Stocks Drop on Trade Concerns; Fed Cuts Rates

perhaps a little bit weaker than expect that. The question is what is this mean for fixed income markets going forward? To adjust that? We welcome Tony Rodriguez, head of fixed income strategy at muvine. He joins us here in our Bloomberg Interactive Broker studio. So, Tony, thanks so much for joining us. Let's start with what we got yesterday from the Fed and from Chairman Pal. What was your key takeaway?

Let mean, my key takeaway was that I thought that the key was that they did not communicate a very hawkish ease, and I think they kind of were able

to thread that need a little bit. I know, it's being referred to as a as a hawk is she's But they did talk in the press conference very much about how the three things that they consider to be the rationale for lowering rates were, you know, global growth, trade uncertainty, and that inflation is gonna be is not at their target, and they re emphasize that they are not going to raise rates until inflation really exceeds their target.

They talk about a symmetric target. So I think that kind of gave the market the idea to look, they're not going to raise rates. The bar for that is enormously high, and the risks remain really unaddressed in terms of weaker global growth and in terms of trade uncertainty. So I think it's more than likely that you we believe you'll see them actually come back to the market to cut rates again in the first half of next year. Because of those two concerns on trade and on global growth.

Everyone seems to agree that the risk to not cut enough is much bigger than cutting two quickly. That seems to be what everyone is saying is that basically, if you air on the side of easing, uh, that's just fine. My concern is that no one's talking about moral hazard anymore in any way, shape or form. Are we seeing anything in credit markets that indicates that perhaps companies are taking advantage of this easy money era that has gone on for a very long time and we'll continue for

a very long time. Yeah, some of the credit markets, I would say, what you're seeing is certainly elevated levels of debt, debt to cash flow, any kind of metric you look at has risen, but they are not at troubling levels. Okay, So companies have, I think, just fundamentally begun to target a different capital structure. Whereas years ago people would have said double A or single as where I want my balance sheet to be, and you in fact even had an occasional triple A corporate credit out there.

I think pretty much financial kind of theory today is triple busy optimal place for me to be. We don't

care about being double A at all. Single A may in fact even be unnecessary because the cost of capital is so low and an absolute level, no company complains to us about capital being too expensive or unavailable, which this is the reason why you're seeing the triple B rated segment of the investment market grow so much faster with record pace of issue and so far this year and nearly three trillion dollars of US and outstanding right and interestingly, what you are seeing is on some companies

who have been kind of the poster children for being at risk of dropping into high yield the fallen angel risks, so g would be the one that really pops up on people's screens. Those companies have shown a real commitment to at least try and in many cases successfully maintain that triple B rating. So whether it's through asset sales UH,

cutting down their share buy back, reducing their dividend. So there is still a focus amongst CFOs and corporate boards to try to maintain an investment grade rating and the triple B space. So we you know, we think that yes, it changes the character of the investment grade credit market

quite a bit. Ultimately, when we get to a downturn, which you know, the spite the longest growth pier we've ever had here, we will get to one UH, then you may see a greater dislocation as a result of this, you know, large amount of triple B because we will have more fallen angels. There may not be the appetite then to absorb it. So the only shock absorber will be price. So you'll see spreads why now more than

maybe we've seen in other previous recessionary periods. So tony, given kind of what we know about the FED, we've got some more color yesterday. Given where we are in this economic cycle, as you mentioned, the very long economic growth cycle. What do you at NUVINE doing with your portfolios right how what kind of adjustments are you making sure? So the thing that we've been doing over the course that i'd say the last call it even six to nine months, has been uh positioning for the end of

the cycle at some point. We don't think it's imminent. We're not calling for a recession in twenty but we do think we're late cycle. And what that means in terms of defensive positioning is three things. Really upgrading in quality within whatever segment of fixing commure an emerging marketshigh yield and message your credit upgrading quality, Upgrading in liquidity so that you aren't able to maybe move your portfolio to an area where there is a dislocation when that happens,

and increasing diversification. We don't think there is a you know, single pound the table, cheap asset out there in the fixed income space, but we also not seeing recession. You want to be exposed broadly to the greater income that's available, versus sitting in a very defensive you know, in the bunker positioning of you know, cash and treasuries. Well, it's

quite a it's quite a needle to thread. And I do wonder how concerned you are about the fact that your peers are doing something similar and they're they're moving up in credit quality. We hear that a lot. And what you're seeing in the market is that the up and credit quality uh debt is actually uh giving you very little relative to history and relative to other aspects.

