WEBVTT - U.S Consumer Sentiment Falls, Bank Earnings 0:00:02.920 --> 0:00:10.799 Bloomberg Audio Studios, podcasts, radio news. You're listening to the 0:00:10.840 --> 0:00:15.000 Bloomberg Intelligence Podcast. Catch us live weekdays at ten am 0:00:15.040 --> 0:00:17.520 Eastern on Apple, card Playing and Broyd Auto with the 0:00:17.520 --> 0:00:21.400 Bloomberg Business App. Listen on demand wherever you get your podcasts, 0:00:21.640 --> 0:00:24.440 or watch us live on YouTube. 0:00:24.880 --> 0:00:28.040 Let's get more on those you Mish numbers hitting an 0:00:28.040 --> 0:00:32.040 eight month low. Joanne Shu is the University of Michigan 0:00:32.159 --> 0:00:35.440 Surveys of Consumer and Director, and she joins us. Now, hey, Joanne, 0:00:35.800 --> 0:00:37.080 what led this lower? 0:00:39.479 --> 0:00:44.599 Still are just vociferously frustrated with the pain of high prices. 0:00:45.120 --> 0:00:47.640 This stands, of course, in contrast with the fact that 0:00:48.000 --> 0:00:51.120 we know inflation has slowed and consumer expectations for inflation 0:00:51.200 --> 0:00:54.200 have also slowed. Both of those things are trending in 0:00:54.240 --> 0:00:56.960 a favorable direction for consumers. But at the same time, 0:00:57.600 --> 0:00:59.840 forty nine percent of consumers tell us that high prices 0:00:59.880 --> 0:01:02.760 are eroding their personal finances. That's pretty much the same 0:01:02.800 --> 0:01:06.200 as what we were seeing two years ago when inflation 0:01:06.440 --> 0:01:07.319 was hitting that peak. 0:01:08.120 --> 0:01:11.440 They seem to conflict with each other. We're less confident, 0:01:11.520 --> 0:01:14.120 but we're more confident that inflation is hidden in the 0:01:14.200 --> 0:01:14.720 right direction. 0:01:16.360 --> 0:01:20.200 I think they're not really in conflict because they do 0:01:20.280 --> 0:01:22.920 believe that inflation is moving in the right direction, but 0:01:23.400 --> 0:01:28.120 prices remain high, and so they are telling us how 0:01:28.120 --> 0:01:31.440 painful it is to continue having their budgets eroded or 0:01:31.480 --> 0:01:34.920 eaten away by these by these continued high prices. So, 0:01:35.120 --> 0:01:38.440 you know, I think consumers are in a way separating 0:01:38.480 --> 0:01:42.800 their feelings and their frustration with high prices with an 0:01:42.840 --> 0:01:45.720 acknowledgment that inflation is moving in the right direction. 0:01:46.480 --> 0:01:50.080 What about CPI from last week, last week, this week? 0:01:50.160 --> 0:01:53.560 It all blends last week? Does that fact? Do we 0:01:53.600 --> 0:01:55.120 factor that in? How do you think that's going to 0:01:55.120 --> 0:01:56.920 affect the reading when you do the second read? 0:01:57.800 --> 0:02:00.760 It's unlikely to affect the future reading because consumers aren't 0:02:00.800 --> 0:02:03.520 really paying attention to the CPI print. You know, the 0:02:03.560 --> 0:02:07.080 CPI print comes with a lag from real time data, 0:02:07.120 --> 0:02:10.120 and consumers are really responding to what they're actually seeing 0:02:10.960 --> 0:02:15.040 in the marketplace around them. So I don't expect a 0:02:15.600 --> 0:02:19.120 jolt from the CPI print, the most recent CPI print. 0:02:19.680 --> 0:02:23.120 But if inflation, if consumers continue to perceive inflation as 0:02:23.160 --> 0:02:25.520 slowing down, we could continue to see that trending. 0:02:25.639 --> 0:02:28.679 I should just point out that CPI was yesterday yes, 0:02:28.960 --> 0:02:33.280 so clearly, clearly, my timeline is really tight. 0:02:33.320 --> 0:02:37.560 Now all right, we moved to the intersection of economic 0:02:37.639 --> 0:02:42.760 data and politics based on your reading maybe in the past. 0:02:43.080 --> 0:02:46.320 What does this mean for the political setup? Can you 0:02:46.600 --> 0:02:47.320 delve into. 0:02:47.160 --> 0:02:49.919 That any Absolutely, so, consumers. 