, I think that if you look at
Speaker 8: the top seven versus the rest of the market, I
Speaker 8: think there were two camps last year really around mid year.
Speaker 8: There were people who were big believers in AI, big
Speaker 8: believers in these companies, and nothing you could say was
Speaker 8: going to change their minds. And then there was sort
Speaker 8: of the rest of the market who hadn't gone as
Speaker 8: all in and they were skeptics, and that skepticism hasn't
Speaker 8: really changed. So I think that ladder camp has really
Speaker 8: been waiting in the wings for the market rotation to happen,
Speaker 8: and so I think they've actually been pretty excited. I mean,
Speaker 8: they're sort of in my camp. A lot of people
Speaker 8: that maybe we ran a little too far in four
Speaker 8: Q and we've got to give some of it back
Speaker 8: before we can move forward. That doesn't seem to instill
Speaker 8: panic in this camp. They just think that it may
Speaker 8: take a little bit more time. And one of the
Speaker 8: things I've told them is, if you look when GDP
Speaker 8: is above or below average. When it's below average, large
Speaker 8: cap and growth tend to outperform. And that's been the
Speaker 8: environment people have thought we were in for a long time.
Speaker 8: But GDP forecasts are moving up. So if we start
Speaker 8: to see GDP move above average and averages about two
Speaker 8: and a half percent, that could really unleash a second
Speaker 8: act of small cap and value out for pformans or broadening,
Speaker 8: you know, was probably the catch all between the two.
Speaker 3: Laurie, can you explain to our audience what it means
Speaker 3: to live on the lawn at the University of Virginia.
Speaker 8: It means that you It means that your classmates see
Speaker 8: you at your bathrobe and random times of day. It's
Speaker 8: basically when I was there, it was it was the
Speaker 8: university's highest honor. I want to say there were maybe
Speaker 8: fifty some out of us you who got chosen every
Speaker 8: year because of extracurriculars, service to the university and academics
Speaker 8: to live there. And it was a committee of peers
Speaker 8: that would select you and it was really just your
Speaker 8: overall contribution to the university that you got recognized for.
Speaker 8: And I was privileged enough to live there in my
Speaker 8: fourth year. One of the best experiences of my life.
Speaker 8: I met some amazing people.
Speaker 1: Absolutely amazing, Absolutely thanks for asking them if Paul, it's
Speaker 1: great as I was given a speech at Darden and
Speaker 1: you know, you gotta walk over there. It's like a
Speaker 1: movie set.
Speaker 3: Yeah, I know.
Speaker 1: And I walked by Glorie's dorm, you know, her halts
Speaker 1: these little idioty doors right in the grass. There's two
Speaker 1: cases of corus light. Yeah, Laurie was killing it. Lauren
Speaker 1: Kelvisina the University of Virginia. Also with the acquaintance with RBC.
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