The FOMC Meeting And Its Impact On Markets

FED a day today. It looks like the FED is about to give us some more color on how it intends to look at the interest rate structure out there. I eat raising rates and that's gonna be some That's a new environment for a lot of investors out there, So let's see how financial advisors are talking to their clients about that. Katerina Simonetti, Senior vice president, Private wealth advisor for Morgan Stanley, joins this. Katerina, thanks so much

for taking the time here. I'm guessing some of your investors really don't have your clients, I mean, don't have a lot of experience investing in a rising interest rate environment. What are you telling them these days? Matt, thank you for having me on um. I think it's no surprise to them that the rates are going up, said has done a pretty good job setting expectations, and look, you know, interest rates are going to be going up, and there

is zero reason why they shouldn't be. Um, we really should not be as low as they are right now. And yet there is this perceived fear that when the race are going to be going up, the market somehow is going to pull apart. Is it's not necessarily the case. Rates should be going up, and we're preparing our clients, and we're preparing the investors who were strategically positioning the

portfolio in light of the rating late. So what do you do with someone who's you know, looking to retire in the next decade or two and is worried about putting new cash into the market of these high valuations and obviously also into bonds when rates are rising. Well, met it's not just the rates themselves, it's also the inflation.

I think that the key of how challenging this environment is is that we've never had the inflation ory period with the raids of this slow and specifically for the in the retirees, the people that are about to start their retirement and are going to be losing their active

income and switching into more of a passive situation. You know, the key is to focus on quality, and you know, when we look at strategic positioning of the portfolios and specifically at certain sectors that you know are a little bit stronger, a little bit more defense than the light of all the challenges that this market present. Our focus is on quality and on larger positions large cap for example, but not just like large cap growth or large cap value,

but on defensive positions specifically. You know, we're looking very closely at each investments and make sure that the companies that we invest in have the earning stability, reasonable valuations, we're not overpaying for them. In the most importantly, companies with enough pricing power to perform well during this the

average challenge and environment. Because while we absolutely are quite positive over the market, there is growth in the US you know that is still strong, that is still going to continue is going to be a bumpy right, and that's would present so many challenges and were preparing investors

for it. So, Katarina, you know, there's I guess a little bit of a push and pool out there from some investors who really, since the Gray financial crisis, have really been successfully invested in the big growth names that have really driven this market, whether it's an Apple or an Amazon, or or Facebook or something like that. To what's really been a good trade over last eighteen or twenty months, which is more of a a cyclical trade if you will, um, maybe even you know, betting a

little bit on the reopening of the global economy. Where are you suggesting, uh your clients think about, Well, I think it's it's all about the balance, right, and it's all about being the resoughtful about the portfolio design. And when we look at the twenty two and to analyze this amazing growth that we have seen uh in the market recently, the especially the year end is generally the good time to kind of just just analyze what happened.

And this is a perfect time for strategic profit taking because there are some areas, for example, that we're used to saying that are extremely aggressive, that performed pretty well, but they are in fact, you know, showing some some stability and showing some price resilience, and they definitely have

role in the portfolio. But this is a good time to rebalance, to go back to the drawing board to make sure that all the sectors are properly represented in some sectors that have that positioning into the interlight of

what's happening with the economy. Sectors like financials, like healthcare, um inflationary hadgets of such commodities and reads for example, Well, we want to ensure that we overweight into the sectors that are either positioned well in light of the rising grades or present to be good inflationary head just or like healthcare. You know, the the um, the this this healthcare crisis that we're experiencing. You know, this this situation with the pandemic that you know is still going on.

And you know, as much as progress are at healthcare companies and you know, are just health care communities making this is still something that is going to be lingering with us for many years to come. So when we look at this positioning of the portfolios, whether it's fixed income, whether it's equity, we need to take inflation into consideration, the resilience quality and make sure that the portfolio is strong enough to get us through this period of volatility

that is not over yet. We still have a lot of challenges out there. Katerina, thank you so much for joining us. Love getting your perspective here. As you talk to and counsel your clients. Katerina Seminetti, Jesus, Senior Vice president, Private Wealth Advisor for Morgan Stanley here, like the rest of us, waiting to see what we will hear from our Freederal Reserve the sion in a two pm Wall Street time, and and how that will impact markets going forward,

and how investors should be allocating their capital. Katina deals with her Morgan Stanley clients, and I'm sure they have lots of questions, and so we appreciate getting some time from Katerina. We have read on the screen here not much to speak about SMP off about about three tenths of one percent. All right, we have a pretty great guest for you right now, Sam City, as president and

