Bloomberg Surveillance: The Back to Normal Year

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So my line would be, never get out of the boat, and it's never too late to get in the boat. We had a sluggish start to the year, which is great because we digested the move of the fourth quarter of twenty twenty three, and I think the market's telling you that we're normalizing or have a more normalized rate situation, normalized growth situation. You got to be in.

There's quiet skew, there's a quiet within the internal dynamics. But the bottom line is it's a wall of money looking for a warm spot.

Is that six trillion in money market fund? Six trillion?

People are saying, oh, never go to equities. I'm like, are you kidding me? Yeah? It is. In what way will it go to equities?

It'll go to equities in several ways. The first is that there was a rush to money market because of the banking crisis in March, and you had folks who stayed there because they could sleep at night and it was the easiest place to be. We've been telling our clients all last year, get out of cash. It's set

So alsha, if I do want to stay in that boat, if you will, do I try to chase those be kept tech stocks that work so well in twenty twenty three, or do I say miss that boat? Let me try to find some value in other sectors. What are some of the sectors you guys like?

So we have said for you know, I was here a month ago talking about about our outlook and I had this phrase, dance with the one that brought you, meaning everybody wants to go to small cap or to go or to go to international em And I say, you know what, that's probably a great trade and it'll work for three to six months, but ultimately, if you're building wealth, I want to be were Capital's street the best, and I want to be in the companies that throw off cash and don't need to borrow.

All first grade Insight of the Week Alicia Levine b n Y Melon. I'm going to talk my book, folks. I can't say enough how the similarity to twenty three is there. You gotta find cash flow quality, cash slow. However you determine that. To me, it's a triple leverage all cash flo something more optimistic for you.

So Alisha on the fixed income business, they actually are friends to fixing them. Actually made some returns last year after getting crushed, just crushed in twenty twenty two. What do you think about this year? We're going to go in the fix income space. I was shocked that last year the best performance was high yield.

That's right, and we had no recession.

Yes, I guess that's the point, but no real recession.

So look, we like the belly of the curve. We're not saying go out to tenure yet. We think that's just too long in duration. We like the five to seven year range for Gouviy's right here. We do like investment grade here, that's sort of a sweet spot. We don't expect a recession, and with that you're going to have, you know, a more normalized year of returns in these asset classes.

So, I mean, it's interesting. We've seen a lot of issuance this year. I mean, companies are coming to the market. So when you markets are open. Markets are open. So when the one of the first calls is to you guys at the Bank of a New York Mellon, I mean, what are you looking for in some of the new issue market here for your credit teams.

Look, we're looking for cash flow, We're looking for sustainability of business. We'd like to see the debt that's been termed out and not floating rate. I just think that's just a better setup. But we like the quality businesses and the fact that the market's open for issuance is really important because it's telling you investors know that the rate fear is over. Like it's done.

Let's go there. I mean, I mean, to me, the ft article over the weekend of the huge issuance coming into the market in the first two three weeks of the year is valid? Does that sustain to me? I look at these big tech companies and it's, you know, on a z V body Boston University basis, they're like breaking the rule book. I mean, they have to do debt issuance. Am I wrong?

The large companies don't have to do debt issuance. They could just you know, to keep themselves floating around. But I don't think it's a necessity. I think it's just an expression that nobody wants it an issue dead Last year the markets were so tight and getting while you can, and if you have the debt then of course you're going to have M and A and they're also going to have private equity deals finally getting monetized this year. So overall it's a very good setup for markets in

So are you you know I'm looking at the earnings for next year because I'm an old equity analyst, and I do look at earnings. I think earnings matter. I see twelve percent, eleven twelve percent earnings growth for twenty twenty four over twenty three. Does that seem like a reasonable number. Two, we're lower.

We're about eight to nine percent of earnings growth. And we've done that from bottoms up analysis with our equity team. We think that's a fair place to be. I'd rather come in estimating that than come in at twelve percent, which I think is a heavy lift. Right, it's a heavy lift. But look in the end, you know, large cab tech can pull it out. All I have to do is cut, cut some headcount and all of a sudden, earnings in the SMP is up ten to eleven percent.

