Corporate Political Activity And Markets In 2022

Let's check in with Phil Plumbo. He's a founder, CEO and ce IO of Plumbo Wealth Management. Phil, what are you telling your clients about this year where the opportunities are? So the bubble has clearly burst in the most aggressive part of the technology sector, and so I would stay away from that area in particular, and by boring quality stocks. As we think about two thousand twenty two, it's all in the backdrop the feeder reserve. How inflation is going

to continue to be a problem. I don't know how they're just recognizing it now. It's going to continue your problem in two thousand twenty two, which means he's gonna have to continue to be hawkish, and that type of

environment that means rates will climb higher. When rates climb higher, it put a lot of pressure on technology stock, especially the most high overvalued parts of the technology sector that we've been talking about for a while now, because their long duration assets and their cash flows that people are paying for. And in a arroging and straight environment, you see a shift towards financials outperforming energy commodities in goals.

So I just want to step in here because you had a pretty interesting comment at the top where you said the tech bubble is popping. What was that happening in the last three days that you really started to see the unwind of that? Was it the FED meeting minutes yesterday that clarified in your mind we're moving faster than we thought. When did you start to see this unraveling?

Remember markets are always for we're looking, So since the Sumber fifteen, when the FED started to get more hawk ish, you really started to see some of these high flyers correct from their highs anywhere from thirty So I could argue that the bubble started really last year and it's continuing right now, and that's not going to settle in until really the FED settles in in terms of where they're comfortable in terms of raising interest rates and everything

that they've been talking about at some point this year, Phil, how do you think about inflation out there? It's real. Whether you you see it at the gas pump or you see it at the supermarket, it's real. How do

you think about it? It's always been real. What people have to understand is that when you shut the whole world down as we did in two thousand and twenty, and you restart everything, and then you have multiple variants that are that are occurring as we're seeing, it's gonna it's gonna it's gonna create an issue with supplied constraints like we've seen, and and then with all the money that's been put into the economy, you know that's going

to create inflation. We know that because if you look at the history of the amount of money that's been put into economy and measured by M two, inflation has

always started as a result of that. Then you put money into consumers pockets, which created this pent up demand and endurable non durable goods in twenty one, and all of that pull forward effect is why we're seeing the inflation numbers that we're seeing today, and that's going to continue because look at omicron and the issues that's that's occurring, you know, within within consumers and people staying home now and manufacturing plants and you know, not being in full

capacity and issues going on with China shutdowns, etcetera. So the pressures are going to continue to just just just doesn't go away in a year or two. We haven't seen an event like this in over a hundred years, so it's a totally different playbook. So that's why I believe inflation is going to continue to be a threat to the economy and the Fed's gonna have to act even more hawkish. And as you mentioned earlier, that means

rates are rising. And I know a one seventy three on the tenure is hardly um high levels given the absolute still so low levels that we're at. But I am curious if we start to think about a two percent in the tenure, when does that become attractive when you're thinking about a rotation from equities after the big run up back into bonds, is two percent tempting at all? Timing bonds and interest rates is very difficult to do.

I would argue that every portfolio. Every investor needs bonds in the portfolio to help protect when stocks really get get hit hard. Obviously the past day or two that's been moved down with both stocks and bonds, and that's happened, you know, maybe two thirteen that happened. And you do get periods like that that that do occur, but it's not normal for that to occur over long periods of time. So it's not a question of time ago when to get in bonds or out of bonds. It's more of

using bonds as a way to hedge against stocks. So Phil on the equity side here, um sticking with kind of the cyclical play, here are their sectors that really kind of jump out at you two that you're talking to your clients about. What I like a lot right now is, as I said before, market's a forward looking so O macron. It seems like it's going to settle in and kind of come and go relatively quickly based

on some of the data that everybody's looking at. So if that's the case, then most likely over the next two or three or four months, you can see consumers going back out there and spending money on services and travel and so forth. So I like airlines here. I like Disney here as an example. As we think about the kind of reopening trade coming back in vogue, and you have to get into that now before that starts, with which again we'll we'll probably see that the spending

of that over the next three and six months. You've got to get ahead of that trade. So I like that sector specifically. I also like financials, so as rates rise, obviously financials make more money. That's the bottom line. It's the way it works, which means earnings will be greater.

So I like that trade. And I also like energy a lot as well, as the global economy does reopen, assuming there is not another variant that that comes across that affects UH, that affects individuals and so forth, I like. I like the rebound and global economy and energy. So that's those do I like as well? All right, Phil, thanks so much, appreciate getting your thoughts here. As we again reset and set off for two. Philip Palumbo he's the founder, CEO and c I O of Palumbo Wealth Managements.

