Bloomberg Audio Studios, Podcasts, radio News.
This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app.
Jared Woodard of Bank of America seeing room to run in twenty twenty five, writing we favor equities given upside potential from broader earnings growth, higher productivity, and deregulation in the US prioritize cyclicals with exposure to enduring themes like defense, tech, SMID, industrials, and energy. Jared joins us now. Jered, good morning, Thank
you for being with us. Happy holidays. We're launching that today a special breaking news Jared, I want to start with this idea of a broadening out at a time we're in the past couple of weeks we've seen a real stalling in that kind of activity.
What makes you.
Think we're going to restart and go back to that idea of all of the stocks outside of the Magnificent seven outperforming.
Well, you know, history's on our side here. If you look at the long sweep of the US equity market in the twentieth century, the average weight in the S and B five hundred by market cap through real economy sectors like financials, industrial, materials, energy, those parts of the economy occupied forty five percent, sometimes more of the S and B five hundreds that was the norm.
Today they're much smaller. They're in the twenties altogether.
And of course it's tech and consumer discretionary and communications, these growth stocks that comprise only fifty percent of the market.
Our view is that as the policy environment shifts, particularly in the United States, as sticky inflation, higher growth potential as well make the value of those real economy sectors rise, investors shill be positioned for a moderation at the sector level, at the thematic level, because we think there's a lot of potential from the regulation from earnings broughting out across the economy and for higher productivity, particularly in the United States,
continuing a trend of higher productivity that started even some years ago.
At a certain point, do yields have the potential to stymy this and we've seen that over the past couple of sessions. Just a question marks around the deficit, question marks just around how much stickiness there is an inflation. Where do you weigh in on that? How dependent is this theory on yields saying kind of where they are going lower?
Well, as I said allocators, we think that long term fixed income, especially government bonds and even investment great corporate bonds may not be as attractive in coming years as they have been in the last few years. You know, we've had this thesis on the end of sixty forty for a number of years now. That's basically played out quite well. If you look at some of the different
acid allocation approaches in the market, familiar and unfamiliar. Having big allocations to long duration fixed income has been a losing move most if you look at it across the treasury curve, many parts of the market are actually still underwater from recent years. I'm not worried about rapid rise
in bond yields hurting the equity market. I do think that we may see stickier inflation and stickier bond yields in years to come, in a way that makes it more attractive to be in credit and higher yielding parts of the fixed income market, and in short duration parts of the equity market, investing in companies that have real profits today, real cash flows today that they can deploy either into their businesses or to shareholders, rather than waiting
for companies that might not see tangible profits until far out into the future.
Jared, So you're describing a much more active approach to not just this whole market, but the bond market included in that. And we've had plenty of people come on here and say, everybody is an indexer now, the way that people are exposed to bonds are through indices. How unprepared there then are investors in twenty twenty five for what you're describing when sixty forty target dated funds and buy the whole market kind of strategies aren't going to work as well.
Yeah, this is an extremely important point because both in the equity and the fixed income markets, we look at benchmarks today and they look more unbalanced than they've ever been. The S and P five hundred is something like two thirds comprisedive of growth stocks. The US aggregate bond benchmark and other familiar bond benchmarks that many people use are weighted at something like seventy percent toward long duration assets
towards assets that benefit from deflation. Now, I think a more balanced approach is going to be extremely helpful in the future. It's already been a great benefit in the last several years, as investors who can wait in a more balanced way across asset classes capture different risk factors, not just one big deflationary or pro growth stock type risk factor can achieve better returns and better risk adjusted That's our call for twenty twenty five, Jared.
When it comes to broad our asset classes, we're speaking with Chris Farona, strategist earlier, who pointed out that volatility is low the bond market, volatility is low in the equity market, but where it's not is the FX market and especially pairs particularly vulnerable to fiscal policy.
Going forward.
How worried are you about a broader contagion that starts and stems from currency markets.
