Stocks Rise to Record, Bonds Fall

Strategistic Credit sweez Um. So, Patrick, I want to just get your sense on whether we're actually seeing fundamental strength in the earnings as we head into the final week of three Q earning season or are we just seeing a very low bar that has been stepped over. I mean, when we take a look at the third quarter earning season, I think your point on a low bar that's been stepped over, I think that's a fair way of putting it.

I mean, in reality, the backdrop is still in NMIC and it's likely to be anemic in the fourth quarter. And when I say we're talking about EPO growth, that is somewhere between one. So once you strip out the benefits of buybacks, earnings are essentially flat. Now, there's some unique dynamics that are are going on, and when you take a look at the median company trends will of a lot better. But but nevertheless it is an anemic

backdrop for for growth. So Patrick on the flip side sets up for maybe some decent growth numbers in Do you think the markets too optimistic about earnings growth? Well? I think if you take a step back, I mean, analysts typically start out optimistic and estimates historically fall. So if you ask me, do those expectations need to come down, the answer is yes. Do I think we are going

to see anything other than what we typically see? The answer is no. And when I say that, we expect EPs growth to come in around five So that's a significant improvement from the numbers that we saw in the current quarter and the numbers that we are likely to see again in the fourth quarter. What do you make of the volatility that we've seen in The response in share is two earnings beats and conversely two misses. The reaction has been more extreme this earning season and then

than it has been historically. How do you interpret that? Well, I think investors have been looking for a way to get positive and maybe maybe let me take a step back here. You know, several months ago we turned more cautious than we've been in a while, and it was really around the deceleration in the industrial data and the fact that the yield curve was inverted. Over the past couple of weeks. Both of those appear to be dissipating, so we have a yel curve that is much healthier

than we had historically. In the industrial data appears to be bottoming. So what we are seeing this earning season is really a confirmation that the trends aren't that bad, and that's why we're seeing the positive response to results, more positive sponsored results than we typically see. Alright, So, Patrick, if I'm in the equity markets, am I just in the defensive stocks utilities, reads, consumer stables, or can I afford maybe take some more risk with some cyclicals or

even some growth stocks. Well, we we think now at the time to make that sort of procyclical shift. So if you have been in the market, it's likely that you probably wore in those more defensive sectors and that has been the leadership really up until about the past

three or four weeks. But with and I had mentioned this earlier, with the beginning of the bottoming and the data in the fact that they curbs uninverted, we believe now is the time for investors to make that pro cyclical shift in their portfolios and in a way from those more growth in defensive sectors. I'm trying to understand what's changed for people to be trying to get positive, I mean, other than just a lot of negativity for a really long time and everyone's just kind of sick

of it at this point. So what has changed? Yeah, So I think in reality we're beginning to get through. I think the most difficult part of the data. We haven't officially bottomed yet in the US in terms of industrial activity. That's likely going to be in the around the end of the fourth quarter. So as we move into twenty nineteen, the pace of indust activity is set to improve, and I think investors want to get ahead of that. And that's why I think that pro cyclical

move in terms of shifting portfolios is the right move. Uh, by the time you see that balance in the data, it will likely be too late. So it's one of those environments where if it's there on the horizon and we start to see the green shoots that we are seeing, now is the time to get into it. So Patrick, part of the support for equity markets over the last certainly a couple of weeks has been an expectation that some type of trade deal will get done, people calling

it a phase one type of deal. But as we know, that can just turn on a dime or a tweet. What happens if you know, we don't get a trade deal on both sides to say, let's kick it down the road to after the election. I think if we get to a point in the discussion where the trade deal looks like it's getting further and further away from being reached, it will likely cause a spike in volatility

and we will likely see stock sell off broadly. Now, what's interesting is over the past uh several months, those in those situations haven't been nearly as severe as what we're experiencing even twelve to eighteen months ago. And I think part of the discussion is the deal is is somewhere in the future, uh, if it's if it's not this meeting, it's next meeting. The shape and the size

of the deal continues to shift. But I think we're getting more and more likely that something will be reached in some kind of form, and I think investors are taking comfort in that. I'm wondering when it comes to bonds, they are selling off in tandem with this risk on feeling, at what point will they sell off too much and will yields rise so much that it provides sort of