He did stints at Ubs and Morgan Stanley and Maryland, so he's been doing uh this investment game for a long time, and that's why we appreciate speaking to him, which we get some really good ideas, and he is really focusing on that reopen trade, which once again is coming to the four we got the Fed minutes yesterday. I think the two key takeaways from the markets perspective is certainly a higher chance of earlier interest rate hikes and maybe even a balance sheet rundown, and that was

reflected in the markets immediately. Let's see what that really means for the near and intermediate term for these markets. We do that with Katie Nixon. She's a c i O of wealth management at Northern Trust. Katie, thanks so much for taking a time to chat with us. Hear, what was your takeaway from those Fed minutes yesterday? Thanks Paul, nice to be here. And I think you nailed it. I mean, I think it pulled forward expectations for the pace and the sequencing, frankly of the next policy move.

I mean, I think we were used to post global financial crisis having a gradual anti quantitative easing than a sort of quiet period, then lift off and then eventually quantitative tightening. And I think what we're recognizing now certainly explicitly in the fmc minutes. Is that the not just the pace, but the sequence is going to be pulled forth.

So we could be in the position of seeing quantitative tightening in how much of that is also taken into account the balance sheet because it seems like the markets were also caught off guard that balance sheet runoff could happen maybe shortly after the first rate hike, where in previous years it was almost two years before the rate hiking cycle started that we even started talking about a

balance sheet. Taylor, You're so right. And one of the one of our themes this year was that the the increased pace of UM of taking the foot off the gas with quantitative easing would easily be absorbed by the market um because of the reduction and the issue once of treasury, so there would be sort of a supply demand balance even with the big um source of demand

being the FED sort of lightning up UM. It's pulling quantitative tightening into two really does change that because that puts a lot more supply of treasuries on the market that will have to be absorbed UM. And perhaps UH, you know, interest rates will be the mechanism through which UH investors are attempted and are are taken into into buying bonds again. So I think it does really change things.

Um if if the FED. Now that's a big if, because it's certainly not our base case that we see this this sort of very aggressive quee lift off Q two. I think that's the risk case. It's not our base case, but that that is that is a risk case because it does put a lot more paper on the market. Frankly at the end of this year. Okay, what is the kind of the base case for the good folks at Northern Trust in terms of the economy in going into well, I mean, we think we're sort of seeing

that we're getting past the peak. So we're certainly anticipating that sort of in April May will be past the peak inflation, and we're also anticipating we're gonna be past peak growth. So one of our longer term themes it's a sort of reversion to mediocrity. So we do anticipate this process starting in two where by this very high level of economic growth that's been clearly propelled by policy, whether it's monetary or fiscal combination, UM will come off

the boil. So we're seeing sort of more four three two type GDP prints as we get through into three. But the good news for investors is that growth that is good enough to keep earnings positive, and it's also more sustainable frankly um than the high levels of growth that we saw UM certainly this this past year in one. So it's good news for investors that growth and inflation

will come off the oil. It sets the stage for sort of more modest but positive returns for risk assets, and it also takes the heat off the FED from having to be even more aggressive in policy online. So equities still the place to be. Yeah, equities are still the place to be. Tailor. The fundamentals are very strong. We anticipate sort of mid to high single digit earnings

UM in two. We think along I guess with the market at this point that valuations have become a bit stretched, so perhaps we see a little bit of give back UM in terms of valuation, but that still leaves mid to high single digit returns for for equities and this year, which is which is pretty good coming after several years of very very high returns. Absolutely, and Katie, I think one of the things that equity investors are trying to grapple with now is where do I want to be

in this equity market. Do I want to be in those growth names that have been so good to me over the last dozen years or so, or do I stick with the cyclical trade. They're kind of a reopening trade, if you will, whether it's commodities or energy and banks and think things like that. How do you think about it over the next twelve months. Yeah, Well, one of the things we've told our clients, UM pretty consistently actually for the last couple of years, is you really you

don't need to pick a team here. Um. You can have all the players on the field, and you should because you can't deny sort of sort of the secular tail ones that are behind some of these great growth stocks. We see sort of an I T spending supercycle coming um in the next couple of years, with you know, big capex in the form of I T spending UM

propelling earnings from some of these big tech companies. At the same time, we do think we're going to be in a sort of re reopening trade here um with the global economic recovery continuing UM to to see momentment to so you want that cyclical exposure. The one thing I will add Paul, though, is at this stage of the economic cycle, with the best sort of GDP prints behind us, it's probably not a bad time for investors to think about putting some defensive names in their portfolio.