Right, How the hedgephones do this year? I mean, I'm seeing bar charts that they had their most profitable year and all that. I don't buy a lot long short shorting year is brutal.

It's brutal, It's brutal. It's brutal last year because even like you probably had a great year on the short side the first ten months of the year, and then you got taken out the last two months, and that's your year, and everybody's judged every twelve months and you've got to repeat it January one. So I think it was a tough year on the short side.

Yeah, I mean they're going, you know, like twenty companies guests right on Macro or whatever. Great, but everybody else got hammered.

So when you talk to them, your clients here twenty twenty four, what did they say? Did they say, we kind of took too much performance into fourth quarter last year and so I need to be a little bit cautious in twenty four? Are you're trying to talk them off that sideline made?

So that's always a question, ok. And then we'll say that does either market timing is impossible. If you're fundamentally positive, you should get it. And that's the first question. The second one really is always about what's going on with our political situation and the election, and a lot of our clients are angst about that.

Okay, the clients do, but are you just quickly here, you really think politics plays into what I should be doing on a three and five year investment.

Call, No, thank you, and that's my message, just don't let your politics get in the way of investing.

Thank you so much with being Y Melton. I hope to see a lot of her in two thousand trying four.

All right, let's check in with our good friend Scott Crohner. He's over there at City formerly Smith Barney and I don't know where else he was, but he's been around doing this equity thing for a long time. He's out in San Francisco. Hey, Scott, thanks so much for joining us here. Boy, what a end to twenty twenty three, And I kind of felt like boy, So we spoke to a lot of investors that maybe that really rip warring ending to twenty twenty three, maybe that took some

So that's been our view.

So you know, we thought that to your point, that the rally into the end of the year was early stages of what we think will be a bigger broadening theme for twenty twenty four away from that megacap growth leadership that looked to be unfolding, and our view had been that the Q four earnings reporting period would be your premise for that, whereby you get companies beating Q four expectations but probably being a little bit more cautionary on their full twenty three Q four expectations, but more

Yeah, yeah, exactly right. And I'm wondering, you know, Scott, what are your tech guys saying over at City. I mean, how bullish are they on this AI thing? Is this really incremental? Can I really use this as an investment theme in twenty twenty four?

Well, and to your point, it's a really good question.

The way we're arguing it, it's consistent with what our analysts are saying is that it becomes more idiosyncratic. It's not a big seven or a magnificent seven this year as it was last year. I think you're going to see different components of that megacap growth cohort that's going to have a fundamental tail wind more directly or perhaps not.

So we think the point here is.

That that the twenty four setup for many of these companies is one where you're.

Getting the news flow.

You're going to need to see it translate into fundamentals to keep these stocks working.

What's interesting and Alicia Levine brought this up with bn y melon of an analog back in nineteen ninety five. It's got some of us of a certain vintage, I mean an old guy like you've seen it. Pall's too young to have seen it. But the answer is we partition into quarters, we partition into annual returns. And the reality is, you know, it's like longitude latitude on a map. They're just lines, they're just calendar dates. And the answers last year can extend into this year, can it?

Well? I mean yes to that point.

If you look at the two year return on the SMP, it's not very meaningful. And that's true for the Nasdaq as well. So when you go back and look at the way we've come out of the pandemic lockdowns, you know, we had the big risk on rally in twenty one twenty two, big valuation reset as we were contending with an hawkish FED, and then you know, twenty three was a combination of general of AI promise kicking in as well as more evidence that you're getting at a peaking FED.

Important point, I mean.

And so so I think it all kind of sets up pretty well constructively as we look into full year twenty four, perhaps beyond.

I mean, Lisa, to me, it's just really really crucial that people understand that we're not slaves to the calendar. And you know, you know, I look, Lisa, at the shock of November and December last year, Up up up, We continue up, up up, and everybody's sitting on the sidelines in cash. I mean, the Mateo families, they're they're charter members. When are you going to move out of cash, Lisa, never are you kidding me?

