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Alex st alongside Paul Sweeney. This is a Bloomberg Intelligence Radio. We are broadcasting to you live my interactive broker studio right here in Midtown Manhattan, Manhattan. Camon Christ Macroman writes at Bloomberg like, if the economy is slowing down, someone may want to tell the consumer, because really retail sales didn't point to that, So I thought that was quite a good point, and you look at equities just flying higher.
Here joining us now is Mariy Shore, Senior Equity Analystic Columbia, Thread Needle Investments. Marie, what good news good news for stocks? Is that a fair statement? We get good news by the equity market.
Absolutely, yes. I think the results today show us that the consumer is more stable versus what was feared. We had heard more throughout the month of July that there was a slow down happening, but in my view, the consumer backdrop remained stable, and the different results that we see between different retailers just shows you know who's gaining
share and who's losing share. But when I looked at the trends today, I think although the high level retail sales number was better than feared, I would say when you dig a little deeper, the trends are still mixed. On the one hand, we see the consumer still choiceful in their spend, spending more on services over goods and needs over ONTs. At the same time, within discretionary we do see some signs of life in categories like apparel
and even electronics. So still a very mixed print, but certainly better than feared.
Back to school holidays.
What are some of the retailers telling me about some of the big events coming up here for the retail sales number?
These events are very important because, as we've heard from every retailer for years now, the consumer is shopping very close to need.
So you know the.
Tone from Walmart in terms of the trends they saw ending the quarter and in August today, we're very positive again they've seen very consistent results. I think the consumer will show up for back to school in the same way that they showed up for holiday, and again I think we're seeing that in some of the data today with the strength and electronics and even in apparel where there are some new trends that are resonating now.
So in the equity market, then, is it difficult to pick the winners and losers? Because it does feel like it's hard to get a broad back or read like the data slowing. We know that check, check that Bucks, but in terms of what they're buying, I would have thought the tapestry would have struggled, right, I would say, Okay, at some point the coach passing on price increases was going to max out consumers. It doesn't look like that's actually happening. How hard is it to do your job?
It has become more challenging, especially because the markets are so volatile right and head funds and macro funds are just having such a large impact in how the stocks are trading. But we are seeing a very clear difference between shared gainers and losers at this point, and so what we're really trying to do is focus on the companies that are gaining share where we see the potential for positives positive earnings revisions.
The problem is a lot of those stocks.
Are screening is pretty expensive, you know, names like Walmart and Costco. On the other hand, there are names where even with more modest revenue growth assumptions, there is a real margin in free cash flow growth story there. So that is like the other group of stocks that we
are trying to focus on. But to your point, it's very hard to listen to what one company is saying and extrapolate that because it really feels like within a kind of lackluster consumer or retail backdrop, there are still some companies like Walmart is a perfect example, that are able to do very well right now, Hey.
Mari, what kind of deals can I get if I go shopping at there? How promotional are retailers out there?
You as for me?
So sweet?
Yeah?
I think we talked about this last time. So since the holiday season of twenty three, the retailers inventory levels have been much better positioned, not perfect, but much better positioned. So while the retailers remain aggressive on promotions to drive traffic, you're not going to see the crazy promotions that they had to run when they were heavy on inventory. And we should also see fewer markdowns, which will be very
good for margin. But at the same time, everyone recognizes that the consumer is stretched, and I know both like the consumer staples companies and a lot of the retailers and brands are talking about needing to promote to drive volume and traffic.
I was reading an article the other day that retailers are already buying their inventory for the holiday, which totally makes sense. I mean, a lot of cargoes were coming into ports, etc. How confident do you think retailers are in their inventory build up for the holiday?
They seem pretty confident.
You know.
What we've seen on the freight side is a recent rise in ocean freight rate, So that's something we've been talking to the retailers about. Right now, a lot of them are locked into their contract rates, so it doesn't sound like that as a near term risk to margin, but definitely something we have to monitor for next year.
There's also been some disruption in the Red Sea.
We've heard about recent protests in Bangladesh, which could impact companies that are sourcing from there, But so far, in our conversations with retailers, it doesn't really feel like any of those things are going to result in any real near term disruption to the business, and it sounds like, you know, the outlook for a holiday in terms of getting the inventory that they want and need is pretty consistent and stable.