Healthcare comes to mind, um, So we would say, put all the players on the field. You'll be there when, um, when that particular sector or style is in favor. Um. And we do have a positive outlook on equities in general, so that that will help as well. But if you don't have a sensitive sense of er portfolio, take a take a good look there. All right, Katie, thank you so much for joining us. Really appreciate getting your perspective, your thoughts. Katie Nixon c A c IO of Walt

Management in Northern Trust. One year anniversary of the January six uh insurrection, I guess at the Capitol Hill and a lot of angles to cover. One of them is how has that the events of January six years ago impacted the interaction of government and big business. We all know that the a lot of money slashing around Washington, d C. From big business pushing around legislation to questions, how has that changed really over the last year, if at all? Paul Washington executive director of the E. S

G Center for the Conference Board joins us. Uh, Paul, give us your thoughts here. We know how pervasive big business political action committees the money associated with them have impacted Washington really since the beginning of time. I guess how has that changed in the last year if at all? Sure,

and first of all, thanks for having me. What happened is UM The majority of companies that have employee funded packed UM suspended their PACK contributions for some are all of this past year in light of the events of January six and then UM and then frankly, they they changed their policies on whom they're giving to, the criteria

they use and so forth. Uh. In in the last year, it's actually become a much more challenging and ironment for companies to navigate in Washington these days, both on the contribution side and on the lobbying side. Are they being more careful given how maybe more open the pressure, given the rise in social media, how people are calling them out more. Uh? Is it really coming from pressure from you know, some of the local people on the ground.

You know. It's what's really striking is that most of the pressure that companies are responding to is coming from employees and senior management. It's coming from within the company itself. That those are the main drivers for companies to suspend their contributions or packs to suspend their contributions. UM. External pressure UM less so UM. Though traditional media was important

as well. So really employees, senior management, traditional media. And then one thing, one factor that wasn't a big issue for companies was invest your attention on this issue. But Paul, I, I know some companies temporarily suspended UH some of their activities, some of their fundraising. But this is Washington, d C. After all. This is this money is coming back, isn't it? Yes,

it is. Although I would just say this, UM, I completely understand a lot of skepticism about corporate money in politics. I would note though, that corporations tend to be a bit more of a moderating influence UH in their contributions. They tend to give their packs, which are funded by employees, tend to give to both Democrats and Republicans, and frankly,

they focus more on results than on wild rhetoric. UM. So what you really sing is that corporate money, which tends to be a bit more mainstream UM is actually being overwhelmed by other types of sort of dark money out there UM and uh so that's just something to keep in mind. I understand people can be really skeptical without corporate money poitics, but when you look at the numbers,

it's it's kind of a little different story. What are some of the issues and that are at the forefront in terms of the mainstream the moderate corporate money that you're seeing. What are some of the issues that they're most interested in and seeing progressed through DC. Sure, I mean it's it's infrastructure policy, it's trade policy, it's UM. It's really industry specific often UM issues that they're focusing on UM and that's the bread and butter for companies UM,

and that's what drives a lot of their contributions. What car companies off guard in the last year was how many and this isn't related to money, it's more related to their public stances and their lobbing, was how much pressure was being put on companies to take stands on social issues that aren't necessarily traditionally core to their business, things like voting rights. So companies in the last year

it was really challenging for them. They were being asked away on a whole bunch of hot button issues, especially at the state level, that a just you know, and really thought of as part of their responsibility. But now now they are. Paul, this is an election year. Congressional election year has that typically impact businesses involvement in in Washington. Uh.

It makes it um. Uh. It's there's heightened level obviously of of corporate giving, but it's also a time where it can be really difficult to get anything done on the lobbying side on you know, policy changes, the legislative changes, um, simply because the focus is on the election and people are you know, are playing a lot more politics. So election years tend to be even more difficult on the public advocacy side for companies. At the same time, the

companies tend to give more money. All right, Paul, thanks so much for joining us. Really appreciate getting your thoughts. They're your expert opinion on what's happening. Dana Washington, d C is big business continues to navigate. Uh. One year after the January six insurrection, Paul Washington, executive director of the E s G Center at the Conference Board, Taylor, I just got a text from Amazon there are three boxes sitting outside of my door. I don't even know.

I don't even know. I don't even know what. But it's like everyday Amazon is dropping stuff at my door. I don't even know how it happens. But I looked down at the stock hasn't done anything in a year, trailing twelve months of four percent. What is going on there? Barry Dhults, Bloomberg opinion columnists and host of Masters in Business on Bloomberg Radio, also runs a firm, Ridholts Wealth Management, so he's been in this money management game for a

long time. Barry, what do you make Amazon? I mean, the mighty Amazon, Jeff Bezos. I mean he's out on yachts in the Caribbean over the New Year's But the stocks hasn't done anything. Really, Yeah, after a fantastic where Amazon really was was the logistical hero of the locked. Not only were they delivering supplies and food and from from Whole Foods to Amazon, but Amazon Web Services was keeping the Internet up and running. Uh. They very much