So are you worried that it's sort of overpriced at this point given that that appetite, Right, Yeah, you always do worry about a consensus trade, right that every is on the same side of the boat. The one thing I would say is that while we're upgrading quality, we have not abandoned completely, for example, the high yield market, which would be in terms of the higher risk segments of market, high yield, emerging markets, triple be debt. We're

not abandoning those areas at all. We still think in fact, there's value to be found. It's just that we're not digging into the triple C segment very much, although there's

occasional opportunities there. I think the biggest thing that you need to make sure you have as an investor is an ability in this type of market to do the fundamental credit work to distinguish between the triple bees that are an opportunity and those that will be a very likely fallen angel or the single bees that could be declining. So the premium on strong credit research I think is higher now as you enter this late cycle with some of these imbalances along the credit quality scale then it

would have been in previous cycles. All right, let me ask you this a weird question just right off of what you just said, credit analysis, credit research. The credit research departments don't exist on the cell side anymore. I mean, and I was there that we people doing credit research

that doesn't exist anymore. What do you guys do about that? Well, primarily you do have to rely on your own internal credit research, And I would argue that you know, over time, really the credit research from the cell side, you know, while some was very high quality and truly just um, you know, effective, at determining relative value. A lot of it was maybe just supporting say the syndicate desk in

the new issue market and the trading positions. Um so, so I think that the credit departments internally at the asset management firms have grown over time. We have over fifty or one of the largest in the business in that space, because the value you can get from identifying,

you know, real opportunities is enormous. Right now when you think of how compressed yields our globally compressed spreads, the opportunity really isn't doing that bottom up work, whether it's on a sovereign in emerging space or on a credit tony. How much do political developments in the United States factor in,

if at all, to your investing thesis. They definitely do, because just broader uncertainty is certainly something that raises the level of volatility and the potential risk in the market. And the political uncertainty not only in the US, but we can think globally with what's been taking place, whether it's around Brexit or other areas of the world, the political uncertainty size so we are paying more attention to

that than we'd probably like to. And UH and therefore tapping into different sources for finding as much good political insight as you can, because it is dramatically impacting potential policy, whether it's on specific industries or broad issues like trade policy, tax policy, regulatory policy, it's pretty critical. So what do you think would happen if President Trump gets impeached? What's

the market response? You know, I think it's considered to be uh in terms of in the House, you know, such an obvious that that's going to happen that right now, the market is certainly convinced that nothing would happen in the Senate. So I think it really creates maybe just some short term noise, but I don't think it will

change anything really fundamentally. How do you guys factor in the all the geopolitical issue is that the market has to deal with every day and least and I have to report on every day, whether it's China trade every day every day. Let me rephrase that, Brexit comes to mind and so on and so forth. M How does that factor into kind of what you guys do day

to day? Sure, well, you have to factor in higher risk premiums for that, for example, because it's not only the political you know, call it noise or issues, they actually create fundamental issues. So Hong Kong, as you just saw right recession, you know, negative three plus per saying growth quarter over quarter, So that political noise does in fact drive true fundamental economic and earnings. UM, you know results. Tony Rodriguez, thank you so much for being here with

us all the way from Minneapolis. How to fix the come strategy at nu Ven have a wonderful Halloween. We're very pleased to say we have with us. Christina Hooper Invesco Chief Global Market Strategists Susina, how often do you feel like chief political strategist at this point? Well, it often happens, but it's usually in the context of speaking with clients who are worried about it and really need help, um making sense of the noise. What's really important in

what is? So? What do you tell them? Well, what I tell them is we have to look at those events that actually have an impact on economic policy. So, for example, what I think is the big news today is of course China coming out and saying that it's unlikely UH to see anything beyond phase one of the trade deal come to fruition. That to me is what's the real news today and that which truly impacts economic policy.

So what do you think, just staying with the China news, um, what do you think the market is kind of discounting? Is it just a Phase one type of light deal or does anybody really believe that will get anything me meaningful?

I think the market has been incredibly optimistic. Anytime there's been positive news flow around the US China trade situation, it's always assumed the best, and so I think actually more than just Phase one has been priced in, and that's why we're seeing a stock sell stock market sell off today. How surprising is this though? I mean, we knew that the Phase one was sort of this peripheral deal or not I should say, superficial deal that would get the parties to Phase two in a sort of

save the phase kind of way. All around, what's new? There isn't? This is groundhog Day over and over again. Thank you, You're like you're living the same story. But markets continue to get overly excited and positive about any news. Um, It's it's wishful thinking, and unfortunately the market continues to get let down. All right, let's focus a little bit

more on fundamentals, um, switch gears. What was your takeaway from the FOMC meeting yesterday and Chairman Pal's comments, is that did it change your view of kind of how you guys want to be positioned? It didn't, but it certainly gave a lot more clarity than we often get