And Mari, when I was looking at the Walmart numbers again, what jumps out of me is it does so many quarters? Is there e commerce up twenty two percent? Yes, boy, they've They're right there with Walmart, aren't they. They don't take it, I mean from with the Amazon. They don't take a step back from Amazon at all, do they?
Right?
No, absolutely not.
I mean, remember, Amazon is still clearly the dominant player in this category. I mean, overall e commerce is about thirty percent of total retail sales, and Amazon is almost half of that. So Amazon is obviously operating off a much larger base. Having said that, Walmart is now growing faster than Amazon. I think the only other company I follow that is growing at a similar rate is actually Costo.
And I think what's happening specifically in the case of Walmart is a lot of their new initiatives, building out their marketplace, building out fulfillment, building out their membership model,
building out advertising. All of those initiatives are finally coming together and really driving their e commerce business and So the thing that's so impressive about Walmart as we look at their results is it is very clear that they are gaining share across channel, across category, across income demographic, and that broad based strength I think will drive strengthen their results for the foreseeable future.
All right, make we appreciate that. Thank you so much. Mario Shore, Senior equity analyst over at Columbia Thread Needle Investments, joining us from Boston, Massachusetts. And again, now I'm addicted to this altd go scream and I'm looking at sort of the estimated sales we're looking at here, and they're still beating competitors.
I know.
Anyway, altd Go really cool function on the termin You should definitely check it out.
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Let's get back to the story of the retail. Is today's the story about the consumer. We had retail sales coming a little bit better than expected. We had Walmart reports some numbers at the street like this SoC is up. So Jen Bartasha's storyin so she's bloomerg Intelligence retail analyst covering all the retail space, including Walmart. Hey, Jen, what did you take away from these Walmart numbers? The streets certainly like them?
Yeah, Actually, Walmart had a great quarter. I think most people expected it because they do tend to do well when the consumer's under stress. But some of the things that were interesting takeaways were things like the amount of generative AI that they're using in their business to close the competitive gap to peers like Amazon, especially in e commerce, the idea that their growth is being led by volume, which is a very different story than we're hearing from
most retailers. And finally, one of the other remarkable things is that they sort of issued a little bit of a warning shot to package food companies about still wanting to try to pass through price increases and that Walmart is really focused on bringing prices down instead.
So does that bode well? So here's what I'm trying to understand what the volume side. Does this mean that this is good news for like a costco or Target? Or is Walmart taking share from the likes of Target.
Well, I would say I would argue that Walmart is probably taking some share and that they're translated that into volume gains because they're very focused on offering value, whether it's from a price perspective or from a convenience perspective, and that seems to really be resonating with consumers. Right now.
Are people coming down who maybe we're not Walmart shoppers, but now they're coming to Walmart. Is Walmart seeing that they are.
They talked last quarter about bringing in hiringcome households, and that trend seems to be continuing. You know, in the last year and a half or so, Walmart has invested in improving and renovating their stores, which is particularly important for hiringcome households, because when you walk into a store and it's kind of dingy or grungy, it doesn't make for the best shopping experience. And so part of that investment is resonating with those hiring consumers. But also people
are becoming more practical about where they're seeking value. And I think I've used this example before, but if you can buy a box of cereal, which is a standard box for you know, fifteen or twenty percent less at Walmart than you can at your grocery store. Even that speaks to hiringcome households that are looking to save a little bit here and there as well.
Also just in comparison of just how expensive regular and grocery stores have gotten to just in terms of that. Also, what about their e commerce because basically another perk for Walmart is there just basically like a giant warehouse.
Also, yeah, I mean their e commerce operations are continuing to grow. I think one of the things that that investors are finding very encouraging is that the losses associated with e commerce aren't narrowing. Originally, Walmart said that they actually thought that it would generally be profitable in the
next year to year and a half. Now today Doug McMillan kind of backed off and said, you know, don't focus so much on just one metric, but that those losses are easing and that really is a good indicator for Walmart as well with regards to its overall profit profile and where it's developing as a company.
