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Any of youant any research.
Staying bullish, three consecutive years of double digit games don't happen too often. Nevertheless, that's what we're expecting. We see the S and P five hundred increasing nineteen percent this year to seven thousand. However, we think it could be a bumpiercent than in recent years. ED joined us for more in the flesh. Good to see you, sir, Thank you. Happy new year. Let's start with that double digit expectation for twenty two twenty five with some volatility.
What's different about this year compared to last?
Well, I think we're starting off with more uncertainty. On both monetary and fiscal policies. We really don't know how all these different policies that the Trump administration will introduce basically from day one. Sure, there's going to be something like twenty twenty five executive orders.
Coming very shortly after the inauguration.
The problem is we don't really know how these things are all intermix. It's kind of like a doctor prescribing a whole bunch of different medications to you and didn't check the computer that some of them don't interact to. Well, so we'll see how deportation and deregulation and tax cuts and terrify increases and what that implies for the deficit, all mixed together. And meanwhile, the assumption is that the Republicans are in a position to get everything through. Well,
maybe that's not quite the case. They've screwed it up before they could do it again, I suppose. So, Well, there's a lot of uncertainty on the administration's policies. And then monetary policy is on pause right now, and the question is how long?
And I think for a while.
Let's stop the administration.
What are the assumptions that you've might have any they come into your forecast.
Well, I'm basically acknowledging that I don't know how it's all going to end up, but my gut feel is that when you add it all up together, it'll be unbalanced positive for the economy.
I think the other thing.
That's important to recognize, especially after the past three years experience, is that the economy hasn't been, as you mentioned, as Lisa mentioned, remarkably resilient to high interest rates, and so.
We really need you know, the economy is kind of like.
The Rodney danger field of all this doesn't get enough respect. It's kind of its own dynamics. It's not totally dependent on what happens in Washington, DC, and so I think we are going to see a productivity boom, which I think has already started, and that'll keep the economy movement at a faster than expected pace, and that'll keep inflation down.
Do you think that rates and are fairly valued, even though some people are saying, actually, maybe they're looking a little cheap after the recent rise at the end of last year.
You're talking about interest rates.
Well, on the interest rate front, I was not in the camp expecting several rate cuts last year, and then at the end of the last year, especially around September, when the FED chair started talking extremely dubbishly. I couldn't understand that. I mean, the economy is doing fine, Inflation is pretty close to two percent, So what's the need for lowering interest rates? I think we're I think we are at neutral. I think we are where interest rates
should be. The economy is doing quite well with it, and there's a lot of consumers, individuals, households that really enjoy having interest rates at these levels, a lot better than getting nothing for your money market funds, which is the.
Reason why somebody people have been piling into cash. It raises a question, if we do see a third year of double digit returns of the nineteen percent gains that you foresee, is that going to be concentrated again in the same leadership, given the fact that a lot of the equal way, the broadening out types of beliefs really stemmed from the idea of lower interest rates.
Yeah, well, look, I think that lower interest rates certainly help smid caps, small and mid cap stocks, and we had a couple of instances last year where all this excitement about rates coming down got them to do reasonably well. And then it's all kind of fizzled the part in December as great expectations changed and suddenly maybe the FED is not going to be lowering interest rates as much, and so okay, everybody piles back in into the Magnificent seven.
But I like the S and P four hundred and ninety three.
They've lagged behind. And you know, I think when you look at an S and P five hundred portfolio, the way I look at it is all stocks, and there are technology stocks. They either make it or they use it. If you don't use it, you're gonna lose it. You're not going to be competitive. So I think we have yet.
To see.
Companies announce and demonstrate that all these technologies that are out there, not just artificial intelligence, but robotics, automation, and just thinking about changing your procedures in a way that makes workers more productive. A lot of that's going on, and we are actually seeing it in the data.
My projection that we're.
In a productivity growth boom is really not so much a forecast as it is an extrapolation. We've already seen a pretty significant pickup in productivity.
I think it keeps going.