0:02:50.639 --> 0:02:52.840 We ask consumers a lot of questions about where they 0:02:52.880 --> 0:02:55.000 think the economy is going over the next year and 0:02:55.080 --> 0:02:57.079 over the next five years, and we have a lot 0:02:57.080 --> 0:03:00.760 of consumers who are responding with I'm I'm assuming I 0:03:00.800 --> 0:03:04.040 answered all these questions assuming such and such candidate is 0:03:04.040 --> 0:03:05.880 going to be winning the presidency. But if the other 0:03:05.960 --> 0:03:09.760 candidate wins, all of my answers will change. And we're 0:03:09.800 --> 0:03:16.840 seeing that for both presidential candidates, with views on both 0:03:16.840 --> 0:03:20.120 positively and negatively based on either of those candidates. So 0:03:20.240 --> 0:03:24.440 consumers are really acknowledging how much uncertainty surrounds their expectations 0:03:24.520 --> 0:03:26.320 right now. So I think we can really expect a 0:03:26.320 --> 0:03:27.239 bumpy right ahead. 0:03:28.040 --> 0:03:30.160 Joanne, we really appreciate it. We always love getting this 0:03:30.200 --> 0:03:32.880 incident analysis. Joan Shue, University of Michigan Survey as a 0:03:32.880 --> 0:03:35.760 consumer director joining us there, you meash sentiment hitting an 0:03:35.760 --> 0:03:37.960 eight month low. 0:03:38.320 --> 0:03:42.200 You're listening to the Bloomberg Intelligence podcast. Catch us live 0:03:42.280 --> 0:03:45.800 weekdays at ten am Eastern on applecard Play and Android 0:03:45.840 --> 0:03:48.600 Auto with the Bloomberg Business app. You can also listen 0:03:48.720 --> 0:03:51.840 live on Amazon Alexa from our flagship New York station. 0:03:52.200 --> 0:03:54.960 Just say Alexa play Bloomberg eleven thirty. 0:03:56.080 --> 0:03:57.520 So we do want to go to the banks and 0:03:57.560 --> 0:04:00.320 take a look at JP Morgan City and we'll Spargo. 0:04:00.360 --> 0:04:02.440 Will Spargo also the worst performing stock right now within 0:04:02.560 --> 0:04:05.640 the S and P. Allison Williams is Bloomberg Intelligence Senior 0:04:05.680 --> 0:04:07.800 banks analyst and she joins us. Now this is when 0:04:07.800 --> 0:04:09.360 I get to spend a lot of time with Allison, 0:04:09.400 --> 0:04:11.240 like this week, two weeks of the year. It's a 0:04:11.240 --> 0:04:13.840 good time for me. Allison. Let's just start with will 0:04:13.880 --> 0:04:14.720 Spargo for a second. 0:04:14.760 --> 0:04:18.719 What happened? So their net interest income is light and 0:04:19.000 --> 0:04:21.720 they're guiding to the higher end of a seven to 0:04:21.800 --> 0:04:24.760 nine percent drop in net interest income, so still a 0:04:24.760 --> 0:04:27.080 lot of uncertainty, but you know, the loans are what 0:04:27.160 --> 0:04:29.680 looks light there. So they're still talking about deposits and 0:04:29.720 --> 0:04:34.480 the pressure there. But the deposits actually the costs arising 0:04:34.520 --> 0:04:36.359 at a slower pace, so we think that's positive for 0:04:36.400 --> 0:04:39.680 the industry. But it's the net interestingcom And then the 0:04:39.720 --> 0:04:42.640 other thing is the costs. So they're operating expenses are 0:04:42.680 --> 0:04:45.000 going to be are their overall expenses are gonna be 0:04:45.040 --> 0:04:47.840 a lot higher. They have this line called operating losses, 0:04:47.839 --> 0:04:52.120 which includes remediation and some of the regulatory related costs. 0:04:52.120 --> 0:04:56.280 So that is also disappointing that those costs still continue 0:04:56.360 --> 0:04:59.039 to weigh. The positive thing we're staying across all the 0:04:59.080 --> 0:05:02.320 banks better fee This is something we were looking for though. 0:05:02.360 --> 0:05:06.360 Equity markets are strong, that's no secret. Equity trading really good, 0:05:06.480 --> 0:05:11.159 equity fees picking up, you know, Fick trading also doing well, 0:05:11.200 --> 0:05:13.440 and so that's all great. We are going to see 0:05:13.480 --> 0:05:15.840 I think higher expenses across the board because of that 0:05:15.920 --> 0:05:18.520 City Group got it to higher end of expenses. But 0:05:18.920 --> 0:05:21.360 that's okay with investors, right as long as you're getting 0:05:21.400 --> 0:05:24.920 higher revenue. It's those sort of lingering regulatory costs. I 0:05:24.920 --> 0:05:26.200 think that we're disappointing at Wells. 