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Speaker 1: Let's get to Ellen Hazen, our guest for the half hour.

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Speaker 1: Ellen is the chief market strategist at fl Putnam Investment

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Speaker 1: Management who joins from Wellesley, Massachusetts. Ellen, thanks for being

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Speaker 1: with us. We're just getting started in the earning season.

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Speaker 1: Yesterday a couple of positive surprises. I would put Netflix

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Speaker 1: very much on that list, along with United Airlines. More

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Speaker 1: of a mixed bag today after the bell, How do

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Speaker 1: you think we're gonna look when we kind of check

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Speaker 1: in on overall third quarter results? Thanks for having me.

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Speaker 1: As we look at third quarter results, we think they

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Speaker 1: are going to be more mrs than the market is

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Speaker 1: currently expecting. And we also think that companies are going

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Speaker 1: to guide down as we go forward. Um, if you

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Speaker 1: look at GDP for this year, it keeps getting revised downward,

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Speaker 1: and it's really hard for companies to keep growing the

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Speaker 1: earnings in the face of that. On top of that

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Speaker 1: with higher inflation and also with negative operating leverage, I

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Speaker 1: think a lot of companies are going to have trouble

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Speaker 1: meeting uh, first of all the top line and kind

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Speaker 1: of all the bottom line. So despite the positive numbers

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Speaker 1: that we saw out of a couple of companies, I

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Speaker 1: think that. Uh, in general, we're going to see more

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Speaker 1: mrs than we have in recent quarters. So so looking

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Speaker 1: at all that does that you know, look at the

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Speaker 1: forecast will of course be the most important thing, But

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Speaker 1: do do these forecasts perhaps also pressage a recession? In

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Speaker 1: your view, It's hard to know if there's going to

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Speaker 1: be a recession or not, but certainly a lot of

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Speaker 1: the warning signs are there, particularly the inverted yield curve

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Speaker 1: and the fact that the leading economic indicator index has

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Speaker 1: slip negative here in the US. So it does look

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Speaker 1: much more likely than it did, say three or five

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Speaker 1: months ago, that we will have a recession here in

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Speaker 1: the US. UH. The key thing that's different, though, and

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Speaker 1: I think this has been talked over, but it's still

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Speaker 1: important to men mentioned is the US labor market remains

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Speaker 1: very strong, and we haven't seen a recession with the

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Speaker 1: labor market this strong in prior years, and so we're

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Speaker 1: in a little bit of uncharted terror story from an

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Speaker 1: economist standpoint in terms of predicting whether or not a

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Speaker 1: recession will happen given the strong labor market. So you

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Speaker 1: mentioned the inflationary pressures there, and I'm going to go

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Speaker 1: right to the margin issues do you expect a lot

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Speaker 1: more in terms of margin compression, Yes, we do. We

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Speaker 1: think right now most consensus estimates are looking for positive

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Speaker 1: operating leverage and I just don't think that that's likely

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Speaker 1: to happen um and it it goes across different sectors um.

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Speaker 1: And so we look at rising everything. Right, some things

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Speaker 1: are beginning to come in, but the year of a

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Speaker 1: year comparisons are still higher. Even if gas is a

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Speaker 1: little bit lower than it was last month, it's still

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Speaker 1: a lot higher than it was a year ago. So

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Speaker 1: we are going to see negative operating leverage in a

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Speaker 1: lot of companies. And what are you at the moment

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Speaker 1: looking at in terms of a the economy and how

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Speaker 1: does that inform you as to where you're putting your

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Speaker 1: money right now? And I'm assuming you perhaps shying away

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Speaker 1: from some of these these growths, but again they've been

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Speaker 1: beaten down more than others. Well, we're looking for the

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Speaker 1: economy to continue flowing into next year. I think economists

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Speaker 1: have taken their estimates down from one point seven percent

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Speaker 1: growth this year to only half a percent growth next year,

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Speaker 1: and we could even go negative next year. So we're

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Speaker 1: certainly expecting a slowdown and so what do you buy

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Speaker 1: in a case like that. The first thing is we

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Speaker 1: are underweight equities in this market because we do see

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Speaker 1: continuing deterioration in the economic fundamentals. So we still do

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Speaker 1: own equities, but we're underweight versus um client long term benchmarks.

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Speaker 1: So that's the first thing. The next thing is we

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Speaker 1: look for companies that are pretty inexpensive. A lot of

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Speaker 1: companies have been beaten down, and particularly we're looking for

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Speaker 1: those that have high quality close in cash flows. UM.