Well, I think if we if we fast forward five or ten years from now, we could look at at one data point from the future that would be valuable to help us allocate across assets today, it would be the level of the US dollar on a real tradeway to basis. The US dollars at the highest since nineteen eighty five. It's too strong. It prevents American exports from being competitive on the global market. Just as importantly, it prevents consumers in places like Europe and China from benefiting
from the wealth that they produce. A rebalancing in the global economy, a slightly weaker dollar, slightly stronger currencies elsewhere
could create the conditions for some really incredible potential growth. Alternatively, if policy makers and leaders can't find a way toward greater balance in the global economy flows of goods and flows of capital, and the dollar remains as strong as it is, it creates the conditions for a very unpleasant, really kind of a bubble in which there's no alternative to US tech and even to US treasuries for all the capitals.
Flowing around the world.
I think that what happens with the dollar, and whether we can avoid competitive currency devaluation in the years to come, is one of the most important trades and questions to answer in the market today.
But Jared, how.
Would policies mean a weaker dollar when the ones that are coming in and being discussed right now by the Trump transition actually call for a higher dollar When you think of things like tariffs.
There's a lot of debate right now on tariffs, on many other policies. I think economic history gives a much different picture than the consensus today. Our economists Bank of America have written a lot about this, and they suggest even if you take a kind of a standard view on how tariffs and some of these other policies might affect the economy, even in that case it's a one time shock rather than a persistent effect on the market, and the effects may actually prove.
To be quite small.
I think there's actually a lot of potential for managing trade relationships, managing flows of capital that many countries have done for a very long time. The West hasn't engaged in that very much. And so the perspective of some of these Western policy makers, including the US, is that really we're actually trying to get back to a level playing field when it comes to managing exports, industrial policy, and trade relationships. Bringing things to a level playing field
that until now have been actually quite one sided. So if that's true, then it may be that the effects of these policies are much less inflationary, much less tagflationary than a lot of consensus has believed so far.
Do you believe potentially we'll see a mar Lago record over the course in the next four years.
I don't have.
Any special insight, although I do think that there's a lot of potential for leaders around the world to get the together and find a new path, not just with their currencies but with these other bigger picture relationships, to take advantage of some of the potential. You know, in Europe and shine other parts of the world, policymakers know that overproducing a good export is not going to be a solution. They've been doing it for a while and
it's not working. America knows that running massive debt epicits and increasing debt to fund unbalanced consumption is not going to be a workable path either. So it's clear there's some potential here for a broad, negotiated kind of a settlement. The open question is whether we have the right leaders for the job now and in the future.
Jared, just before you go, you did make this point I do want to dig a little bit further where you said, if you could see one data point to set asset allocation into twenty thirty, it would be the level of the US dollar. Can you give us a sense of how the asset allocation would change if it were strong or if it were weak.
Let's say, just you know d x Y get getting down to ninety or even to eighty, A great global rebalancing in goods and capital. I think that unlocks potential across the market, so deep value arguably value traps in the market today, Places like European and Chinese equities could suddenly become live options again for investors. Tech sectors, growth stocks suddenly become much less attractive compared to value. Real
assets can perform really well. Alternatively, if there is no real policy leadership on the global stage, or there isn't a path to some kind of success, and you just see continued excessive dollar strength, let's let's think about you know d x Y at one twenty. Then the thesis theories just there simply is no alternative to the US market and the dominance of growth stocks, of tech and treasuries and so on for recent decades would be expected to continue. The danger there, of course, is that's how
most investors are already allocated today. That's where the big the length is in positioning. I think that could set up some really unpleasant overvaluation even bubble light condition that can create a lot of fragility and even volatility in the market at.
A generational level.
I think it's an extremely important policy moment, and given how extreme positioning evaluation is becoming, markets are really exposed to what happened in these big picture policy debates.
In the years dot com. It's extremely important.