0:05:26.360 --> 0:05:30.440 These banks are all very different businesses, aren't they, Wells Fargo. 0:05:30.600 --> 0:05:34.000 To what extent are they into commercial real estate? And 0:05:34.040 --> 0:05:35.359 what does that mean for this bank? 0:05:35.600 --> 0:05:38.919 So they're all in the same businesses but to a 0:05:38.920 --> 0:05:41.599 different degree. And to your point, Wells Fargo is much 0:05:41.640 --> 0:05:45.000 smaller in these capital markets businesses where we're seeing a 0:05:45.040 --> 0:05:48.480 lot of the strength versus JP Morgan and City Investing, 0:05:48.560 --> 0:05:53.120 but still smaller. And commercial real estate, they are the 0:05:53.160 --> 0:05:57.799 biggest lender in office. JP Morgan's actually now the biggest 0:05:57.839 --> 0:06:02.839 commercial real estate lender overall after FRC. But you know, 0:06:03.040 --> 0:06:06.200 I did the office I think was not a big 0:06:06.240 --> 0:06:09.200 factor for Wells' this quarter. They did increase their provision 0:06:09.200 --> 0:06:11.520 a little bit. We are seeing losses. JP Morgan sort 0:06:11.520 --> 0:06:14.080 of alluded to some losses. I think where we're seeing 0:06:14.080 --> 0:06:16.480 the issues or Wells has said the issues are really 0:06:17.000 --> 0:06:19.800 in the institutional space. So they do have an eleven 0:06:19.880 --> 0:06:24.600 percent or so reserve there, I believe, I didn't I 0:06:24.640 --> 0:06:27.400 didn't check this quarter, but the overall reserve is eight percent, 0:06:27.520 --> 0:06:31.039 and so that was about the same this quarter. But 0:06:32.320 --> 0:06:34.080 that's something that's going to be a long story. We're 0:06:34.080 --> 0:06:36.560 going to continue to see that play out. But it's 0:06:36.640 --> 0:06:38.839 it's really I think the revenue side that's that's weighing 0:06:38.839 --> 0:06:42.480 on Wells. They are more lever towards net interest income 0:06:43.360 --> 0:06:46.400 and unfortunately seeing some of the pressure there. 0:06:46.640 --> 0:06:48.560 So asking for a friend who may or may not 0:06:48.560 --> 0:06:51.920 be interviewing the Wells Fargo CFO later at three pm. 0:06:52.040 --> 0:06:54.159 What would be some good questions to ask, like, what 0:06:54.320 --> 0:06:57.440 like after getting through this these numbers and seeing achieving 0:06:57.920 --> 0:06:59.960 now it's not it is efficient because there are also 0:07:00.120 --> 0:07:02.360 is going to bugger later? What would be some questions 0:07:02.360 --> 0:07:02.760 you'd ask, I. 0:07:02.760 --> 0:07:04.919 Mean, what you know in terms of the loan jaman 0:07:05.040 --> 0:07:07.920 they've they've said they're cautious. Is there a reason why 0:07:08.600 --> 0:07:11.280 they would have more caution than others or is it 0:07:11.400 --> 0:07:16.080 just a mixed issue? But really commercial, you know, commercial 0:07:16.080 --> 0:07:18.720 and industrial. We saw a big pickup in some of 0:07:18.720 --> 0:07:23.680 the industry data. Why aren't we seeing that at Wells? 0:07:23.680 --> 0:07:24.720 And what are they seeing? 0:07:24.880 --> 0:07:25.040 Right? 0:07:25.080 --> 0:07:27.880 And so we've gotten some news over the past couple 0:07:27.920 --> 0:07:30.720 of days with regards to change potential changes in the 0:07:30.720 --> 0:07:34.600 industry outlook, how does that impact their views going forward? 0:07:35.040 --> 0:07:38.160 Yeah, we're supposed to get a rate cut. Everybody thinks September, 0:07:38.280 --> 0:07:40.080 So how does that affect everybody? 0:07:40.720 --> 0:07:42.600 Right? And the hope for banks would be that it 0:07:42.600 --> 0:07:43.720 would spur some long growth. 0:07:43.800 --> 0:07:45.600 But it like happened over twenty four hours, right, so 0:07:45.640 --> 0:07:47.480 it's like they haven't had enough time to really. 