We're it just wrote thirty seconds, where does growth come from Walmart? Is it just a GDP top line story?
It is in part Paul. But at the same time, they really are pulling more people into it. They're kind of with their their overall ecosphere, and so it's also through variety. So it's not just the store, it's you know, an increasing marketplace where they're becoming more competitive with the likes of Amazon. But it's also things like financial services or vet services or things that they're exploring that help bring people in for more than just shopping.
All right, that's I tell everybody My next gig is I'm going to be a greeter at Walmart. I'm not kidding. Jen Bartash, just thanks so much for joining.
That would be entertaining or weird.
That would be you would loved and you walked in to see me. Wouldn't that be great?
I don't know how people were dressing walking into the I'm really trying to absorb what this would look like.
I We're gonna have more coming up. That was Jen Bartash's given us the latest on Walmart.
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Alex Steel here alongside Paul Sweeney. This is Bloomberg Intelligence Radio, where you bring you all the top news in business and economics and finance through our lens of our Bloomberg Intelligence folks, because they cover two thousand companies and one hundred and thirty industries worldwide. So back to that retail sales data. Good news, good news. I guess you look at the two year though bonds yields are up by about twelve basis points, which is a head scratcher for
me because the news is good. So good news is good news. That's at least what the equity market is saying. But then the bond market, what is that telling me? Luckily, we're going to talk to Vanir buan Shalli. He's founder and chief investment officer of long Tail Alpha. Hey, Vanier, are we looking at the bond and equity market telling us the same thing about retail sales right now?
I think they're slightly different. I think this has been a problem, not just this year, but for a couple of years now. I think the equity markets are being driven by a lot of cources externals, buybacks from large corporations retail buying a lot of stock. The bond market is not that convinced. I think the inverted youth curves, certainly we can talk about it, is telling you a
very different story. I think long term meals are too low here, which is part of the reason why retail sales and the economy is strong and keeps getting stronger.
What do you make of a week ago Friday that was a real shock to the marketplace and we see it saw dislocations. I mean, we had the VIX, which is now below fifteen was above sixty five. What do you make of that training activity we saw a week ago Friday even here?
Yeah, so you know I wrote about this last week. What we've observed over the last few years is that the intensity at which markets are selling off and the big spikes is getting bigger and bigger. It happens over a very short period of time. And you know, going back town two thousand and eight, where he used to take a months and quarters, now it's just taking weeks and days and maybe hours. And last Monday was again you couldn't have done anything except if you did something
in the pre market. You know, Nick was down twelve percent we were up that night all night, and you know, again it was just an air gap. There was absolutely no liquidity. And I think that's just one of those warning shots that tells you how lever the system is and how ill liquid the system is. And I don't think that was the end of it. I think even today, the massive valley we're seeing is happening on extremely in ill liquid conditions.
I thought positioning, though, if we just stick with the mom market Verzayonna, I thought positioning was all cleaned out now that after the turmoil last couple of weeks, now you have a cleaner read. Is that not the case?
I don't think so. I think what happened was people try to get out. I mean it's like a very big elephant trying to get through, you know, the eye of a needle. I think some people got out, maybe in Tannic on Monday and Tuesday, and then a lot of systematic strategies started to reverse as BIS dropped, Like Paul just mentioned, from sixty five pre market to about you know twenty, many systematic strategies that are index to the volatility market have to re lever, and I think
that's what you're seeing today. Very ill liquid billions and billions coming back into the market, and there's really very little liquidity for them to buy the risk assets back.
Vinyar, What do you think our Federal Reserve is going to do next month?
Well, I think they have to ease now that they've conditioned the market, they have to ease, and I think, you know, that could be a twenty five. I don't think they're going to do fifty will be too aggressive. My senses, they're going to do a hawkish ease. They'll do twenty five, and like the ECB, they'll say we'll wait and see what happens, which is exactly what they should do at this stage. And I think, you know, that could set the stage for the next round of
the carry trade unwined. I mean, it's trillions out there, trillions that have been accumulated over yeah, I don't know, two decades or so. Because US rates going down, Japanese rates going up compresses the yield spread, meaning a stronger again, which could generate the next round.