Jared Witard, we look forward to speaking to you sooner than that to talk through what some of these policy implications are. Jared Witdard of Bank of America. We really appreciate your time. Chris joins us now. Chris, great to see you here, Welcome back. I'm just I'm not going to go with the puns, although I kind of want to.
What do you make of the fact that we're just seeing such limited breaths or bad breath in the market right now with so few stocks gaining amid the recent eating out of some of the tech socks.
Yeah, frankly, I think it's a little overstated.
I mean, this is two weeks of some squishy internals, it's not two months or two years. The entire year twenty twenty four, we've had between seventy and eighty five percent of stocks of the two or day moving average, so this has been relatively broad for most of the year.
I think the bar has to be higher before.
You say, oh, my goodness, the breadth is deterioring to such an extent where it sends this awful message about what's going on under the service of the market. I don't think we're at that point yet. We're in the middle of December. As we know, it can be a seasonally choppy period here these next two or three weeks.
You tend to resume with strength in the January.
I think the question, Lisa will be does the market justify or does it continue to justify the level of.
Bullishness that's out there.
I mean, you start the segment by talking about what the expectations are for next year. So I think as analysts we have to ask ourselves is the market still living up to the hype? And that'll be the big question for us overcoming weeks.
What is the hype?
And I asked this because it is it earnings, is it policy or is it fed? Which is the most important hype for this market to live up too?
Well?
I think there's clearly this awakening am animal spirits.
You see in the targets.
The attitudes from the cell side today are remarkably different than they were a year ago.
We did that exact same study twelve months ago.
The street was looking for basically an unchanged S and P in twenty twenty four and what are we up?
Twenty five percent?
Right, So there's clearly a resetting of expectations here.
And I don't think that's fatal or catastrophic.
But you know, what we've always tried to answer is does the market justify that level of enthusiasm. I think the good answer so far is largely yes. I don't think the internals have deteriorated to such an extent. I think the leadership is still pretty pro cyclical here. But as we write, our margin for error has to be smaller than it has been in the past because the expectations are high, you know. And I think interestingly you kind of hint at Europe here a little bit, where
the setups the exact opposite is probably in Europe. Here, I think the expectations are remarkably remarkably low for something to go right here, and it could be any number of things. It could be China getting better, it could be peace, it could be any number of things. But when you're talking about forty and forty two pmis in France and Germany, the bar is really low for something to go right there.
A low bar for Europe and China, high bar for the US. I found it so interesting, though, that you've just been on a tour talking to clients and a majority saw the next move being ten percent lower in the S and P.
What did you think about it that it was such an outlier. We've basically been on the road every day since the election. It's been a busy six weeks. I'm happy to be back in New York. But what's been such a consistent feature of all of our client conversations for four or five weeks is this unleashing of animal spirits. And then something happened over the last week where attitudes have shifted here a little bit. They've become a bit
more restrained or modest. I don't know yet if that's an outlier or if people are seeing something, But I say, on balance, if you look at all of our sentiment indicators empirically, they're falling somewhere between the eighty fifth and ninety percentile historically. So we're kind of right in the zone where you got to maybe watch your back here a little bit, because it's never what you know that hurts you.
It's what you don't know that gets you.
And there's probably something out there that we're not thinking about that could be an.
Issue some point next year.
But this is the thing, and I mean, Lisa started out with this, you so rightly call out that the forecast this time around last year was a gain of less than two percent, and it really paid off to fight the bears. It paid off to not listen to them and go fall in. How hard is it to fight the bulls? How hard is it to fight momentum like this, even if at times it seems a little bit on the edge of your flum Yeah, well.
I don't think you can yet, because I still think the market's living up to the hype, and you see it in a couple places. Number one credit conditions are remarkably benign here. I think if something meaningful is going to shift out.
There you're going to see a deterioration took credit.