No?

Giving it on to the mattress. That's it.

I mean, the whole keep under the mattress thing. Paul's a scar of all this.

I know, and I think pandemic. It's it's one of the you know, the bullish calls out there for a lot of so Scott, you know, I know you guys you know speak of cash. I know you guys at City have been on the forefront of kind of ETF and ETF research here and just in the last few weeks we've had that Bitcoin ETF. When you're talking to your clients out there, well, where are we now and just thinking about ETFs as a as a real option.

Well, I mean, you know, we think there's a you know, an ongoing, brave new world that keeps unfolding via ETFs, and there's this sort of a new next big thing that keeps kicking in. Gone in the days where you're just simply passively, you know, replicating underlying indexes. And in are the days where almost all the new launches now have an active spind to them. So you're seeing many

So you know, we think this is a big deal.

But we think also what you have to keep in mind is that increasingly these are the tools that are being used for the model portfolios that more and more financial advisors are best in client assets.

Huge, too massive, right up. I'm going to give credit to the ft you can't remember exactly Blackrock with a massive restructuring going on there, mister Fink driving just what you heard from mister cron and it just I wonder, Paul, is a death of traditional mutual funds.

I tell you what.

Yeah, well, I just people want this people and Eric Belchunas you know, we try to get Belchunas into seven o'clock hour.

No, No, it's just too early.

He's coming up.

But I mean you even see mutual funds tom converting into ETFs. It's just really an extraordinary change. I know, the research folks at City have been all over this. So Scott's we step back here kind of what are some of the sectors that you guys and your team are focusing on here for twenty twenty four.

Okay, so we're playing this broadening theme.

The argument has been, you know, most of last year's returns was a function of this megacap growth cohort.

And the view is very simple. You can't continue to premise.

A broader higher market on just that you need a broadening effect aligned with this gradual pivot in the FED and what we think is happening with fundamentals from an earning's growth perspective, our view pretty simply has been that the broadening effect has to be a key driver of future upside. We began to see that in November and December, as you saw ten year nominals come off of that five percent level. We're taking a little bit of a step back to start this year, but we think that's

As ways of expressing this.

Goat thirty seconds. Scut Cronner, What do you do with healthcare? It was supposed to be the darling last year. It wasn't as an ugly beginning of the year of hospital non earnings, non cash flows. What do you do with healthcare?

You own it.

We upgraded from an underweight which we had all last year, to market weight recently. So the fundamentals aren't perfectly there yet to get us really excited. But I got to tell you, when you look at the earnings growth setup going into twenty four, healthcare is set up to have one of the more aggressive mean reversions to the positive this year, and so we want to have healthcare exposure, no question about it.

Scutt Croner, Thank you so much. With City Group, Jennifer Lee joins us. She's the beamon Capital Markets far more doing a holistic view on economics as well, Jennifer, what is your queue forour call? Mike McKee was fucking two wish? Can we do better than two wish?

Ooh, I'm sorry. First of all, good morning and thanks for having me on. Actually we're a little bit lower.

We're at one and a half ish for GP growth.

We're actually a little bit of an upgrade for we had previously thanks to that starting of that expected retail sales number. But overall we're still seeing growth, which is pretty incredible given that we've had over five hundred basis points of great tights over the past play years. So hey, this is a good news story.

I think in the.

Formula, what's the distinction between say two point two two point three percent and your one point five percent A cause an investment? Is it a net export dynamic? What's the variable that gets you to be more quiet?

I think it's going to be on the trade side as well, just like a little bit of a of a of a hit from net exports. Overall, Bucause investments has been a little bit lower, But I mean it's going to be all about the consumer, and that's obviously the biggest part of the US economy. So the US consumer has been driving all is momentum for now. How much they can continue doing that remains to be seen. But I mean, I feel like every quarter this year

And Paul, this is critical. Jennifer's nails in that it's a net export mystery. That's obviously a China mystery. Yeah, maybe a Germany flat in a back mystery. I'll let you decide. If it's an EV vehicle disaster mystery. I don't know, but she's dead on that we ignore NX on the back end of the equals.