a negative headwind for for stocks. Well, Historically throughout this recovery, that threshold has been around three and a half percent on US tenure. So right now what we're seeing is as interest rates rise, it's a signal that the backdrop for risk assets is improving. So I think we have a fair amount of distance to go before we have a headwind from let's say, evaluation call or or some other relative opportunity improvement. We still have a fair way

to go before we get there. Any sectors, Patrick, you're just staying away from right here, given that you're getting a little bit more cyclical. I mean, we want to continue to de emphasize those defensive sectors, the the reads, the utilities, UH telecom and and also UH certain certain portions of stables that that's areas where you are not likely to participate in the rally that's likely going to

happen here. Patrick Palfrey, thank you so much for joining us, Patrick as a US equity strategist for Credit SWEE giving a sense that the credit sweet is turning a little bit more I guess aggressive, little bit more cyclical, away from some of those defensive things which have been such good performers this year, some of the best performers that we've seen. Well, Investors are certainly have a risk on field.

Today we have the SMP up a fourteen points. Investors are stepping back and are saying, when I look at the economy, I see a weak manufacturing sector, a weaker business investment sector. But that's the economy, which is the consumer continues to power on. To get a sense of where we go from here, we welcome Chris Rupkey, m u f G Union Bank Chief Financial Economists. Chris, thanks so much for joining us. Is it all just about the consumer right here? Well, the consumer is doing pretty well.

Some of the sentiment numbers are bouncing around, but there's no worries. Consumers sees uh, no recession. It's and it's not just the consumer. Remember it's also uh, new consumer consumers being created. And with that strong jobs report we got Friday, you know, we know basically there's about two d and twenty three thousand more people with paychecks in the US. So that's good. Yeah, there there's no recession. Certainly, the only recession talk gets going, uh if the trade

war escalates. So at the moment, it looks like the US and China are getting ready to at least sign phase one. I mean a lot of people have doubts about what is in phase one, how important that is. Phase two and three are going to be much more difficult, but you know, at least we're moving ahead and there's no bad headlines out there for stocks and bond markets today today. I love that that he added today. Right,

We'll see about tomorrow, but today we're holding in just fine. Chris, I want to talk a little bit about something that UBS analysts have called a two tier economy. When it comes to the consumer. You have on one hand, upper income and medium income individuals in the United States doing pretty well or very well, and then you have the lower income where you're seeing delinquency is picking up to faults picking up on consumer loans, and I'm wondering how big of a concern that is for you. Yeah, it

isn't right now. I mean, I'm, you know, always trying to be a macro economist. I don't get into issues like income inequality. I did notice that, you know, wages are doing okay. If you look at non supervisory worker wages in the report we've got Friday, they're running three and a half percent year over year, which you know, it's better than a poke in the eye with a

sharp stick. And the average hourly earnings that includes bosses, of course, that's only running three so they're getting a little bit more factory workers three and a half percent versus three percent. But you're right, I mean, but most of those issues, the income in quality issues so called, I don't think there ever enough to really drag us down into a recession on their own. So Christopher not

heading into recession eminently. Um. You know, one of the concerns is, you know, I guess just this trade issue. It appears that a phase one type of trade negotiation and agreement could be in the offering. Is that pretty much what you think the markets discounting now? And is there an area of risk as it relates to this trade. Well, I'm a little bit concerned that what's happening with the

December tariffs. Um, you know, it was scheduled to go to fIF tariffs on China imports of the final hunding sixty billion of goods key goods like video game consoles and cell phones and laptop can shuters and certain shoes and clothing. Uh, that would be big. I mean, if the us UH suspends that tariff, I don't know if they're going to agree to that as whatever they're going to sign in the days and weeks to come. Chris rop Key, thank you so much for being with us.

It's important to get your insights on a day when things do look a lot rosy, or at least from the headline perspective and market action. 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 A. Bram Woy. It's I'm on Twitter at Lisa Bramwoits one before the podcast. You can always catch us worldwide on Bloomberg Radio.