We'd love your thought on us Stale as well, so that thought will comes to you in just a moment. US Stale right now negative in the pre market has been all morning off the bank and reporting the President minding would block this Stale getting confirmation find it blocking nip on Stale's proposed takeover of us Stale. The President's saying the following, we need major US companies representing the major share of US steel making capacity. That is why
I'm taking action to block this deal. He goes on to say, US Steel will remain a proud American company when this American owned, American operated by American union steel workers the best in the world.
This raises the question of how this will be interpreted next year. This seems to be in line with what President elect Donald Trump was talking about that he also
would block this deal. But it comes at a time where everyone is expecting a whole host of mergers and acquisitions as a result of a loosening in some of those parameters, and it raises a question what's national security, what becomes political and what we'll get through at a time when ostensibly this is going to be an administration more amenable to mergers.
Stock is down in the free market by a round about eight percent. And to bring you back into the conversation, to build on what Lisa was saying, what's the signal you take away from this.
From the steel announcement.
Blocking the deal? Tell what handket down, what countcat down?
I mean, I guess we have to conclude that the Biden administration is still still in business. They haven't closed the shop yet, but it is consistent with what Trump's been pushing for, as you said, and it's also consistent with a regime change in the Biden years and Obama years. I think you could kind of combine those years together.
We had a lot of globalization, the idea that America's interests were identical to global interests and we all had to work together, kind of a Kumbayah kind of approach. Now we have no Everybody pursues their own national interests and we can talk about it and negotiate and work things out, but you know, we're going to push for our national interests. You push for your national interests. We'll use our economic power to get what we want and to try to cut back what we have to give
in return. And that's kind of the environment we're in right now.
Real tension developing, especially at a time where people are talking about potential external foreign investment in the United States in order to gain a presence here at a time where people are talking about mergers and acquisitions, the boom that possibly could really lift banks in other financial firms, how do you put that together with a real existential question about what is national security?
What is going to be politically viable?
Will this administration, the Trump administration, be excited about the idea of tie ups even in the tech space, Well, I.
Think that it'll be more leslie fair than we had under the Biden administrations, as certainly we'll have more M and A activity. I think it's been going on kind of quietly in the tech field. It's just not public because a lot of the deals are Microsoft buying.
A private company.
That's one of the frustrations that small cap managers have is they spend all this time putting together a portfolio of twenty great little companies and they expect that, you know, only a few of them will become the next Microsoft, and it never happens because Microsoft buys them. So I think there's still a lot There is a lot of M and A going on even now, But I don't think the government's going to be as interventionists as we've seen under Biden.
So you're unabashedly bullish. You do expect this to be continue to be the roaring twenties. What is the potential risks that you see out there at a time when we're talking to some people about gold, some people about the possible dissolution of some of the m and I.
Furvor, Well, you did mention that I'm looking for a bumpy year, and I would say that a lot of those bumps are going to be occurring over the next few months. We certainly have the uncertainty about monetary and fiscal policies, the bond vigilanties, my friends, the bond vigilantes are acting up again, and the bond deals around four and a half percent and getting a lot of questions, not just only can we go back to five percent, but could we breach that and go to six percent.
I wouldn't be surprised if we saw five percent, and I would spook the market a short term basis, but I think we'll find plenty of buyers at five percent, just the way we did last time. And then of course there's geopolitical concerns. The Middle East is still a mess. You know, we have yet to see what Israel is going to do next with regards to Iran and what Iran will do next with regards to Israel, so that that confrontation is still ongoing, as is Ukraine in Russia.
So I think, you know, you put it all together, and at least for the first few weeks of the year, I think there's a potential for the market two weekend and maybe perhaps even a correction, but I would I would view that as a buying opportunity.
Certainly weave for the last week.
ED.
It's good to say, sir, thank you. I did this more often in person, absolutely thanks for being here at any day of any research advestors looking at hats of keydanks this month with next Friday's payrolls report followed by CPI and a Federate decision at the end of the month. Claudia Salm of New Century Advisors noting the FED summary of Economic projections isn't living up to promises, writing tension has been building around the SEP at the Power Feed.