from chair Powell. I think there was a little trepidation that they would remove the language that that they did remove um, but he was able to come back in that press conference and make investors fear more more confident about the market because it appears as though the FETE is going to be sitting on its hands for a while before it ever considers raising rights. I coined a new phrase this morning, Alice in Wonderland market hawkish cut

negative rates. These contradiction in terms, I'm wondering how you're sort of deciding how to position next and light of the earnings that we're getting, the things that are not uh, you know, sort of wishy washy, complex, complicated contradictory phrases. Are you seeing this latest three Q earning season as a positive sign for the U S economy? Well, it is potti positive, but modestly positive. And I say that because companies have become very good at managing expectations and

meeting or exceeding them. So this was certainly a positive earning season, but we have to recognize that probably the more positive theme as we head into is that the FED is relatively accommodative. We just don't have enough visibility on what earnings is going to be like for all of but we do have more visibility I think after today, after yesterday's press conference, in terms of what the FED may do. So unless we see a significant spike in inflation,

we're likely to see continued low rates. So in this environment again continued local rates UH, late cycle UH slowing growth, still growth in US economy, but slowing. Are there sectors that you feel more comfortable with right now versus some others? Well, it's all a question of timing. Because UM for the last few weeks and possibly a bit longer, um value has looked attractive. The cyclical names have looked at track active because we saw steepening of the yield curve. UM

that seems to be changing today. I do think the longer term, if we look out for the next six to twelve months, is likely to be again growth out performing value, and so that would drive me to tech UM, not the cyclical tech names, but the more secular growth names as an area that continue to perform well. So UH, software for example, UM, cloud computing. Uh, those areas where we're seeing very nice levels of growth. It's some good numbers out just on the tech front last night Apple

on Facebook. So does that give you I'm not sure what your exposure is there, but at least it appears that the consumer facing technology continues to be quite strong. It does. It does. Technology continues to be the go to place for corporate spending as well. UM. In environment where you have a tight labor market, we're likely to see companies spend more on innovation, spend more on technology

that in a productivity. So while we're seeing a decline in business investment overall, I think we'll see more dollars allocated to technology going forward. And we are seeing today Apple shares as well as Facebook shares rising after beating expectations. Apple shares up two percent at Facebook up three and a quarter percent. We're speaking with Christina Hooper, Investco, Chief Global market Strategist. I don't know if you knew this, but it is philosophical Thursday and earlier today on this

program right here. You heard it first. Um, you know, we did get Twitter announcing that they were going to strip out of political ads this morning shares spell perhaps in response to that, perhaps into response and something else. Meanwhile, Facebook coming out adding subscribers not taking a similar measure shares popping. What does that tell you about investors and how much they care about some of the sort of social implications that is that are talked a lot about

in Washington, d C. But aren't necessarily do anything. You hit the nail on the head. They've been talked about for a while, and so until we actually see the issues coming at us UM and very very close proximity, investors aren't going to worry about it. We've had that overhang of greater regulation hanging over tech for a long time now, totally. But it makes me wonder all these people saying that E s G filters are so important to them, and they're looking at all of these like

so at the social consequences. Uh, they're not making much traction here because it doesn't seem to matter. Am I wrong? Uh? You're right, But we're looking at a snapshot in time, and I think E s G will be one of those factors that over time rewards those companies that it believes are UM more in keeping with with the values of E s G. But over the shorter term, I think what we're going we're likely to see is reaction

to the democratic primaries that this could be UM. This could be where you actually start to see some nervousness filter into tech prices UM for those companies that are are perhaps on the front lines of potential regulation UM, depending upon which candidates do best in in certain primaries. Just real quickly, any sectors that you're just or any asset classes you're just staying away from right here, well,

I think we need to be very well diversified. So there's no asset class that I can say we should have no exposure too. But I would say that this is an important time to be emphasizing dividends. So all else being equal, UM in a given sector, migrate to those with that are fundamentally solid but have a dividends. Christina Hubert, thank you, Thank you, always wonderful having you.

Thank you. Christina our investcor TEF global market strategist. Joining us here in our investue, in our interactive broker studios. Let's bring in Mark stoke O. He's CEO and portfolio manager of Adams Funds. Mark, thanks so much for joining us here in a Bloomberg in our Actor broker studio. You know this, today's impeachment is just another piece of quote unquote noise, uh, that investors have to deal with.