CEO of Customers Bank, and they've had a pretty good pandemic. Sam, looking at your your stock price, you've gone from twenty bucks basically a share at the end of beginning to sixty bucks a share basically now. And I see that some analysts are even raising your price target, uh tow to seventy five dollars web Bush, for example. We talked to Dan Ives from web Bush a lot um and b Riley has your price target raised to a hundred dollars, so expecting a lot from customers. Walk us through what

makes Customers different than other banks? Sure? Absolutely, Well, Matt and Paul, thanks so much for having me. It's a pleasure to be here. I really appreciate that that introduction. You know, Customers Bank entered the pandemic as a tech forward, organic grower, and I think that's really one of the big things that differentiates us. So in the banking industry, there's not so much to differentiate yourselves on and a reasonably commoditized business, so service and technology are big portions

of that. So we started off in the in in March and April of last year by being a big player in the Paycheck Protection Program and that really helped allow us to deliver three thousand plus loans ten billion dollars of PPP funds out. We also earned origination fee, which really allowed us to build some capital and support the future growth of the organization. So being that sort of tech forward organic grower um with a very strong digital focus as it is, is really what what Customers

Bank is today. Sam, what are your clients doing these days? They've just gone through you know, almost two years of unprecedented disruption to their businesses. Just give us an overall sense of how they're faring. Are they are they trying to come back, are they trying to invest in their business, are they trying to expand? Or are they still cautious? Absolutely so, I think that there's obviously been a little

bit of a change in stands. Will wait and see what happens with the Fed UH later today, UM, But earlier this year there was a strong sense of confidence emerging inflation. I think that that concern has turned into a little bit more of a little bit of a reality UM sitting where we are today, but overall, the

macroeconomics backdrop is strong. There are challenges with supply chain, there are challenges with concerns about labor UH and inflation, but generally UH, the the sentiment is still positive and I think that's the that's the importance. We've survived as an economy, the pandemic, and you know, while they're they're arguably could have been too much stimulus as leading to

potential non transitory inflation. I think at the end of the day, it's it's difficult to um to Monday morning quarterback with certainty I just want to paint a picture for for listeners of where you're coming from, because you have a pretty impressive resume. Undergrad at Wharton NBA. From Harvard, you worked at Providence Equity Partners as well as Goldman Sachs. You've done real estate focused private equity, You've done blockchain

based real payment services. UM, what do you think with all of this experience in finance and on Wall Street, what do you think of something like defy? M so uh. I like to firstly say, my resume makes me seem a lot stronger uh than I am, but note the less that's that's how my friend. That's very humble of you,

you know. But I think Defied is really a reaction to to where we are from number one, the emergence of blockchain, because that's really the ledger and the and the platform upon which and the infrastructure upon which these

decentralized finance concept is is going to be established. I think, you know, generally, as you think about if defy it is successful in the way that the folks that are that are um emerging as as important players and platforms from a decentralist finance perspective, Arguably, centralized finance kee structures methodologies would would change UM and you may see reversion back to a different way of doing business, to traditional

forms which are working extremely well. By the way, say that's that's why I asked, you know, yesterday I talked to Mike Novigrats. He's got a new office UM down by Goldman Sachs and he was most pumped about that. And it just makes me wonder, UM, what the future of Wall Street looks like? How do you see it?

You know? UM, At Customers Bank, we we like to think that this hybrid approach of human based experienced bankers plus technology and a commercial banking sense is the right is the right hybrid way to approach the market today. I think similarly, from an investment banking perspective, you're gonna see very similar trends. There's always going to need be a need for for customized advice, for specific advice, and

for bespoked UM type transactions and service in handholding. It. It's going to be difficult to completely UM, you know, change the way that that many businesses need to operate, given the fact that that that there's a lot of businesses that that have disparate needs and not everything is somotronized. Alright, never enough time, Sam, but always great talking to you. Thanks so much for joining us. Sam. To do there's president and CEO of Customers Bank. Check out the stock.