So you think that we'll see a hawkish ease in September. But a hawk ish use doesn't seem to me. A carry trade unwined, it would be more than more dubish they are.
No, yeah, possibly, it depends on again the carry trade online.
Right.
The currency markets is driven by the short trade differential. Right, So US rates come down twenty five basis points unless the Japan has to raise another twenty five basis spin that fifty basis points have a very significant magnifier effect on things like the cost of carry and so on, And I think that's what's going to drive things in
the short run. So when I say hawkish ease, I mean they're going to ease, but then they're going to try to manage expectations for rates, call it two years out or five years out, that this is not the beginning of ten ease cycle, which is typically what you know, what happened, and most of the markets are going to try to build in right away.
If you're in a fixed income space, where do you see value here? Do you should I just stick with my two year treasury north of four percent?
Here?
Should I take some credit risk?
No?
I like the two year note. I think, Paul, the two year note and T bills. You know, just a month ago the auction cleared at close to five percent. So I think if you can get a four percent yield on two year notes or five five uarter percent on T bills without taking any risk, duration risk or credit risk. I think that's a great place to be. And I'm talking about credit. Yes, it could tighten, but I mean it's trading at basically all time tights right now.
I mean investment great credit and highield credit. You really have to bet that there is nothing on the horizon that could upset the Apple card and I believe there's a lot out there, so you have to be careful right now.
Well, yeah, that was an interesting That's an interesting point because when we saw the VIC spike, we didn't see the blowout and credit spreads in a way that one might have thought. Why do you think that was?
Yeah, I think the market was waiting, right. So we were here early in the morning, you know, and we were watching the VIX at sixty five and the futures. The VIX future is only getting up to about thirty something, and the credit market waits and sees right because the credit you can think of it as a long term put on the equity market, and the fact that the vics came down was a breath of relief or the
credit markets. President did white out, and CD Express did widen out about fifty seven or actually mid sixties from fifty to fifty three the week prior. But then as the VIX came down, people basically said, Okay, this vigpike is not translating into long term equity volatility rise because the VIC curve was inverted and so on, and credit markets watched that pretty carefully, and basically that was the reason for the credit markets to kind of settle down again.
If you believe like I do, that that was only the first round, I do think you have to be careful because the next time around, if there's a big shock to the system, great spreads could widen then stay wide, not even widen more.
Finear, how do you guys? Do you guys have exposure to alternative investments? Is that part of your outlook?
So we're direct investors in the market, so we don't allocate to other funds. Obviously we're creating, you know, all the futures and options and so on for our investors. But yes, we are looking at all the alternatives as signals on what might be happening. So you have to be pretty hooked onto what everybody else is doing.
In today's market, What do you think is going to be the trade around the elections? Like, I get the FED, we got to get through that, right, But there's got to be some political and geopolitical risk hedging that we're going to see crop up. How do you think about that, particularly when it doesn't really matter who's going to be in the White House in that it feels like deficits are just gonna be blown out no matter what.
Yeah, I think the a lot of it is priced in right. A couple of months ago when I was talking with someone the colleagues at Boomberg, you know, my view was that, you know, mister Trump was probably going to win, was pretty much baked in, and then you know,
with everything that's transpired, it's very close raiseds. We know, And one of the big shocks from the twenty sixteen elections was that a the market got who was going to win wrong until the Florida returns were coming in and then second conditional on who won, the direction of the market got completely wrong. You know, it sold off limit down and then limit up. And I think that's the possibility here. So the elections could be extremely volatile.
One is we don't really know who's going to win, and secondly, we don't know conditional on who wins what the market does. And I think that's the surprise that you've got to be prepared for. And given that, we believe there's a very good opportunity generally to be long volatility, right because volatility vixes back to below sixteen fifteen almost it's a great time to bet on the unpriced event possibility of something that market is not discounting actually happening.
You know, one of them could be Kamala Harris wins and instead of the market selling, oh, there's a massive upside rally in the market because that's really not a priced outcome in the market today.