I think secondly, the leadership on balance is generally pro cyclical, right, That's been a tenet of this rally all year. So if I'm going to change the call, I need the consistent stuff to deteriorate. And neither credit nor a leadership have really to any meaningful degree. I think the three things you can kind of watch here to maybe shift opinion. Notice how post election equity vol and bondvall have collapsed, right,
But what hasn't Currency vall has not. Currency vol is kind of still near the high as it was pre election. So I think if something is bubbling or brewing out there that we're not focused on, maybe an M and H from a currency markets here, a dollar SNH looks like it could be lost higher here we've obviously seen
the move in the euro. I think if something or even dollar yen, I think if something's brewing that's unexpected in twenty five, it probably comes from currency, not from credit rates or equity.
When you say that, potentially you're talking to these clients who think in the last week at least those final clients on your road trip around America that think we could see the ten percent pullback is the reason because of the policy uncertainty, or they just think maybe we're getting a little bit too lofty with these valuations.
It's more the latter.
I think, ironically, there's an embrace of kind of what the proposed policies are looking forward to. I mean, we were talking about this somewhat casually yesterday in a meeting. There's a kind of a nineteen eighties feel out there right now, and it's certainly not lost on me. I do think, you know, speaking in the context of sentiment, again, it's emblematic of an environment where the bar has certainly been raised here. I think the expectations are pretty lofty going to next year.
What we've seen historically.
Is when you've had a change in power, the market tends to run until the inauguration.
And then the spring is just a chop.
I'm not opposed to that outcome here, but we'll certainly call it as we say it.
You've been constructive on China. Yeah, what do you make of the latest we've heard out of China in terms of looser fiscal policy, looser monetary policy, but still very thin on the details.
Yeah, you know, we've always kind of said with China, it's not my opinion or your opinion that matters, it's the market's opinion. And I think the way the market has interpreted the hints of stimulus that you've seen over the last several months from there is different than how it interpreted everything else the last two.
Or three years. I mean, the momentum surge you saw on.
September was significant, and I thought the consolidation in the months that followed the last two months was pretty benign.
And you get some kind of renewed signs of life this week. What's important for us in China, consumer discretionary is leading. That's odd for me.
If we're still in a black hole, recessionary, apocalyptic environment. The financials act pretty well, Chinese tech is breaking out.
So I think it would be silly not even to be open to the idea that something's changing out there.
And what I encounter traveling and talking to clients is complete resistance to the idea that something's changing, So.
Be open to it. Most people don't even know China's outperformed this year.
FXI is up forty, Nasdex up twenty five, so it's already happening and there's a complete disdain or neglect for it.
Not a complete disdain. We just saw the biggest influence into Chinese stocks going back to nine weeks, so we do see some sort of acceptance of this idea. But I am wondering going forward, putting all of what you just said together, and given how high the bar is in the US and how low the bar is in Europe and to some degree in China, are you overweight Europe and China and basically shifting away from some of the high calls in the US.
So we're not overweight those parts of the world yet.
But I do think it's a good exercise kind of at the end of the year, as the calendar gets ready to return, is to reset the chip stack and kind of get closer to the benchmark. And I want to kind of get closer to the US benchmarket smaller, and I want to get a little bigger elsewhere. I do think there's the potential for good surprises in other parts of the world. If I can make one last point, I would encourage everyone go look at the European defense contractors.
They're all breaking down. When did they break out? They broke out at the start of the war. Is something imminent peace brewing in that part of the world.
I want to be open to that.
I want to be open to that too. Christopher Own, thank you so much for being with us. Chrispher of statigaz a bird company, always wonderful to see you, and I think that we can officially launch Happy Holidays, Happy Holidays. Former New York Fed President Bill Dudley, writing in his new column that just dropped across Bloomberg, the FED can and must at times make assumptions about what politicians will do.
When the Trump.
Administration's tariff and deportation policies coming to focus, that outlook may become less rosy. Bill Dudley, I'm so pleased to say joins us now, Bill, thank you so much for being with us. Let's just talk about how a FED comes up with a dot plot looking into twenty twenty five without making some assumptions about what the policy backdrop is going to look like.
I think they are going to make assumptions.