0:07:47.240 --> 0:07:50.600 Act None of their views, you know, everything that they've 0:07:50.600 --> 0:07:53.080 prepared and they're talking about today, right, that would be 0:07:54.320 --> 0:07:56.840 you know, baked in as of the quarter end, and 0:07:56.920 --> 0:07:59.480 they did say there's a lot of uncertainty, right, so 0:07:59.520 --> 0:08:02.160 we we didn't see much movement. We saw one rate 0:08:02.240 --> 0:08:04.520 hike I think got taken off the table in the 0:08:04.600 --> 0:08:08.040 last three months. Entering the year, there's been a much 0:08:08.040 --> 0:08:11.600 bigger change, right, So we saw three rate hikes get 0:08:11.600 --> 0:08:15.520 taken off the table in one queue. So we're people 0:08:15.520 --> 0:08:18.320 are feeling a little bit better today about prospects for 0:08:18.360 --> 0:08:21.640 the FED. But my guess as well as is going 0:08:21.680 --> 0:08:23.880 to continue to be conservative, and I think investors are 0:08:23.920 --> 0:08:25.880 going to want to try to feel out on the call. 0:08:26.480 --> 0:08:31.000 Is it conservatism or are there more reasons to be worried? 0:08:31.040 --> 0:08:33.280 And I would tell your friend to ask the CFO 0:08:33.320 --> 0:08:34.840 about that. Thank you. 0:08:35.080 --> 0:08:38.200 I understand why Wells Fargo's shares are lower. I don't 0:08:38.280 --> 0:08:42.200 understand why JP Morgan and City Group shares are lower 0:08:42.200 --> 0:08:44.480 because those results were better than expected. 0:08:44.840 --> 0:08:48.480 They were, but you know, JP Morgan, I think it's 0:08:48.520 --> 0:08:51.200 a matter of the expectations, right, So it's always about 0:08:51.240 --> 0:08:54.040 what are the expectations versus the delivery? 0:08:54.440 --> 0:08:57.720 Okay, what was the big takeaway from the biggest US bank. 0:08:57.840 --> 0:09:00.600 I thought so, I thought solid quarter. I mean, twenty 0:09:00.679 --> 0:09:04.080 percent return on tangible equity. That's that's pretty that's that's 0:09:04.120 --> 0:09:07.120 pretty amazing, you know, And they keep warning investors that 0:09:07.160 --> 0:09:09.840 we're you know, we're over earning seventeen percent. Is they're 0:09:09.880 --> 0:09:10.920 through the cycle target. 0:09:12.280 --> 0:09:16.079 But you know what's the secret sauce for JP Morgan 0:09:16.120 --> 0:09:16.920 and Jamie Diamond. 0:09:17.240 --> 0:09:19.640 I think what they've done over the very long term 0:09:19.720 --> 0:09:23.520 is invest and they just are enjoying a virtuous cycle 0:09:23.679 --> 0:09:27.200 of those leading market positions. Right. So they've invested in 0:09:27.240 --> 0:09:32.480 their trading business, they've invested in deposits, They've made some 0:09:32.480 --> 0:09:33.280 good purchases. 0:09:34.480 --> 0:09:34.680 You know. 0:09:34.760 --> 0:09:38.600 The one other key difference Wells Bargo versus JP Morgan 0:09:38.640 --> 0:09:41.000 and Bank of America is you know, they had this 0:09:41.160 --> 0:09:44.200 asset cap during the pandemic and that really limited for 0:09:44.240 --> 0:09:46.719 them the opportunity to pick up a lot of customers. 0:09:46.760 --> 0:09:50.080 And so while there's a lot of talk tracking those balances, 0:09:50.160 --> 0:09:53.599 right so we're moving down the balances all the fiscal stimulus, 0:09:53.559 --> 0:09:56.679 et cetera. But if JP Morgan and Bank of America 0:09:56.720 --> 0:10:00.079 are holding onto those customers, that's a structural benefit that 0:10:00.080 --> 0:10:01.720 that well is missed out on a little bit again 0:10:01.760 --> 0:10:03.160 because of their regulatory issues. 0:10:03.240 --> 0:10:06.559 So city is going through that five year restructuring stuff. 0:10:06.600 --> 0:10:08.120 Where are they in that? What did you learn? 0:10:08.280 --> 0:10:12.400 I mean they're getting closer, right, but it's still it's 0:10:12.400 --> 0:10:14.400 going to take time, I think, to get through the numbers. 