stumbled last year. And if you go down the list, first Bezos, who's been with them from day one, the founder and CEO for twenty years, since the mid nineties. Uh, step down to CEO. That's a giant loss. Uh. They seem to have lost their status as the low cost option. I think when everyone's sitting at home and staring at their screens all day, when you go to buy something in Amazon and it looks a little more than cheap, it's easy enough to google around and say, oh, you

know this is more expensive than elsewhere. Uh, that's not how any of us behaved a decade ago. You oh, it's on Amazon, have it delivered the next day, and you know they've made some changes. There's a ton of advertising on the site. It's much less attractive, and they is a ton of third party sellers, which if you remember eBay, Uh, third party sellers are a big headache, both regular totally and administratively. So no surprise they had a mediocre year. The stock was up to and change.

When you compare that to their peers, when you look at you know, Google and Apple and Microsoft, Google was up sixty five percent, Microsoft was up fifty two I think Apple was up thirty five two percent. Is that's like losing money relatively speaking? So doctor us about not only Amazon, but big tech, because when it comes to some of the regulatory overhangs on this stock. People were saying, this is an administration who outwardly says they hate big tech,

they hate monopolies. But it's been a lot of bark without a lot of bite, at least when it comes to the rhetoric about breaking up big tech. Where are we with that regulatory overhang on the stock? Yeah, I don't. I don't see big tech being broken up as much as Hey, the next time Facebook and I still can't call it meta, but but the next time that company sees an Instagram or or Google sees a YouTube and wants to acquire it. Um, we've seen that that acquisition

process has led to less competition in the space. Facebook and Google have really a death grip on online advertising. Everybody else is just kind of picking up the crumbs. And so the likelihood is the likelihood is that, um, those sort of acquisitions and mergers are going to be looked at with a much greater level of scrutiny, scrutiny

than we've seen in the past. But the idea that we're going to break up Apple or we're gonna break up Google, I'm kind of a hard pressed to to see that as a um any sort of likely resulted anytime soon. You know, I'm just looking at the FA function here, the financial analysis function on the Bloomberg terminal for Amazon. I got a half a trillion dollars in revenue, and the consensus forecast is it's gonna grow eighteen percent in another seventeen percent next year. This is still a

really good growth company. I'm kind of surprised the stock is kind of, you know, lagged, there were just underperformed some of its its peers. Well, look at how well it's done over the course of um two years, you know, when when we look at when we look at Amazon, yeah, they had a pretty mediocre UM but one I'm sorry, but but look at the numbers, what they've done over the prior decade, the decade leading up to last year.

The stock rose one thousand, eight hundred. The company has a one point six trillion dollar market gap, and as you've pointed out, for the law of big numbers hasn't kicked in yet. They're still growing at a substantial basis. The question is how much of that is already reflected um in the price. So I look at the one year stock, it's it's up a year uh, two percent. I look at the three year stock price, it's up a hundred eight percent, and so that that says to me, hey,

maybe this got a little ahead of itself. Uh, and it needs to digest some of that growth that I look at the five year revenue numbers, it's just under thirty percent. That that's that's a shocking, shocking number. And and earnings have have over the five year period also doubled, So the growth story is still intact. The question is, hey, at one point six trillion, did it get a little

ahead of itself valuation wise? And maybe it needs a year or so to digest those gains before it can start chasing the two and three trillion dollar club like Microsoft and Apple. You know, it's interestingly I'm looking Barry at the A n R functions is of the Bloomberg function segment of the day A and R for analyst recommendations. Get this fifty nine by ratings, zero holds, zero cells. Have we ever seen that before? You've seen Nobody wants

to be on the wrong side of that trade. It's been embarrassing for the handful of people who are negative on Amazon over the past decade. And so I think just from a career risk perspective, people haven't. But it raises a valid question. You know, when we see upgrades, when we see raised targets, that can be a spur to the stock price moving higher. If everybody is in, if everybody is bullish, if everybody has a by rating, what's the next catalyst going to be the past few

catalyst us? Um, you know, Bezo stepping down was not a net positive, obviously, he's a very highly regarded CEO founder. Um, what what's the next surprise after Amazon Web Services? So maybe the company is close to fair value and and therefore it's harder to drive that price. I remember a big chunk of Amazon is a retailer, and that's a very different multiple than hwork. You're exactly right, all right, Barry. Thank you so much for joining us. Always appreciate checking

with you on these Thursday mornings by Adults. Bloomberg opinion columnists and host of Masters and Business on Bloomberg Radio. Ridholt's wealth management as well. He's a founder there. They run a bunch of money, so he's been in this game for a while. Thanks for listening to the Bloomberg Markets Podcast. You can subscribe and listen to interviews with Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller, I'm on Twitter at Matt Miller, and I'm fall Sweeney.

I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio