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Terminal and the Bloomberg Business App. Mike Wilson and Morgan Stanley joins us ahead of the most important earnings print in the years.
I'm not sure, Mike, if you'd agree with that.
I will ask you this though, What is more important, Mike to you this interest from Chairman Powell a little bit later this morning, or that payrolls print on September sixth?
Yeah, good morning, John. I think in my mind it's about the payroll number. It's really about the labor data period. That's what's going to take tape, what the Fed does, They've said that, and that's what the market's going to trade off of.
I mean, if you go back a month ago.
That's when we had this correction, and it really did kick off with a weaker non farm payroll number. Now that has been somewhat refuted by better claims and also just you know the deal that the jobs are okay still, but then we got the revision. So the data is still very mixed in my view, and the market under the surface, as we like to look at it is
still trading very defensively. It doesn't know, So I think it comes down to that payroll number, the federal reacts, and we'll see and we'll see how the market goes. I mean, my general view is if they cut twenty five, that's probably fine. If they cut fifty, historically that has been a bad signal for the equity markets.
Mike, you say the markets traded pretty defensively. I want to pick up on that and just build on a little bit. In some places we start to see that breadth improve against small caps of studes perform. We've seen the record highst on an equal weight through this week so far.
Mike. Do you think we're just.
As vulnerable as we were at the start of the month to week data or if we reset things differently this time around.
I think we're more vulnerable to another negative data point on the labor market. That was sort of a warning sign, and once again we don't know the result. But if we get a negative payroll number, I think the market could react just as bad at the index level.
So let's talk about that under the surface.
I mean you mentioned small caps have done better where they did better in July when the money rotated away from the Magnificent seven and some of the quality growth leaders, and it went into defensives quite frankly, so defensives of now. And when I say defensives, I mean utilities, healthcare, stables in real estate. Those four sectors have led on a five day basis, on a one month basis, and a
three month basis, So it's been very consistent. And that's about the time we pivoted back in May to a more defensive book and I don't really see any reason to kind of deviate from that.
Now.
If we get a very strong payroll number, then that it's going to reverse sharply back to the more cyclical parts of the market. I think it's going to be very messy. I don't anticipate the labor data to improve dramatically. I don't know if it's going to deteriorate further, but given the signal from the stock market and the bond market, quite frankly, the markets are definitely paying attention to this.
And this is a big number, Mike.
If I can ask what probability of a recession do you think the equity market's essentially pricing and you can look at breadth there or you can look at aggregate. And the other question was on margins, how do you see that evolving? Because I felt margins had a nice tale wind with the fact that that essential cost of input prices were coming down. Does that change if prices are going to be more stable, it's all going to come down to those sales numbers. So I guess two questions.
Yeah, we'll start with the second one.
I mean, I think you're dead right on I mean, what the micro data has been definitely weaker than the macro data.
And let me just take a minute on this.
This kind of goes to my core thesis that we basically have a policy mix, call it fiscal dominance, where fiscal policy has been really the dominant lever for the last couple of years. That's what led to the inflation breakout. In my view, there was some supply constraints, sure, but
basically had too much aggregate demand from fiscal stimulus. And now that's somewhat that is somewhat prevented the Fed from being more proactive with rate policy, and in effect, it's crowded out, as you were mentioning earlier, it's crowded out the middle class. It's crowded out the lower class, lower income class for sure, and even some of the wealthier investors now are being crowded out.
And that's why small caps have underperformed so much. So that that's very much intact.
And I think that you know that that policy mix has been unusual.
It is also extended.
I think the cycle longer than what it probably would have been, which has kept the Fed doing their job of keeping rates.
Higher for longer. And they're and they're now it's working.
Now it's really starting to bite any interest rates sensitive parts of the market, like housing, autos in some of those areas.
So overall, I.
Would say that the S and P level, it's not really pricing in a recession at all. I would say at the stock level, it's probably similar to where the bond market is. That's why we have defensive leadership. That's why small caps have and persistently underperforming. And it's probably in the twenty percent range or so, and that's what always happens, right until it's definitive. The stock market doesn't really want to go there, and it won't go there because it needs the hard data.
Thank you, which actually makes a lot of sense to me. We all see the same data. So this idea that the bond market might be pricing is something very different from the equity market. When we're all looking at the data, we're all listening to the Fed. One point you made earlier that fifty basis points might be viewed negatively, and I see the point.
What does the FED know that we don't know why are they.
Cutting fifty but if we hear from chep Out and I don't know if we'll hear it today, but providing a context around potentially going faster initially that if Montree policy is restrictive, they're just trying to reduce the level of restrictiveness. You think the equity market might like it, that they can be a little more aggressive initially, so they're not behind the curve. I guess that was a learning from the hiking cycle. It would be to start
earlier so you don't have to do as much. I think you can finess that message and keep it in the normalization of fifty basis point cut.
Well, anything's possible, for sure.
I'm just saying Historically speaking, when the FED is kicked off with a fifty basis point cut, it usually has led to, you know, not a great outcome that that that you know, basically were on the down swinging on the cycle. Now this cycle has been unique. They got they probably got higher than they initially planned. So maybe that that sort of situation doesn't apply this time. So I'm open minded to anything. All I'm saying is that if the FED were to do fifty, that means that
data probably deteriorated more. Okay, that's really kind of where that comes from. And that would suggest that probably the labor market in particular deteriorated more. And that's how the bomb market's pricing it right now, right, I mean, they're basically saying it twenty five percent chance of a fifty basis point cut. That's not you know, that's much less than it was two weeks ago.
My less squeeze and subsective preferences as well. I know you're not a big fan of can sum it's Christion. Based on the conversation we've just had, industrials, how do they fit in? Why do you like that's part of the market so much right now?
Well, I would say, you know, we don't love industrials here, we're just sing in the consumer.
I'm sorry.
In the cyclical bucket, you've got to own something, right. You can't just be totally naked on cyclical exposure. And if there is one group that we would gravitate towards, it would be the industrial sector that that's cyclical preference. Is there within technology, which is a cyclical group, I would say we would skew more towards software rather than semiconductors or hardware, simply because they're more defensive, but it.
Is cyclical still.
So those would be the two cyclical groups that we would like in conjunction with our defensive bias, which is utilities, you know, healthcare, staples in real estate.
My Wilson of Augustanding Mincha always cry to catch have with the set. So here's the latest this morning. Kamala Harris, formerly accepting the Democratic nomination, prioritizing a fight for America's middle class, Donald Trump zero again on immigration as his counter programming campaign made a stop at the UST Mexico border, threatening large tarris on countries that don't accept deported migrants joining us from the DNCA Chicago.
It's Blimberg's and Marie. Let's get straight to it.
The question that came from the former president, why didn't she do these things that she's complaining about. What's the response from the Democratic Party to that?
Well, Jonathan, she gave this speech last night, which I think you nailed it. It was heavy on vibes and rhetoric and short on policy. That is normal for acceptance speeches. What Donald Trump is going to do now and when we're on a race seventy four days to this election, he is going to want to define her and tether
her to Biden. Biden obviously was not polling well, not only because of things like inflation and his age, but also just you know, other things not happen under the surface brought her in the economy as well as immigration. So Donald Trump and his campaign has been trying to nail Kamala Harris on those specific policies yesterday was really her introducing herself to the American people at the top of the ticket, not just as the VP ticket VP slot.
And when you look at some of the broad parts of policy, whether it's the economy, foreign policy, immigration, and reproductive rights, it really felt like a continuation, or at least she was cherry picking parts of the Biden menu that she would carry through to her administration. Not a lot of details, but broadly in line with what we've been seeing from President Joe Biden.
Maybe she spent a.
Little bit more time on reproductive rights, something that she really talked about when she was vice president already and Joe Biden stayed away from. But most of this felt like a continuation. And Donald Trump is going to try to really tether her to Joe Biden because he pulls well when it comes to things like the economy and immigration, and Joe Biden and Kamal Harris did not when it comes.
To Donald Trump.
Can we talk about one specific policy that's been mentioned in the last twenty four hours threatening launch Tarris some countries that don't accept deported migrants.
What's been the reaction to that.
Well, Jonathan, when it comes to the Democratic reaction to migration immigration Kamala Harris said yesterday this would be her policy position, which is to bring back the bipartisan immigration agreement that we're struck between a number of senators Knows, notably Senator James Langford of Oklahoma and Connecticut Senator Chris Murphy, and that Democrats have been hammering that. The reason why that deal did not go through because presidents said, I
want that deal killed because I want the issue. So that is their current plan, which is more support for border security, the ability for the president to have his executive power to shut it down. When it comes to tariffs broadly, at the entire DNC, they have been talking about the fact that this is a sales tax. They don't want to say the word tariffs because remember Jonathan, this administration also kept terrors from the Trump era under
Joe Biden's watch, some of those Chinese tariffs. But they are calling it a sales tax.
MH.
I appreciate the imper will catch over in about an hour's time from the DNC in Chicago. Speaking of the menu, vtig'sis at Botanski with this to say, the Harris campaign has treated Bidenomics like a buffet whereby they can embrace the issues the play well at the kitchen table well, hopefully leaving the less politically palatable provisions behind. Isaac joins us. Now for more so, Isaac, let's build on that. What's on the menu?
Well, sure, thus far, it's whatever plays well with the vibes. As you said, right, like, all that we've learned over the past few days is that is that they have a triangulation play called here to do their best to a blunt the attacks that Vice President Harris is too liberal and b to to meaningfully separate Vice President Harris from some of the more contentious Biden issues, and to portray her as a change agent. And that's why you saw President Trump just last night trying to tag her
as the incumbent. And that's what the next seventy.
Four days is going to be about.
Is Vice President Harris seen as a representation of the current administration and the incumbency, or is she seen as an agent of change?
Isaac, When you sit down with clients, when you catch up with them in person over the phone, and they ask you, Isaac, which candidate is the pro market candidate? If you form strong ideas about that, yet you know.
Look, I think what we tried to focus on is acute market themes, right, Like, we feel pretty strongly that Trump is good for M and A because he's going
to change leadership at the FTC. Right, That's something that we can really sink our teeth into when clients ask who's good for the market broadly, I think that one's a lot tougher because when you look at Trump's policies, we're talking about tariffs, right, talking about uncertainty in the global economic regime that I don't think folks are really getting their arms around, especially since we're not going to have the sugar high of tax cuts that come along
with that. And so I think that that's really the stinction that we've made and the point I've tried to make the clients, and the one that I think we really need to start understanding and sink Garan teeth into is no matter who is in the White House, we're going to have buckets and buckets of deficit spending coming through the tax reform effort that comes next year.
I think, in terms of more detail on Harris's policies, do you think that's a when or if? Do you think she's going to try to go as long as possible without providing detail on that, or is she being sort of strategic about it.
I've been surprised at how open Democrats at the convention have been in their belief and their hope that she will not offer much policy detail. I found it interesting that a number of top Democrats have said, do you remember that Elizabeth Warren when she in twenty twenty had a white paper for every policy? There were twenty pages, well vetted by academics and market experts for each policy, and she sure as heck didn't win, So why would
Harris and so? Look, I think that this is again going to be something that they ride the vibes, which which John has outlined, for as long as they possibly can. The date that I have circled on my calendar is September tenth. That's the first and only debate between these two. And to me, that's the moment where perhaps the rubber can heat meet the road in terms of some of these policy specifics that I think we're all yearning for Isaac.
We couldn't agree more.
What is particularly striking to me, as well as how much room, how much space progressive like Warren Alexandro Acasso Cordez have given the Vice President Kamala Harris. They're not trying get to unpopular themes. If you think about where Harris was back in twenty nineteen gone into twenty twenty, if you were running in that primary, you had to make commitments to things that weren't going to be popular with the rest of the country. Do they continue to give her that kind of space, Isaac?
I think they do until election day?
And so those there are two points to make here.
Number one is the one unifying issue for Democrats is that they are against Trump. So as long as they can keep this race about Trump, they will remain together. But the second point, and the one that I think that we should examine over time, is I truly think that if Democrats are in power, you're going to start to see those fissures re emerge. And Amh mentioned the immigration bill that failed. That immigration bill had a chance to become law this year in large part because of
the election. Now, if Democrats win the White House and they're in power in Congress in some way, shape or form, I'm not sure that same immigration bill passes because at that point you see the progressive voices rise and become even louder. And so that's something we think about, that chasm between rhetoric and reality that warrants consideration.
Is it when it comes to blue sweet red sweep? Formed any firm ideas on that one? Also, what's your base case?
Now?
Look at the moment I think that we're going through the presidential election. There seven on the presidential side, there the seven states that matter. I still think that you have to look at the issues that animate those voters. The top ones are the economy and immigration. Trump does better on average by eight and fifteen points in the swing states. As long as that maintains, I view Trump
as a slight favorite. On the Senate side, I remain committed to our view eighty plus percent likelihood that the Senate is going to flip to Republican control. And I think that's something that investors in markets should really more themselves to, is that we will have a small Republican margin in the Senate that can then give us some sort of framework for thinking about what next year will look like.
Interesting, Isaac, thank you, sir, appreciate the update. I suppotanski that a great Actually when begin with that top story, stocks arising as trade is a wait. FED Chair Jaypounce remarks at ten am Eastern Time. Bob Dollar crossmark right in the following. The global economic expansion remains intact and will benefit from rate cunning expectations. Equity valuation remains at risk, especially if growth continues to decelerate and the FED does
not show urgency. Bob joined us now for more. But we want to talk about a gap, a spread, if you will, the difference between FED funds in the two year you've noted. That's the why this going all the way back to two thousand and eight. And when people say two thousand and eight, Bob, they get worried concerned. How worried and concern should they be?
Well, look, the journey is out. The economy is slowing. I don't think people can dispute that anymore. But we don't know is it going to be a soft landing or a harder landing. And look, that's a mind view out of the Fed's control. The FED what he does in the next few meetings will impact the economy later.