0:10:14.440 --> 0:10:18.360 But they did a lot of heavy lifting last year. Jane, 0:10:18.400 --> 0:10:22.040 I think is really you know, making some tough decisions 0:10:22.160 --> 0:10:25.760 and you know, made significant cuts and I think that 0:10:25.760 --> 0:10:28.240 that is really helping. But it's going to take a 0:10:28.280 --> 0:10:29.600 little while to flow through. 0:10:29.920 --> 0:10:32.240 It's Jane Fraser's report card. Do you what do you 0:10:32.280 --> 0:10:33.480 give her this semester? 0:10:34.280 --> 0:10:36.520 So I don't know, is that Adam am I allowed 0:10:36.520 --> 0:10:40.360 to give grades? I mean I will say, like I said, 0:10:40.440 --> 0:10:43.760 she's getting it done. So I think that she's doing 0:10:43.800 --> 0:10:44.400 a great job. 0:10:45.080 --> 0:10:47.520 Allison, thank you so much. See this this avoids me 0:10:47.520 --> 0:10:49.240 bugging her later. So now she can go and write 0:10:49.280 --> 0:10:51.880 her reports, look through slides. I can tell my friend, like, 0:10:51.920 --> 0:10:57.240 we're good. Alison Williams, the amazing, wonderful senior bank analyst 0:10:57.400 --> 0:10:59.800 for Bloomberg Intelligence. Great stuff going on there. 0:11:01.320 --> 0:11:05.199 You're listening to the Bloomberg Intelligence podcast. Catch us Live 0:11:05.280 --> 0:11:08.800 weekdays at ten am Eastern on Applecar Play and Android 0:11:08.840 --> 0:11:12.000 Auto with the Bloomberg Business. You can also listen live 0:11:12.080 --> 0:11:15.240 on Amazon Alexa from our flagship New York station, Just 0:11:15.320 --> 0:11:17.920 Say Alexa playing Bloomberg eleven thirty. 0:11:19.360 --> 0:11:21.880 Alex Deeal Paul Smuenia is off today. John Tucker is 0:11:21.960 --> 0:11:25.600 joining me for the two hours Change seats co host 0:11:25.640 --> 0:11:28.800 as well as doing our business flashes for us. This 0:11:28.840 --> 0:11:31.840 is Bloomberg Intelligence Radio. We cover all the top news 0:11:31.840 --> 0:11:33.880 in business and finance and economics. There are lens of 0:11:33.880 --> 0:11:37.200 Bloomberg Intelligence analysts. They cover two thousand companies and one 0:11:37.280 --> 0:11:40.880 hundred and thirty industries worldwide. We also go outside, of course, 0:11:40.880 --> 0:11:42.640 to get your take of how the people on the 0:11:42.640 --> 0:11:44.240 street are going to be viewing this and how they're 0:11:44.240 --> 0:11:48.599 investing their money. Phil Orlando, Okay, so John Tucker just 0:11:48.640 --> 0:11:51.040 literally ran over and sat and sitting next to me 0:11:51.080 --> 0:11:54.240 now and now he readjusting at the moment he did 0:11:54.320 --> 0:11:56.760 need to be closer. Phil Orlando is chief Equity Marcus 0:11:56.800 --> 0:11:59.840 Strategist and head of Client Portfolio Management and Federated her Means. 0:11:59.880 --> 0:12:02.360 And he is standing by all right, philm looking at 0:12:02.360 --> 0:12:05.680 the Russell. It's up one point seven percent. The glory 0:12:05.760 --> 0:12:08.160 day is of small caps. Are they here and will 0:12:08.160 --> 0:12:09.640 it be sustainable. 0:12:11.559 --> 0:12:16.280 Small caps? Yes, And that is an important distinction that 0:12:16.360 --> 0:12:20.760 we had federated Hermes reiterated with an exclamation mark. At 0:12:20.800 --> 0:12:23.800 the beginning of this week. We had gone to a 0:12:24.120 --> 0:12:27.360 five percent equity overweight at the bottom of the market 0:12:27.480 --> 0:12:31.680 last October, and the S and P five hundred over 0:12:31.760 --> 0:12:35.079 that last eight or nine months up thirty five percent. 0:12:35.440 --> 0:12:38.839 The MAG seven over that same period of time is 0:12:38.960 --> 0:12:41.160 up like I don't know, one hundred and thirty percent 0:12:41.280 --> 0:12:45.680 or some ridiculous number, But the small caps and the 0:12:45.800 --> 0:12:49.880 value stocks and the international stocks have really lacked. We 0:12:50.360 --> 0:12:53.560 think we're starting to see a reversion of the mean 0:12:53.800 --> 0:12:57.280 that's starting to happen with small caps. We think are 0:12:57.360 --> 0:13:00.600 going to be one of the beneficiaries of that, along 0:13:00.640 --> 0:13:04.760 with value names and along with em names. So our 0:13:04.880 --> 0:13:08.520 best guess is that this nascent move that we've seen 0:13:09.679 --> 0:13:13.400 with the small caps has legs, and we think this 0:13:13.440 --> 0:13:15.280 trend is going to continue. 