All right, Vaniir, we really appreciate, thank you so much. Really great to get that perspective, very helpful of Viner buon Shali. He's joining us, founder and chief investment officer of long Tail Alpha. Don't you kind of wish if you're a market participant, you could like put in a position and then like go away for eight months and then come back and see if it made money.
What's called it?
You know, you know, again investing in the S and P five hundred that's why you see those index ETFs. True, we're just getting so much fun flows in there because a lot of people are saying, you know, for most of folks out there, just buy an ETF that mimix the market and just go away. I mean, from a cost perspective and a return perspective, probably a good strategy.
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Let's go to Deer So I mentioned it. It's up over six percent. It wound up cutting costs, but its earning is also kind of less bad than feared. My question though, always if you have corn like at four dollars a bushel or under which, because conditions are so good for corn right now, that's gonna be really tough for farmers, and then how do they go buy all the fancy equipment And.
You're right, you're right, I didn't look at corn bushel.
Yeah, And there was a great piece I forget where I read it that talked about how it's actually technology and innovation that's allowing American farmers to do so well as in have so much crops, but then that hurts on the price side. Very cyclical industry there. So Christopher Chelino is Bloomberg Intelligence Senior US Machinery analyst, and he joins us, now give us your take on deer.
Earnings, Alex. I mean, the results really weren't as bad as many had feared going into the quarter, both from a top line perspective, margins, earnings all kind of better than what we had to expected in what is a pretty challenging environment given the commodity price backdrop. I think one thing to take away from the quarter is that,
you know, pricing really continues to be remarkably resilient. We actually saw pricing accelerate here in the quarter in their agg businesses, and then really they kept their twenty twenty four guidance unchanged for the most part. After all, their
peers cut during the quarter. So while we're not quite out of the woods yet and there's certainly more headwinds from a demand perspective moving into twenty twenty five, I think this probably just you know, alleviates some of the concerns over a more severe down term in the near term.
You know, growing up in my lawnmowing days, I always wanted a deer tractor, but my dad would never go for it. So I had to push mow our lot which is a little over an acre, I mean something that was a lot, and I'm like, for three bucks by the way, and I'm like, can you kick in for a deer tractor? No, what's the thing now? I got the vestmuscooter, so that's one of the is off my bucket list, but not the deer tracktro I'm still working on.
I feel like, what would you do with that?
Exactly? I have met it drive around town. So talk to US Chris about what deer's saying about the the US farmer, because it just feels like that's a deer is a real proxy for the US farmer.
Yeah, and certainly nothing runs like a deer, Paul. Yeah, the backdrop isn't really favorable for the farmer, at least for the balance of this year and probably into next year. You know, Commodity prices continue to be under significant pressure. If you look at corn, soy wheat all down, you know, fifteen twenty five percent plus year to date, farming come is going to be down north of twenty five percent this year. New and used inventories are still quite elevated.
We don't have these big pricing tailwinds that we had over the last three years, so it's certainly a challenging market, and input costs are relatively elevated, so farmer incomes are going to be under pressure. Really, the focus with Deer and really all oeams now is really to try to
kind of right size the inventory in the channel. Inventories are too high, so there's gonna be a lot of focus in on underproducing retail demand for the balance of this year with the hopes of producing in line with retail demand and then you know where the retail environment shakes out for next year. It's still a little bit up in the air, but certainly from a commodity price perspective and a farm fundamental perspective, certainly no signs of a bottom yet.
Well also I should point out too, and we say like less bad than feared, like North American sales we're still down about or lower by fifteen percent, and revenue in South America down by fifteen to twenty percent. Do we feel like this is definitely the trough though.
Yeah, I think it's it's a story of the nicest house on a bad block, right. I mean, it's still a pretty difficult environment and it's still pretty fluid. I don't have a ton of sense if we have really good visibility on a trough yet. I think that's what investors are, you know, starting to co lesson around twenty twenty five will be a trough earnings year, but it's still kind of a little too early, I think to
draw any conclusions. I think we'll have a better idea probably at the end of next quarter and how we exit the year in terms of an inventory perspective, And if they're able to kind of get through those inventory cuts and we're kind of more aligned with the demand environment, then I think it's even possible to see earnings growth and margin expansion even if we're looking at a lower or slightly lower retail environment.