The ticker is CEU b I trades on the New York Stock Exchange. All right, it is FED day today. Um. The question is how our investors positioning their portfolios for what is likely to be a rising interest rate environment. Let's check out the Brian small Look, Chief investment Officer of hood River Capital Management. Brian, thanks so much for joining us once again. You guys at hood River, you

focus on small cap growth stocks. Give us a sense of how you think small caps are going to perform and what's going to be a different interest rate environment. So we're constructive on small caps from here, especially after after this ten percent pullback or so we've seen in small caps since oh Macron broke and talks of a FED taper of really heated up here. Valuations have pulled back pretty significantly to where now small cap trades at

an absolute pe discount on earnings versus the SMP. Usually it's at a premium. The market does have to thread the needle here over the next couple of months with rising rates and O Macron, which could kind of put a pause on recovery while rates are going up. But after that, we think that earning assessments need to move up and the economy will recover and you want to own stocks and small cat stocks will move up with

those earnings revision. Specifically a good river. We're looking for a dislocation in of the market fundamentals for that particular company, which is what the streets expecting, and we're optimists is gonna be able to find plenty of those opportunities in twent twenty two. So do you expect a big dip a correction? Is there is there an opportunity for investors to buy? So yeah, I mean, I think we're kind of looking at it here. There's going to be continued

choppinists over the next month or so. You'll probably see a spike in O Macron cases crowd crowding out Delta, but thus far the disease looks to be more mild than Delta. We're probably going to have a vaccine ready in the next days and people are gonna start to look through that. The FED doesn't have much room to raise race it looks like without invarying the curve, but the market is basically saying that it's transitory, and that's

how we're thinking about it. What are some of the sectors that you think investors should be looking at in their portfolios in two again, given what looks like to be a at least for some period of time at a rising interest rate environment, So we're overweight, and we've been overweight for the last nine months or so. Cyclical names, so that would include financials, industrials, consumer stocks, and then

also some semi stocks. Valuation is more important in a rising rate environments, particularly in small cup growth um so you want to own names that are cheaper on traditional valuation metrics like price to earnings. A lot of growth investors tend to look at enterprise value two revenues and and when you have to discount the terminal value out more,

that can make those stocks riskiers. That's why you've seen software names, for example, pull back a lot and biotech pull back a lot in this environment because in rising rates environments is tougher on those valuations. What do you expect to hear from Jerome Powell today? Do you think we'll get any surprises or does he telegraph everything pretty well? He tends to telegraph everything pretty well, and River were not exactly said watching experts were focusing on bombs up,

stock picking and s pundamentals there. But but my sense is that he's had to get track wickers there and they'll just announce an accelerated taper, which I think is what the markets expecting. Is there a risk in your mind as you listen to and read FED Chairman Pale's comments over the last several months, that perhaps he feels he's a little bit behind the curve and maybe needs to catch up and maybe maybe more aggressive than the

market's discounting. I think that's for sure a risk. He basically acknowledged the fact that he had to take the word transitory out of their vocabulary. And when you talk to companies, that's what we're doing every quarter. We're talking to foreign companies every quarter. They're seeing real inflation that they have to handle day to day, and there's no

guarantee that that is transitory. So it's not responsible for the FED to handle it that way, and they're gonna have to make some adjustments and see how see how it pleased, all right? Brian great having on the program. Thanks very much for joining us. Another Harvard NBA by the way, but I would say more importantly a University of Virginia undergrad. He's Oahu. But but he's also a fellow alum of Solomon Brothers like me. Wow. Yeah, the

solid team, all right? Excellent. Brian Smallock is the chief investment officer at hood River Capital Management, talking to us about the future of growth and markets. Enough of this tri state areas stuff out a little bit. Dan Gander joins us CEO of r n C Genter Capital Management to talk about his expectations for UM, the FED, the markets, and the economy. Dan, we had a very strong pp I number UM nine point six, nine point seven percent. I think after a huge CPI number six last week.