I think they're going to assume that the twenty seventeen tax cuts do get extended. So I think what Paul said at the last press conference, you don't guess speculator to assume is actually contradicted by what they actually did in December twenty sixteen when they did include the fiscal policy students that they thought was going to be enacted by the first Trump administration that was in the forecast.
So I think, you know, they have to assume.
It when it's big, when it's likely, when it's sort of clear what it's going to be, and when it's priced into financial markets. And I think that's true for the tech, for the extension of the tax cuts. It's not true for terrorists or immigration policy, because it's very uncertain about what those policies actually will be at this point.
Bill, Do you think that that's why it's more important to look at, say, tax cuts, than some of the other policies that could potentially have contradictory effects on inflation and growth.
I think the real problem on terrorits is you don't know how big they are, how long they're going to last, what the whether it's going to be retaliation, And on deportations, you just don't know the magnitude or speed of what the program is going to be. And so if you don't know what it's going to be, it's really hard to put it into the forecast as in terms of its likely effects. Well, so I think the text so I think the text cut assumption is going to be in there, but nothing else.
Well, when it comes to terrorists is September twenty eighteen, Tealbook talked about the fact that in the first iteration of Trump they just saw the terroriff's as a one hit threat. Do you agree with that assessment and do you think that would still hold today for this FOMC.
I don't think you're gonna make any assumptions on terror shick because we just don't really know what the administration is going to do. I think the big difference, though, the terrorsts that were done in the first Trump administration were actually relatively small. A tariff on an importse one from one and a half percent of imports to three percent of imports during the first Trump administration, We're talking
about much bigger numbers. Now, we're talking about ten, twenty percent, sixty percent against China.
So Magatue may be much greater.
But we're not really sure is this just a threat or is it actually going to turn out in terms of substance.
So, Bill, what we essentially have is just then corporation of tax cuts and missing out on two key pillars of Trump's policy going forward, immigration and at the same time tariffs. I know that this is a sacrilegious question, so you'll have to forgive me, but are the dots even useful this time around?
Then?
Well, I think what's the problem with the dots is you're going to have an an unusually rosy forecast because it doesn't include some of the more controversial economic policies that could really change the outlook with respect to growth, inflation, and proctuvity. You know, higher tariffs, deportation is going to be disruptive to the economy. It's going to tend to push inflation up, it's going to push growth down, and that's just not going to be in the forecast.
At this point. Bill, what's your base case for how they're going to sort of telegraph some sort of pause or some sort of adjustment to the process of rate cuts in twenty twenty five.
Well, I think I'll be done in a couple of different ways.
Number One, the number of rate cuts that they show in twenty twenty five will go down from last time. Last time in September they had four ratecuts for twenty five base point ratecuts in twenty twenty five, so this time will be two or three.
And second, I think poll will talk about.
How inflation is a little bit sticky, the economy is doing really well. You'll probably see some upper revisions of the Fed estimates of so called urstar, the neutral rate. So I think all those things together will make it pretty clear that you know, January is probably going to be a pause, and that's really what's priced in the market. Markets are very certain about December being a cut, and they're pretty certain about January being a bass bill.
What's your take if you were on the FMC, where would your dot be, what would you be looking for for next year? And what the bigger concern is inflation or weakness?
Well, I think the big place where I would probably diverge from the consensus of the committee is our star.
Right now, the media estimate or our star is two point nine percent.
So the Feds basically show the federal funderate going to two point nine percent in the SEP not in twenty twenty five, but in twenty twenty six and twenty se twenty seven. I'd have a higher artstar probably something in the order of three and a half percent, maybe maybe a little bit of higher. So I would not have as much cumulative easing of manditary policies what the Fed will have, and.
That seems to be where the market's at right now. Certainly as well as former New York Fed President Phil Dudley, thank you so much for being with us.
This is the Bloomberg Sevenants podcast, bringing you the best in markets, economics, an giopolitics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and as always, on the Bloomberg Terminal and the Bloomberg Business app