Chris we heard from I guess Home Depot says some of their customers were deferring big projects waiting for interest rates to decline, and as Deer said, anything about that, like, if I'm a farmer, do I say, man I'm need the tractor this year. Maybe I'll wait next year when maybe my financing rate will be a little bit lower.
You know, the large ag, the large professional farmer a little less sensitive to the interest rate narrative. It certainly has more of an impact on their molag and turf business and utility customers. They are much more interest rates sensitive. But that market has now been weak for multiple years, so I think we're at a trough or coming into a trough on that market. And then I think, you know, some new information that we got this quarter is that
particularly on the construction side of the business. Now they took down some of their numbers for the year, and actually construction was one of the disappointments in the quarter as some of the rental fleets and construction equipment customers slowed some of their order velocity and they pulled back on some of their capital spending. So and the higher rates were a contributing factor to that. So I think that's where you're seeing more of the impact less so on the large professional farmer.
You know, I hired out of Global data at Bloomberg Intelligence twelve thirteen years ago. I didn't know anything. Now he's a rock Star, and he talks to people all over the globe, talks to these companies. He knows what he's talking about. Christ Gielino, one of the good ones in Bloomerg Intelligence, covered some of those industrials off along with Karen Ubelheart talking about deer some better than expected earnings.
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Dalex Steel, Paul Sweeney live here in our Bloomberg Interactive Broker Studio, streaming live on YouTube as wells ahead over there and just check out Bloomberg Podcast, and that's where you find is here. You know, thinking about where we were a week ago Monday, the Vicks over sixty, big sell off in the markets, it's almost like, please look at the markets today. It's almost like it never happened. Our earnings. That good is economic data? That good. Let's
chicken with a professional. David Kodlak, Founder, Chief executive Officer and chief investment strategist. He kind of does everything there at Mainstay Capital. He joins us from Troy, Michigan via zoom. David, what do you make of a week ago Friday, what we saw, particularly in the morning, to what we've seen since then?
Right? Yeah, so we you know, we had that growth scare because of an ism and poor ism and a non farm payrolls number two weeks ago, and that was aggravated by.
The yen carry trade issue. With a week ago.
With job as claims, we got a little bit of help there, and of course the data today with retail sales, jobs claims a little better than expected. But I think look at the data yesterday or let's say Tuesday through today. Tuesday we had PPI coming in well below expectations. Yesterday we had CPI coming in slightly below expectations, Headline inflation is below three percent for the first time in a
long while. And now today we have retail sales kind of blowout number when we're expecting four tenths and get one percent, which says the consumer is still strong. You know, if I'm going to loosely borrow a Mark Twain quote, reports of the consumer's demise have been greatly exaggerated. We need the consumer to stay strong. It's two thirds of our economy. They were certainly strong last month.
So look what we have. We have growth with lowering inflation.
I don't want to overstate it that it's a Goldilock's economy because we do have a real fear of recession.
We need the FED to get started on.
Their easing cycle and I think it'll be twenty five basis points at not fifty in September that many are predicting. But they need to get going and they have the room to do it. We're on a good glide path on inflation. And you know, when we have growth with inflation inflation slowing.
That's a pretty good scenario for the economy.
Why are rates up then right now? In that scenario just lined up?
Yeah, Well, rates are up today because the retail sales number came in so strong, right, more than double expectations, and you know kind of you know the growth scare of two weeks ago.
It's it's really been a significant change, you.
Know, the Harrison that Paul was talking about from two weeks ago to so alex we've really seen you know, a terrific number that tells us the consumer is still out there buying, and that's all important, right for the US economy, The consumer is all important. It's two thirds of consumers, two thirds of our economy, and that was a very reassuring data point. But it means the economy is a little bit stronger than we thought. Bond yields go up five or seven or nine basis points.
So what type of stocks, what type of sectors work in an environment David, where you know the economy is hanging in there, maybe slow, but hanging in there, but we now have the prospect for lower rates. What kind of sectors screen well for you guys.
Yeah, So, first of all, you know, we we liked the secular growth stories like megacap tech for a long time, and we still believe in the AI plays, but now we can look at cyclical plays. Take financials you know that have struggled so much.