So it's already cooked and we just don't know.
You want to be fearful, pretend there's going to be our hard landing not out of the question. The consumers slow and you're seeing it all over the place, but we just don't know how slow they're going to get.
That's the problem.
Well, play best guest with me. Now, let's take that spread. You've got FED funds up here and the two year down here. How do you expect that to close? Is it the two year yield coming up to FED funds, fed funds coming down, the two meeting each other.
What's that going to look like?
Look, the Fed's going to lower rates. The Chairman will make that clear today. But as you and Stewart talked about earlier, we just don't know the.
Pace of that decline.
You recollected appropriately January First, we're gonna get six cuts this year.
Oh no, no, it's going to be seven. Well here we are.
We haven't seen one yet, and so I think it'll be slow but deliberate, and the language will be will watch very carefully. Look, inflation, remember, is still two point eight, it's not two. So they have to have their one eye on that corner of the world too, as they on the other hand in the fight this emerging economic slowdown.
But we've ran it into this story.
We've noted that the equal Way s and P five hundred has printed a couple of all time high so far this week, we've seen the leadership come from the small caps at times. Once again, with that in mind, are we more at risk of this day to come again weaker all over again on September six?
I absolutely agree that that's the question mark, and that is the risk that things slow down faster than the market is expecting. And there's a little bit of well, whatever ails us, the FED will have the cutting power to fight that. Well, you know, what the FED does today doesn't affect the economy for some time. Little psychology maybe, but that's about it. So it is how fast does this thing slow?
Bob on those lines, man, how sensitive do you think the Fed is the financial conditions here? I how reactive would they be if we got, you know, a sharp pullback in equities on some week labor market data in your view, I think.
You bring up a good point, and that is things that might be out of our control.
Look, we had that a month ago.
It turned out to be, you know, the Japanese yen carry trade. And you know, as the market was following those three days, we just had some clues it was No, it's a fear about the economy falling apart. It's causing this decline. Well maybe that's what started, but we know what aggravated it. So to your point, the financial system doesn't necessarily operate smoothly every day, and we could get a bump there as well. Not predicting that, but there is always discontinuity in the system.
And you mentioned high valuation. Mean, would you have the view that the market kind of needs some rate cuts given the level of valuation here or do you think you know we can kind of skirt through things of growth stays?
Okay, I love the way you put it.
Valuation is demanding a good environment, maybe a perfect environment, and therefore the Fed better do exactly what they need to do, and earnings better come along, and we better not have any more consumer weakness. A lot of good news in this market with a PET into the twenties. So yes, we do need to justify these valuations reasonably good economic news and or FED assistance.
What would you adv K four going deeper into the second half then, Bob, I'm just sitting here guessing that you're not telling everyone to sit in cash and take five percent and wait it out.
What are you telling them to do exactly?
On the other hand, we've got this momentum driven bull market, and you know, fighting that kind of market is a fool's game.
So you've got to be invested. Just be careful what you own. You've heard me say it before, earnings.
Predictability, earnings persistence, and cash flow. So should we get into sort of a bumpy environment, those kinds of stocks will sell off less, but they'll do just fine on the upside.
And Bob, A lot of those stocks you've described, I think are what people have kind of owned, you know, for a period of time here, is that a steady issue goes or would you worry about positioning, you know, being so long of those kind of stocks if we did come under suppressure.
This is debate.
We feel like we're having out tech all the time. Is it Are they safe or not? Basically, yeah, so I would broaden the list.
Valuation has got to come into the question relative to the earnings persistence, et cetera list that I put together. There, I wouldn't just own high pe stocks. They have some vulnerability should things not go all that well. And back to what Jonathan said, a few minutes ago. The market is broadening, and to those of us are a little cautious, that's a good sign that we're getting some broadening. I guess it couldn't get much narrower.
Yeah, I mean, I think that's the question we get on the broadening theme is do I broaden? Am I willing to broaden out into a weakening economy? And I feel like that's like a big trade off that people are struggling with.
Do you have a view there?
Yes, I do, and that is be careful how much broadening you do.
We all know the downcasts.
Small in particular tends not to do well economic slow down environment. They do best when we come out of a recession, and so I think it's don't be zero in those areas, as many people are, but don't overdo it. We've lost two thirds of the small cap rally we saw in July relative to bigcap. That's a lot of deterioration despite the broadening that we're speaking about here together.
Another way of asking the same question, do I want to we own financials going into the back end of the year, Bob, Yes or no?
Yes?
Absolutely, I think that's look a lot of lending took place outside the banking system. That's why bank balance sheets are on average better shape today than they are typically at this point in the economic cycle, and they're pretty cheap.
So yes, I would own financials.
Big mass off the life from earlier this month. Pupto across Mark Pupto.
Thank you.
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