0:13:15.840 --> 0:13:18.960 Continue for how long And what happens to the mega 0:13:19.360 --> 0:13:21.280 cap stocks at this point. 0:13:22.640 --> 0:13:27.120 Well, our again, our best guess is that the valuation 0:13:27.280 --> 0:13:30.000 of the MAG seven names is ahead of themselves. Our 0:13:31.360 --> 0:13:34.120 full year target for next year. The S and P 0:13:34.240 --> 0:13:38.640 five twenty twenty five is six thousand. We broke fifty 0:13:38.679 --> 0:13:42.840 six hundred a couple of days ago. The market, in 0:13:42.880 --> 0:13:45.240 our view, the broad market is well ahead of itself, 0:13:45.880 --> 0:13:50.400 largely driven by the significant outperformance of the MAG seven names. 0:13:51.040 --> 0:13:54.319 So what we expect to see happening now through the 0:13:54.400 --> 0:13:57.000 balance of this year, maybe into next year, we'll see 0:13:58.080 --> 0:14:01.360 is some profit taking with a lot of these MAG 0:14:01.480 --> 0:14:04.880 seven names, because we think the valuations are extended, and 0:14:04.920 --> 0:14:09.200 a rotation in broadening out of this rally into the 0:14:09.240 --> 0:14:12.600 small cap names and the domestic large cap value names 0:14:12.679 --> 0:14:15.320 and the small cap names. 0:14:15.480 --> 0:14:18.200 So you would characterize this as healthy for the overall market, 0:14:18.200 --> 0:14:18.679 would you know? 0:14:19.080 --> 0:14:22.800 We think it's incredibly healthy, because the market the performance 0:14:22.840 --> 0:14:25.880 over the last eighteen months between the MAG seven and 0:14:25.920 --> 0:14:29.960 the Forgotten four ninety three was about north of one 0:14:30.040 --> 0:14:34.480 hundred percentage points. I mean, that's not sustainable. The valuation 0:14:34.880 --> 0:14:39.160 on this very select group of growth and technology names 0:14:39.360 --> 0:14:41.520 in our view, had just simply gotten ahead of itself. 0:14:41.520 --> 0:14:44.240 And so what is happening now, I'll use your words, 0:14:44.440 --> 0:14:46.600 it is very healthy. We think some of this fraud 0:14:46.680 --> 0:14:50.800 that's come off the top and a rotation into these 0:14:50.840 --> 0:14:53.360 areas that frankly have been left for dad over the 0:14:53.440 --> 0:14:58.320 last eighteen months is a very rational move by the market. 0:14:58.680 --> 0:15:01.520 Here's my question, it's why is this time different. I 0:15:01.640 --> 0:15:03.920 feel like small caps have made a bid for it 0:15:04.480 --> 0:15:07.080 over the last few years and it's never been sustainable. 0:15:07.320 --> 0:15:09.600 We may get those fed cuts, but where are we 0:15:09.600 --> 0:15:11.440 going to get the actual earning support. 0:15:12.840 --> 0:15:16.240 Well, the earning support is coming that you look at, 0:15:16.400 --> 0:15:19.200 for example, the current quarter, which just started today, the 0:15:19.240 --> 0:15:21.560 second quarter earnings, it's going to be a pretty good quarter, 0:15:22.280 --> 0:15:23.960 right Revenues are going to be up about four and 0:15:24.000 --> 0:15:26.680 a half percent year on year, earnings will be up 0:15:26.680 --> 0:15:29.200 about nine percent year of the year. It's going to 0:15:29.240 --> 0:15:32.320 be another terrific quarter. And as you look at the 0:15:32.480 --> 0:15:36.520 trajectory of the improvement in earnings, most of this over 0:15:36.560 --> 0:15:39.760 the last year, including the current quarter, has come from 0:15:40.560 --> 0:15:44.600 the very strong underlying fundamental prospects of these very select 0:15:44.600 --> 0:15:47.640 group of growth and technology names. But as we look 0:15:47.680 --> 0:15:50.720 at this trajectory of the