I think so. And I think Jennifer, one of the things here that I think just kind of surprises a lot of observers, including myself, is the strength of the US consumer. Here. Give us your sense of kind of where the consumer is these days and kind of what are your expectations here for twenty twenty four.

So as long as the job market, i mean, Joe market is actually that it's all going to be going down with the job market and job in labor demand, you know, job growth has certainly cooled from you know, do you remember that one month which with over five hundred thousand jobs, which is obviously not sustainable. So we're going down to a slower pace of job growth, which is okay. We've got the job list rate still picking up at three point seven percent, I think is the

Another story again.

But you know, as long as they have something in the bank, something tucked away for a rainy day, I think it keeps them in a very good position, all.

Right, given that, I mean a solid backdrop for the US economy, not the same for China, and boy, if we were just flash you know, rewind a year ago, everybody's twenty twenty three outlook was kind of predicated upon a strong rebound in China and that did not take place. What's your read of what's going on there now and kind of how we should think about China over the next twelve eighteen months.

So a year ago, this is when they were first coming out of that lockdown, so it looked like they're like the savior to the world with that really strong and I can't remember what the number was, key one GDP growth figure, and of course everything fizzled even before the first quarter came to an end.

But it all boils down to, you know, a very weak property market.

You know, it's no longer we're not seeing that scene kind of housing demands. Everything was overbuilt, so that the property market itself accounts for the biggest part of the China's for Chinese consumers or households wealth.

So when you see your property.

Losing value quickly, you know it's it hits confidence, it hits Chinese consumer spending, and that of course will hit business's ability to raise prices. So you're seeing that deflation there. So that's what the hardest part, that's what they're trying to overcome. They're also have major labor issues. You know, it's they're not only losing in numbers, but in age as well, rising age. The everyone's getting older. We saw last week about how it was at The birth rate

Show is very disturbing, and this is really good analysis. Jennifer Lee. Then what is your run rate? Almost like potential GDP of China? Totally unfair question. Nobody has a clue, But are you going to frame out potential GDP that used to be seven eight nine percent is now below five percent?

So we've got the right question.

What we have the next couple of years, like this year and next year at about roughly four and a half percent. You know, whatever their growth target is, you know right now it's around five percent. You know that they met it last year. But you know, it looks like whatever the target is going to be, if they're going to have a target this year, is probably going to be below that, like I said, around four and

I read that somewhere.

You've got evs of course AI as well, and of the renewal of energies, energy sources. That that's what they're trying to build up. Small part of the overall Chinese economy, but that's what they're trying to you know, create and to and to rely more on. And plus is it's all also very much less labor intensive than what there's there their strong sectors were in the past.

So this is what they're trying to work on.

And then you know, at some point, you know there it's going to be you know, a big a bigger driver I think of the overall Chinese economy.

All right, So if China is sub five percent growth and we've got economic weakness in Europe, particularly in Germany, as Tom's mentioning here, it just makes the US look that much more, I don't know, unusually strong. I guess, how do you think about the US relative to other parts of the world. How unusual is that for the US to be such an I guess, an outlier if you will.

I don't know they'd bee hundred fully hundred percent unusual, But I mean, right now, it's it's certainly looking like it is the you know, the uh, the one big driver and the one big bright light in this whole in the world. I mean, everyone else is still growing, but it's just not as strong as the US dollar. And this is why I'm just going to switch this a little bit to on the currency front. This is you know, when we're trying to look at our currencies.

If the US.

Economy is slowing but still perceived to be a lot stronger than what we're seeing in Germany, for example, and in China, it's going to still keep them, you know, some strength behind the US dollar. It won't weaken as much as you know, as one would assume in a period of FED rate cuts, which we're looking forward to start in the second half of this year.