Is this gonna push Jerome Powell to be faster with his taper. Well, I think he's in a position that he just can't ignore it. I mean, they took an early position that inflation was going to be transitory. I think that they're frankly being honest that that's what they thought. They didn't really know how things were gonna flesh out now with the CPI number, as you mentioned at six,

eight with pp I at nine six. You know, we don't have the new PC number, which is one of the main things that they look at, the personal consumption at spendature index, but that was five percent in October. So we're no matter how you look at it, we're running double to triple really where they'd like to be at two to three percent. So I know, I don't know how you ignore it. I think it's it's a matter of what do you do about it? And the

you know, they're the tools are there. You know, you you finish out the taper even faster, obviously, start to raise FED funds, and we don't you know, certainly don't think along with everyone else that we're going to see an increase in rates at this meeting. But you know, you you look, you're putting some odds on the table. Now. You could see something as early as the first quarter of two or certainly by the second quarter, and up

until recently two was off the table. So things are changing, Dan, things are changing it. As you mentioned here, how do your clients, how are you positioning your portfolio for what's likely to be, you know, a rising interest rate environment for the foreseeable future. Well, I think on the equity market, there's really not much of a change when you when you look at it historically of what you're likely to

see out of this FED. I mean, when you look at it historically, typically when there's a major reversal policy, you normally see fifty basis points initially twenty and the same thing when they start lowering rates, it's very very similar. I don't think you're gonna see anything more aggressive here. As a matter of fact, you might even are much more likely. You're just gonna see a well telegraphed twenty five basis points increase, and they'll do that very steadily.

Now with that, if you look at it again historically from the standpoint of FED policy, is that pees generally don't change much. You know, what they were at six months before the FED started the rays and where they are six months after basically that twelve month window, pea stay about the same. So I think the equity market, you know, we're you know, it will certainly start to buy us more the value stocks. It's going to buy us more the sixical stocks. You know, we're we've already

begun tilting more in that direction. You know, the bond markets a different matter altogether. I mean, you're you're gonna have to be very active and what you're doing in the bond market, you know, as the as the youal curves already shifted. What do you expect in terms of hikes? I mean you said you don't expect this meeting. I don't think anyone does. But um, is the dot plot gonna show to this year? Is their possibility for a

hawk is surprise? Look, it's always there. And I think that the good thing about Jerome Powell's he's you know, it's not like dealing with green you know, green speak. I mean he telegraphs it right out in front. Everything's I think he's going to give the market a lot of indication, uh to some degree. Frankly, you know, the market may even breathe a sigh of relief when we have that, you know, because the market will take good

news bad news. It just doesn't like no news. And so this this unknown limbo right now is making people nervous. So you know, I doubt that we're gonna be see something that's going to surprise the market. But him well telegraphing in advance that they're going to start with the basis point to increase and FED funds, you know, I think is what we're going to see. So Dan, all right, that's the Fed. And again we're gonna get a lot

more information later on today. The other aspect there are One of the other aspects that the market tends to focus on is kind of what's coming out of Washington, d c Um. How important is that to you to this market or do you think the markets again is pricing in some kind of build back better But there's other things to focus on. Well, I think the market is definitely pricing it in and the build back better.

We're look, we're gonna have something now, whether it's a two trillion dollar number or a two trillion that really is four point two trillion when you take the time limits off. I mean, we're gonna have something that's going to come out of that. They're gonna make some kind of a deal. But but now, I don't think you're gonna see anything very radical, and the reason being is that the Democrats right now are in trouble. Look the

way the numbers stack up now is redistricting. They're gonna lose the House two and so you have a lot of people that are midstream that you know, they're they're just not going to go hardcore against radical democratic policy because they don't want to. They don't want to get washed out. So I'm not expecting anything dramatic. You know, we were probably the biggest thing the market will be concerned about, and that's waning is significant tax increases. But

I mean that that's frankly, it's really dropping off. You're just you know that that's going down to a whisper right now. So we don't think right now, barring something unforeseen, which can always happen, there's going to be a dramatic change of change in policy that will have a significant impact. All right, thanks very much for joining us. Dan, always great talking to you. Dan Genter there, who is the CEO as well as the c i O and the

chairman of R and C all management. I love. I mean a lot of people have a lot of titles, um and I always wonder what else, what else is he hiding? Exactly based in the based in Los Angeles, we get get getting away from the metro area. So I think it's great, by the way to have a diversity of views, because if you just stick in the Wall Street bubble or just in the Tri State area. If we include you know, Wall Street, Greenwich and Summit,

you don't get the viewpoint from the left. From the left coast, I'm not necessarily left, obviously, and it's key I think to get Thanks for listening to the Bloomberg Mark Gets podcast. You can subscribe and listen to interviews of Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller three and on Fall Sweeney I'm on Twitter at pt Sweeney. Before the podcast. You can always catch us worldwide at Bloomberg Radio.