Over the past years.
Now, you know, we actually had the yield curve uninvert briefly last week. We're but we're certainly seeing a steepening of the curve, and as the FED starts to cut rates, we'll see that steepening of the curve, which will be good for financial is because nim nedis interest margin improof, so we like financials or an extending bond duration. We had for a over a year and probably fifteen months had been an ultra short term bonds because we just wanted to capture the yield and we didn't want the.
Interestraight rest and that was a good play.
But now it's time to be extending duration because we know the FED is going to be cutting. Forecasts are still about one hundred basis points by the end of the year. That's you know, with that easing in place, that means we want to lock in rates and extended duration, and we also are broadening. It gives us an opportunity to broaden portfolios into small caps, value cyclicals, mid caps, you know, areas that we had been mostly vuoid in favor of large cap and large cab megatach.
But what about the idea that with small caps the pe ratio, so the P part wound up rerating enough that okay, maybe you want to buy it, but maybe that thesis is out the door of it because small caps did have a run before the growth scare, but that the E part isn't really holding up. That's what I hear a lot about the small caps and these airs.
Yeah, forty two percent of the small cap stocks in the Russell two thousand aren't profitable. You know, it's it's a struggle.
You know, if a small cap stock does well, it grows into the MidCap region, it leaves the Russell two thousand. So what Here's what needs to happen for small caps, is we really ne what's coming. The rate cuts that are coming avoid a recession. And the PE multiple of small caps is so attractive compared to large caps at this point. You know, we were hitting earlier in the year historical highs multi year delta of PE of large
caps versus versus small caps. So the attractiveness is there, but we need the right kind of environment data like today. We've seen what the Russell two thousand did today in early training, up over two percent. And if we get the rate cuts, the economy can can be slowing a bit.
But no recession. That's a that's a good environment for small caps, for value, for cyclicals.
Do you think the FED is going to go twenty five or fifty basis points? And do you even care?
The first of all, that's you know, that's a good way, that's a good way to ask that question do we even care? The most important thing is is they get started. The first cut means they switched from a neutral stance to an easing bias, right from neutral to easing. So the first cut is symbolic in that regard if we I think.
That they will go twenty five basis points, because.
If they go fifty, and I know what the case is for that, for the case that others are making.
But then it raises a question, are they are they doing fifty because they're behind. I mean, they've still got November de Son, They've still.
Got more meetings to achieve seventy five hundred basis points by the end of the year, maybe even do a half cut later. I just wouldn't start there again for symbolic reason. So I think they do twenty five. But you know the part about do we even care? The main point is is they get started. Let's get let's get going, fad, Let's get the first cut in there and established where you have changed your bias to an easing cycle.
But to that point, you know something that I feel like is becoming more of the conversation. I think it was Bostic that mentioned this when he was speaking to the ft is that you had a delayed reaction and transmission mechanism of policy on the way up with rate, So why not expect that then on the way down, which implies that we do need to see sort of a little faster, more aggressive cut so it filters through the economy a little faster. What do you think about that part?
I think that's actually it's absolutely right.
I mean, when we talk about FED policy and the mistakes they've made, they made the mistake of twenty twenty one of staying easy for too long, continuing to buy mortgage backed securities, making mortgages so attractive people saw their house price one and a half times are double in a couple of years, and they created they helped create the problem of inflation with the first policy here by
staying easy for too long. And they probably are going and when we look back, they probably will have stayed tight for too long. Five and a quarter is a restrictive policy. See inflation is on a glide path to their target. It's time to get on with cutting rates. Probably should have.
Cut twenty five in hindsight, you know.
They probably should have cut twenty five in July and then they'd be ready for another twenty five in September. And that's what might beg the question they need to do fifty to get caught up. But yeah, our concern is they made the same mistake on easing as they did as they did on or easing now as they did on. They were easy for too long, went way up to it, you know, drove it up to illustracted policy, and now they got to get on with it, all right.
David, thank you so much for joining us. Always appreciate getting your views. David Coodley's a founder of mainstay at Capital Management, joining us from Tory, Michigan via zoom.
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