Jennifer Lee, thank you so much. In your free time at the Bank of Montreal, would you think some Montreal Canadians this is an important interview because there's a lot of people out there saying move away from the Magnificent seven, and one of the places to diversify into is mid caps and small caps. She's truly expertise on this with RBC Marcus Lori Calvacina owns a high ground as well. It's been a pretty good couple months from mid caps and small caps, Lorii, hasn't it?

It has? You know, we've gone from when I go into meetings, my salespeople sort of whispering, Hey, Lourie, this is a large cap person. Don't talk about small caps to literally every meeting in the first you know, five ten minutes doesn't matter if your large caps, small cap, growth value, hedge, fun long only everyone wants to talk about them. I got a little crowded.

Yeah, Are there a Magnificent seven in mid caps or dare I say small caps as well? Are there is like a focused overweight?

It's a great question. I would say quality is the thing that you always hear day in day out, year in year out, that small cap pms are never going to really gravitate away from, and so you do tend to see certain names at the top of the Russell two thousand get concentrated. That's something though, I mean, we've been seeing that for a decade or at least, and you know, we don't see it nearly to the same extent.

See but Laurie, I just don't buy the small cap thing. I've just been burned so many times. Investors have been burned so many times over the last twenty years. Here, how do you think about the small to mid cap universe these days?

So it is getting jerked around a lot more by ETFs and passive money than it has in the past. And so that's why I think that we are seeing very wild swings. And you know, we do see the hedge fund community in particular try to make trades. You often will see it when there's you know, sort of a domestic focus focus trade that they want to do. Trump's tax cuts back in twenty sixteen caught a lot of you know, small cap eyeballs. But I think what really did it this last time around was FED cuts.

So how about earnings. I'm an old equity analyst. Earnings still matter to me.

You know.

We still have SMP looking about I don't know, eleven twelve percent earnings growth in twenty twenty four. How do you feel about that? What's your comfort level?

So with when we're looking at the large caps space, specifically, we're looking for something more like four to five percent earnings growth this year, and that's not to say that I think the year is going to be a disaster. We still have fifty one to fifty target on the SMP.

They do on a nominal GDP basis? Do they outperform or is the big companies so growthy they actually get a better revenue pup.

So, you know, it's interesting. I haven't looked at the revenues too closely. I do think that large those you know, kind of bigger cap companies, they have much bigger cash piles, so I'm guessing that there's you know, sort of more buffer from that in terms of interest income. They've also just had much cleaner balance sheees in general, so there's

So when you do go out on the road, lord and you talk to institutional investor clients, here, are you getting the sense that maybe they felt like they missed out on that big move at the end of the year and so they're playing ketchup here or are they trying to find some value where we are they looking these days?

So you know, I think that if you look at the top seven versus the rest of the market, I think there were two camps last year really around mid year. There were people who were big believers in AI, big believers in these companies, and nothing you could say was going to change their minds. And then there was sort of the rest of the market who hadn't gone as all in and they were skeptics, and that skepticism hasn't

Laurie, can you explain to our audience what it means to live on the lawn at the University of Virginia.

It means that you It means that your classmates see you at your bathrobe and random times of day. It's basically when I was there, it was it was the university's highest honor. I want to say there were maybe fifty some out of us you who got chosen every year because of extracurriculars, service to the university and academics to live there. And it was a committee of peers that would select you and it was really just your overall contribution to the university that you got recognized for.

Absolutely amazing, Absolutely thanks for asking them if Paul, it's great as I was given a speech at Darden and you know, you gotta walk over there. It's like a movie set.

Yeah, I know.

And I walked by Glorie's dorm, you know, her halts these little idioty doors right in the grass. There's two cases of corus light. Yeah, Laurie was killing it. Lauren Kelvisina the University of Virginia. Also with the acquaintance with RBC. This is the Bloomberg Surveillance podcast, bringing you the best in economics, finance, investment, and international relations. You can also