balance of the year, the 0:15:50.840 --> 0:15:53.000 second quarter, even though it's going to be a good quarter, 0:15:53.760 --> 0:15:56.800 is going to be significantly slower than the first. The 0:15:56.840 --> 0:15:59.640 third quarter is going to be significantly slower than the second, 0:15:59.680 --> 0:16:03.600 fourth quarter slower than the third. The areas that we 0:16:03.960 --> 0:16:08.240 like are are showing in improvement in revenues and earnings 0:16:08.560 --> 0:16:10.720 from the end of last year, beginning of this year, 0:16:10.880 --> 0:16:13.880 into the end of this year. So there's going to 0:16:13.920 --> 0:16:15.920 be sort of two ships passing in the night, if 0:16:15.920 --> 0:16:19.800 you will. The underlying fundamentals, as measured by things like 0:16:19.880 --> 0:16:23.480 revenues and earnings will get better for small caps and 0:16:23.680 --> 0:16:29.600 value and ems, and will deteriorate for these mag seven names. 0:16:30.040 --> 0:16:34.720 The stock market, ultimately, as a forward looking discounting mechanism, 0:16:34.800 --> 0:16:38.200 will attempt to begin to price in these sorts of 0:16:38.280 --> 0:16:43.400 developments six to nine months before they happen. Now, if 0:16:43.440 --> 0:16:45.640 we think we're seeing this over the course of the 0:16:45.680 --> 0:16:47.840 balance of this year, let's say the fourth quarter is 0:16:47.840 --> 0:16:51.880 when this truly manifests itself. The now is exactly the 0:16:51.920 --> 0:16:54.600 time when the market should begin to recognize this trend, 0:16:54.800 --> 0:16:57.600 as we're getting into the second quarter earning season and 0:16:58.240 --> 0:17:01.760 digesting the earnings and the guidance, and then begin to 0:17:01.800 --> 0:17:05.359 recognize that that valuations need to move in different directions 0:17:05.520 --> 0:17:06.920 for these different asset clasts. 0:17:07.640 --> 0:17:11.199 Some stocks are more forward looking than others, with a 0:17:11.320 --> 0:17:15.040 lower interest rate regime. If that's where we're reheaded, what's 0:17:15.040 --> 0:17:17.400 your outlook for particular sectors. 0:17:18.560 --> 0:17:21.840 Well, you're exactly right. We do expect interest rates to 0:17:21.880 --> 0:17:25.960 move lower. We're not quite as sanguine or optimistic as 0:17:25.960 --> 0:17:29.480 the consensus, which I guess believes that we're going to 0:17:29.480 --> 0:17:32.840 see the first rate cut this cycle in September. We're 0:17:32.880 --> 0:17:35.680 still in the camp that we do believe that there 0:17:35.720 --> 0:17:38.320 will be two one or two rate cuts this year, 0:17:38.320 --> 0:17:40.439 but we think that both of them, one of them 0:17:40.520 --> 0:17:42.399 or both of them is going to come after the election, 0:17:42.920 --> 0:17:46.000 So that would suggest the November seventh or the December 0:17:46.000 --> 0:17:49.720 eighteenth FOMC meetings. We think that trend continues over the 0:17:49.720 --> 0:17:53.399 course of next year, with another one hundred basis points 0:17:53.440 --> 0:17:57.600 of cuts in the funds rate coming probably on in 0:17:57.680 --> 0:18:01.440 every other meeting base. So if you give me the 0:18:01.520 --> 0:18:05.480 luxury of looking out eighteen months, you've probably got the 0:18:05.520 --> 0:18:08.479 funds rate down one hundred and fifty basis points. That 0:18:08.560 --> 0:18:14.240 should be a very constructive tailwind for small cap companies 0:18:14.280 --> 0:18:17.080 that historically do well when interest rates come down. 0:18:18.200 --> 0:18:19.680 What do you do with bonds then? 0:18:19.960 --> 0:18:24.639 In that environment, So our view on bonds is that 0:18:24.680 --> 0:18:27.040 we should be lengthening out or looking for an opportunity 0:18:27.080 --> 0:18:30.480 to lengthen out duration, that if the funds rate is 0:18:30.480 --> 0:18:34.640 one hundred and fifty basis points lower eighteen months from now, 0:18:35.200 --> 0:18:37.680 then treasury yields are probably going to be lower as well, 0:18:38.520 --> 0:18:40.960 which means that if I had the opportunity to start 0:18:41.000 --> 0:18:43.520 to lengthen out duration at you know, five percent of 0:18:43.520 --> 0:18:45.679 four and three quarters or even four and a half percent, 0:18:46.640 --> 0:18:49.159 I think that's a reasonable bet. So if we're going 0:18:49.240 --> 0:18:53.480 to again look out eighteen months, could we see benchmark 0:18:53.480 --> 0:18:57.040 ten year treasury yields, you know, down below four percent, 0:18:57.080 --> 0:18:58.919 three and a half percent something like that. If the 0:18:58.960 --> 0:19:01.080 answer is yes, and and that's the direction we think 0:19:01.080 --> 0:19:05.919 we're going, then extending that duration here, you know, in 0:19:05.960 --> 0:19:08.639 the four to four and a half percent neighborhood, in 0:19:08.720 --> 0:19:09.800 our view makes sense. 0:19:10.960 --> 0:19:14.439 Do you expect a September swoon? It is coming up 0:19:14.480 --> 0:19:15.640 on that time of year. 0:19:16.320 --> 0:19:18.760 You do, Which is why we took two points out 0:19:18.760 --> 0:19:22.000 of our five percent equity overweight at the beginning of 0:19:22.000 --> 0:19:25.080 this week. The stock market, in our view, is ahead 0:19:25.080 --> 0:19:31.600 of itself. Stocks are overbought. We could absolutely anticipate, you know, 0:19:31.760 --> 0:19:35.040 at a minimum of five to ten percent correction, which 0:19:35.400 --> 0:19:39.120 we think would be very healthy. Looking out, say between 0:19:39.160 --> 0:19:43.600 now and the election. So stocks have done really well, 0:19:44.119 --> 0:19:47.000 we would expect to see sort of a rotation here, 0:19:47.200 --> 0:19:49.600 a reversion of the mean, if you will, in which 0:19:49.640 --> 0:19:54.639 disproportionately more money comes out from a profit. Taking standpoint 0:19:54.640 --> 0:19:58.000 on the stocks that have just gone vertical, and see 0:19:58.000 --> 0:20:01.080 this rotation into a lot of the same actors, like 0:20:01.119 --> 0:20:05.040 the value, like the small caps, like the em names 0:20:05.080 --> 0:20:10.280 that haven't performed anywhere near as well as the MEGS 0:20:10.280 --> 0:20:10.919 seven names have. 0:20:11.880 --> 0:20:14.560 Wow, Okay, I better get that money another my money 0:20:14.560 --> 0:20:20.119 market fun Now, if we're going below four for the tenure, which. 0:20:19.880 --> 0:20:23.040 Is also Ira Jersey's call before the end of the year. 0:20:23.080 --> 0:20:25.040 I'm gonna be one of those people. All right, Hey Phil, 0:20:25.040 --> 0:20:27.320 thanks lot, We really appreciate it. How Every weekend, Fill Orlando, 0:20:27.480 --> 0:20:30.760 chief equity market strategist and head of client portfolio Management 0:20:30.800 --> 0:20:33.159 over at Federated Hermes. 0:20:34.240 --> 0:20:38.120 You're listening to the Bloomberg Intelligence Podcast. Catch us live 0:20:38.200 --> 0:20:41.280 weekdays at ten am Eastern on fo cardplay and Android 0:20:41.320 --> 0:20:44.440 auto with the Bloomberg Business App. Listen on demand wherever 0:20:44.480 --> 0:20:48.320 you get your podcasts, or watch us live on YouTube. 0:20:49.400 --> 0:20:51.639 Let's get to the story that is really upsetting John Tucker, 0:20:51.680 --> 0:20:54.639 and it's this AT and T story. AT and T 0:20:54.720 --> 0:20:58.359 stock obviously falling disclosing some hack of calls and texts 0:20:58.480 --> 0:21:01.680 that affected its custom I'm John Butler is Bloomberg Intelligence 0:21:01.680 --> 0:21:04.679 senior telecom analyst, and he joins us. Now John Tucker's 0:21:04.720 --> 0:21:08.119 not getting on'sages. 0:21:08.480 --> 0:21:09.359 Okay, John? 0:21:09.359 --> 0:21:11.840 Should Should John Tucker be nervous right now? 0:21:11.840 --> 0:21:12.399 What's happening? 0:21:13.359 --> 0:21:16.040 No? John Tucker should not be nervous right now? 0:21:17.520 --> 0:21:19.920 What was stolen was interview was Let's move on. 0:21:23.560 --> 0:21:26.600 I recently had my ID stolen. I think it's become 0:21:26.720 --> 0:21:29.919