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Speaker 1: So we're looking at a lot of healthcare names. You

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Speaker 1: can see a lot of the pharmaceutical companies here in

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Speaker 1: the US trading at single digit multiples and they still

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Speaker 1: have two and a half three percent yield. We're looking

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Speaker 1: at a company like CBS, the health care insurance and

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Speaker 1: retail companies trading at ten times earnings and you still

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Speaker 1: get earnings growth in so you get paid to wait

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Speaker 1: with that one with the two and a half percent

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Speaker 1: yield too. So there are names that you can find,

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Speaker 1: but you want to find companies that are generating free

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Speaker 1: cash flow now uh and that have been really beaten

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Speaker 1: up along with everything else, I think with rising real

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Speaker 1: interest rates because we're having synchronized global central bank tightening

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Speaker 1: those high fires of yesterday in terms of growth stocks

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Speaker 1: that have come down a lot, but they didn't have

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Speaker 1: a lot of cash laws. I think those are not

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Speaker 1: the place to be. I think it might look tempting

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Speaker 1: because they've come down a lot you look at where

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Speaker 1: they were, but those cash laws are just worth a

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Speaker 1: lot less than they than they were before with higher

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Speaker 1: real rates. So the markets already expecting a peak and

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Speaker 1: FED funds of around five so maybe they get a

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Speaker 1: little bit more tight beyond that, but let's say five percent,

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Speaker 1: we can agree on that as the terminal rate. Wouldn't

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Speaker 1: it make sense then to begin to look at fixed

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Speaker 1: income more than equity? Absolutely, And for the first time

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Speaker 1: in years, we're finding attractively priced, high quality corporate bonds

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Speaker 1: and even treasury bonds for our clients. And so this

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Speaker 1: higher rate environment is positive for fixed income, and so

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Speaker 1: we are putting some of the cash that we have

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Speaker 1: to work buying bonds. But at the same time, you

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Speaker 1: need to be careful because your upside is capped with bonds,

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Speaker 1: and so you want to be really selective about which

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Speaker 1: corporate bonds you buy. You want to make sure you're

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Speaker 1: really high quality because if you get it wrong, you

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Speaker 1: can give up a lot of performance. That way, give

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Speaker 1: me some names that you like and the ones that

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Speaker 1: you don't. What have you been cutting and what have

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Speaker 1: you been buying into the woods? Uh? So on the

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Speaker 1: equity side, as I said, we are looking at a

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Speaker 1: lot of them. We are looking at a lot of

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Speaker 1: the health care name names and other high quality names

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Speaker 1: like Kroeger, same thing right, ten times earnings. They're going

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Speaker 1: to have a lot of accretion from the Albertson's deal.

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Speaker 1: On the bond side, we're really cutting back on some

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Speaker 1: of the corporates and redeploying that money into treasuries. So, uh,

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Speaker 1: we're seeing some high quality corporate names trade at very

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Speaker 1: tight spreads, and so we've been we've been cutting back

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Speaker 1: on this. We still think treasury inflation protected securities make

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Speaker 1: sense to own here um and and conventional treasuries as well.

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Speaker 1: So we've been speaking a lot, whether it's equity or credit.

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Speaker 1: On the US domestic side, are you looking at opportunities offshore?

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Speaker 1: I'm curious about that. I know the dollar has been

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Speaker 1: very strong, but if we're already be beginning to question

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Speaker 1: the durability of higher rates and maybe looking at a

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Speaker 1: FED pivot in the near term, and I say that

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Speaker 1: maybe six months from a now or so maybe less

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Speaker 1: are you looking at opportunities off shore. We are always

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Speaker 1: looking at opportunities off show because if you simply look

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Speaker 1: at the evaluation discrepancy between the multiple the US is

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Speaker 1: trading at on the stock side and multiple that European

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Speaker 1: countries or Japan are trading at or other countries, it's

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Speaker 1: it's a big gap, right, and that gap has has

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Speaker 1: not narrowed at all. Now, you could have made this

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Speaker 1: argument for five years ago, uh, and you would have

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Speaker 1: got your head handed to you because the gap didn't shrink.

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Speaker 1: But at some point, right, at some point, when you

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Speaker 1: get re accelerating economies that are growing faster than the US,

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Speaker 1: that gap may narrow. And so the opportunity is there,

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Speaker 1: but getting the timing is really tricky. And as I say,

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Speaker 1: it's it's been a wide gap for a long time,

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Speaker 1: and until we see more evidence that the dollars beginning

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Speaker 1: to weaken, we're not willing to take that bet. Ellen

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Speaker 1: real pleasure having on the program. Thank you so much

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Speaker 1: for joining. It's Ellen Hazen that she's a chief market

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Speaker 1: strategist at FL Putnam Investment Management getting her take on

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Speaker 1: the market