It's trade, it's Brexit. How do you suggest investors should kind of factor in our factor out the noise in their investment process. Well, it's it's a really good question and it's something that we are pretty passionate about because one of the concerns that we have is most of the time when um, there are uneasy things happening, investors get nervous, they get scared, and their first reaction, because it's easy, is to trade, and they'll trade out of

their positions. And you know, there's a there's a statistic that is is actually troublesome and most individual investors that invest in the SPY, just a regular smp FI funderd t F, do not get the sp F t F return because they trade. And you know, I think it's it's trying to be more one intellectually honest about how much risk you should be taking given where you are in your life and what you're just saving for. Number two, decide what asset classes you want to be invested in

and leave it alone. There's a lot of noise, and a lot of this noise tends not to really matter at the end of the day. It will matter today, might tomorrow, might for a week. But the idea that it's it scares you into trading is exactly the wrong thing. You know, over time, bowl markets last twice as long as bear markets. The markets go up over time. And if you're again, if you're intellectually honest about how much risk you want to take and you invest leave it alone.

Doesn't mean you can't adjust if something changes in your life, but you really do need to stay invested in order to really get the power of compounding uh that long term investing offers. So I have active managers. Why not just as you know, a person creating a retirement fund just put their money in spy and leave it there until they're older and they rejigger it and make it safer. They could. The problem is you you take away any opportunity to outperform that. And I think that one of

the things is an active manager. If you're not choosing active manager. But but yes, exactly. But then the question is, as an active manager, how do you know when to trade given the noise? What what what's the sort of threshold of change? Um, you need to try to tune out the noise and concentrate as best you can on data. If you concentrate on data, that will lead you to place that that will lead you to decisions that we think are better decisions as opposed to I can't believe

that X y Z happened. Maybe we should get more defensive, Well maybe not. Maybe that's not the right answer, um, And you know, defensive stocks might be and maybe in vogue might not be. But I think it's it's it's the concept of trying to tune it out and have a longer term perspective. And again, as I said earlier, part of the problem here is it's easy to trade. All of these companies have made it incredibly easy to trade,

and um, which is fine, and it's cheaper, which is great. Um, but most people should be in it for a longer term and and just try their best to to tune out the noise. And again, as I said, if if you're trading, you are not getting the benefit of compounding, which over the time is an incredibly powerful concept. What any ATMOS funds? How are you positioned right now? We're

ten plus years into this economic cycle. Um. You know that's getting people to think about, g do I need to be out reallocating my assets here for what the next five years is likely to be probably lower growth in the last five How are you positioned? Uh? We we are positioned looking for stocks that we believe can out perform the SMP have haven't heard. So in some respects we're a little different because our bogie is to try to out perform the SMP. I found it. We've

been fortunate we've been able to do that very well. Um. But so that that's different than somebody who's looking for an absolute return. I mean our the way that we manage the fund is we're sector neutral, which means we have the same waitings in healthcare and technology and all the sectors as the sp We at our value by selecting the right stocks within each of those sectors. Um.

There's been a lot of debate about growth versus value. UM. You know, we tend to be core managers, and I think that one of the challenges with growth versus value is everybody today, I believe, is guessing that it's time to go into value. There really isn't much in the way of empirical data to to to convince us that the the the the the growth uh when over value is going to change anytime. So again I go back

to to data. I would I would prefer to see rather than say, I think right now is the right time. You could have said that a year ago, two years ago, five years ago, you could have said that. So we would prefer to see value stocks begin to have an inflection point versus growth, and that to us would lead lead us to believe that now is maybe a better time to begin to look at value. Take Facebook, and and and uh Apple that reported yesterday, so they reported

really good quarters. Um, so your your your value alternative is IBM, Cisco, Oracle. So I I don't believe that this is this is the time to just put a stake in the ground and say it's a really good time to go to value. We would prefer to see data tell us that in fact, they they are uh producing better revenues, better earnings, and they're sustainable. So mark, what's your highest conviction stock? Pick right now? Microsoft? It's our biggest overweight in the fund is Microsoft, all right,

and what's your what's your thesis? The Microsoft thesis does revolve a lot around the cloud. Um, it's uh, they do a lot of they do a lot of really good things. But the cloud to us has a lot more runway to go than I think a lot of people expect. We think there's at least five year runway in the cloud. They they've proven they are really good competitor to Amazon's uh aws. Azure has has proven that.

The other thing that I think is really important is in the cloud, we've seen higher revenue go in how revenue in the cloud companies. A lot of that is not prices going up, but companies buying buying cloud equipment and find buying cloud equipment for leverage and and hoping to be able to do and realizing they can get a lot more leverage. They're they're buying more equipment is opposed to prices are going up significantly. So I think that's a that's a that's a good guide post too.

There's there's a lot of momentum here and they're really good at it. Mark Socle, thank you so much for being with us. Chief executive officer and portfolio manager for Adams Funds. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. Paul Sweeney, I'm on Twitter at pt Sweeney. I'm Lisa abram Woyds. I'm on Twitter at Lisa A. Bramwoit's one before the podcast.

You can always catch us worldwide. I'm Bloomberg Radio