The FED has long been data driven in its decisions, but the complexities of the post pandemic economy have led it seemingly to rely on data over forecast. Powell even admitted as much at the press conference. Claudia jointed just now for more, Laudia, welcome to the program and a very happy new year to year. It's good to see you once again. How is this complicating decision making on the f WEBC.
Well, I think, you know, a real theme of the last FMC meeting was how much uncertainty there is about the outlook for twenty twenty five, and a lot of that comes from policy uncertainty out of fiscal policy.
But you know, the FED has.
Increasingly underpower become very data driven, and it's hard to believe it, but I think we're actually going to see a year where the data plays an even bigger role, and we already know that that can create a lot of unnecessary volatility because it's hard to measure a thirty trillion dollar economy in real time with a lot of accuracy.
So they were going to continue to see this.
Real overreaction, and we saw this yesterday with the initial claims for unemployment data to just you know, these little scraps of data we get on how how strong labor market is how hot inflation is, you know, So buckle up.
Well, Claudie.
This is a reason why people can't liken the moment that we're into a dark room with a blindfold on, with lots of furniture, going around and trying not to bump into anything because the data is messy. We keep talking about distortions, but forecasts have been wrong and the whole concept of transitory is a huge scar over this fed. So is there a forecast or an economic model that
they should be following. And I'm asking you of this some rule who has come out and talked about how every rule has its exceptions and it's difficult to really come up with these.
Right, Yeah, this is the past for a half year.
Have not been kind to rules or rules of thumb or how it's usually in the past. But we also can't become hamstrung by a mistake or a misjudgment that was made in twenty twenty one about inflation.
Right.
We have moved forward and there are we've seen the economy slowly overtime heal. We're seeing patterns that make a lot more sense than they did in the early days of the post pandemic recovery. So the FED, Yes, and that's exactly how it feels in a dark room moving We know there's furniture, but part of the Fed's job is to help turn the lights on and at least chart a path.
And yes, that could mean redirecting.
But to just well, you know what we do This next year is going to be all about the data points we get. That really sets up I think a lot of unnecessary volatility, Like the FED is injecting volatility because it's saying, just follow those data points, and we know we get bounced around by them, so you kind of you need to have a grand plan in terms of how you're working your way through the years. It's tricky, like the policy uncertainty is real for this for the FED.
So I'm not saying like I have an easy solution for them, But now is not the time to back away from some of the forward looking the heuristics that we have.
Mom and Elerian I would agree with you, and he's talked about this as much the whole over data point dependence. What patterns are you observing that you think are going to be important and prescriptive for what's to come in the US economy?
Right, So I tend to I keep all eyes on the labor market, and that's such a linchpin to the resilient economy we've had and the ongoing recovery. In addition to you know, millions of Americans lives really depend on their paychecks. And this is one where I worry that the FED is somewhat come placent. I think they're being hyper visional mot inflation, as we know the FED often
is and should be. But their outlook that most of the officials laid out in the last summer of economic projections, there's a pretty optimistic one on the labor market and basically saying, hey, we're back, We're back to normal, We're back in think Mary Daily even use the words kind
of an equilibrium. Got one vacancy for one unemployed worker, and it's close to what the FED things the long run unemployment rate is, and they project that to stay with us, like, hey, we've got back to equilibrium, We've got back to a good place.
We're going to stay there.
And I think there's a lot of other dimensions you can look at the labor market, particularly the differences between the hiring and the firing.
When the hiring doesn't look so good.
The firing looks really pretty great, Like that's not typical for a labor market, you know, that's in balance, that's in equilibrium. And so I think there are some signs and that's why we have to keep an eye on out or the places where it doesn't make sense.
And in other big.
Pieces, we've had a big push from the increase in labor supply from the immigration into this country, which has been extraordinarily high in recent years.
And that that's turning.
Or even if we don't have mass deportations, we're not going to have a big push from the outside immigration. And that's an important that's been an important dynamic at the labor market. We're going to watch it on Why so I don't think things are as calm in the labor market as the FED kind of in their latest.
Projection seems to view.
And I mean, you know, we're going to get our first taste of the data next week for the with the report.
Irol's coming on January tenth. Just quickly, Claudia, how unusual would it be for unemployment to stabilize at these levels after coming off the lows to the extent that they have.
It would be very unusual to stabilize and hold in this place for like the next three years, which is essentially what the FED is projecting. But that's saying that we're in a good place and we're going to stay there. But we have there is a sense that, you know, barring a lot of this policy uncertainty, this year twenty twenty five really.
Could could be. It still could be, but it was don't have to be.
Like we get to the sustainable place, we work out some of the last disruptions.
So we'll see.
I hope you're right.
Clodia Samp of New Century Advice is Cludia, appreciate your time.
Thank you.
I think we all hope Clodius right. Stephanie Roth the full free search market banner of Banks of America joining us run a table to the turf you.
Good morning and a happy new year.
Good morning.
Let's see you both. Let's start with you, Stephanie. Expectations for a week today in a payrolls report.
Yeah, so we're looking for one seventy five on payrolls, which sounds a little higher relative to expectations.
But I think the surprise from the report.
Just given where markets are, is that it could come into the soft side forgetting about the headline number. There could be download revisions to the prior two months, And importantly, we're looking for an unemployment rate that could take up a little bit higher than what expectations are looking for. So there might just be some soft pieces of the report that at the margin could put some downward pressure on yields.
Where's the weakness come from?
Because I think the book was right now would say claims to low lay off the low things look pretty good.
What looks bad?
The breath hasn't been very good in terms of hiring. That's been quite disappointing. A lot of the gains have been driven by healthcare and government, and that's not a sign of a really really strong labor So we think the lead market is fine. We think the underlying trend is one hundred and forty thousand, but at the margin that's probably a little bit softer than where consensus is at the moment mark.
We were talking earlier with Claudia sam and she was talking about how the FED has really injected a lot of volatility into the market and the rates of market in particular, as a result of its data point dependence. Do you expect there to be quite a bit of volatility either way, if there is any kind of surprise whatsoever on Friday's payrolls.
We do we also think that volatility is going to be a little bit higher in the rates market this year, simply because the FED is so data dependent and there's still so much we don't know about next year, how will all these economic policies take shape, what will the impacts be, and so we do think that a very data dependent FED in that context, we'll just keep ratevall
a little bit higher than it otherwise would have. Now, if we get the kind of number that Stephanie was talking about, if we see some softness in the underlying data, we do think that there's pretty good potential for rates to move quite a bit lower, largely because we think that there's so much good news that's priced into the market right now, there's so much optimism about US growth remaining strong, about around elevated risk asset valuations, that if
you start to see any wobbles in the economy, then we do think that there's a fair amount of reassessment that's going to have to happen, and that should mean lower rates.
Do you think that that's the bigger potential surprise is actually some weakness that spurs a rally just based on the positioning so far a rate rally.
Yes.
Look, we generally perceive that right now optimism in the market is extremely elevated, and we've seen that over the last few months. There's a great deal of expectation that this is going to be a super growth friendly administration and that their scorecard is going to be the SMP. And that's essentially we think driven risk assets to very very elevated values, whereas we think that the range of
outcomes next year is much wider. We don't know exactly what the policies will be, we don't know what the impact on the economy will be, and as a result of that, we think that there's a little bit of a mismatch there elevated optimism versus a very wide range of outcomes, and we do think that should be supported for d at least in the early part of next year.
Stephaniel one policy, what assumptions if you made about policy changes from the Incomic administration for the next year or so.
So for this year, we think it'll be mostly that deregulation, which is a positive for growth.
The tariff thing is, of course one of the biggest questions.
We don't think that will happen until later this year, partially because they want to tie that to TCJA, And importantly, like like Mark said, there's a ton of uncertainty when we're thinking about policy, but we think a lot of it's going to be relevant for twenty twenty six rather than twenty twenty five.
But it's not likely to be that stimulative.
Right.
The TCJA is a four trillion dollar.
Tax bill that's going to be just keeping policy as is. It's just to keep policy largely steady. There's going to be a couple of things that could at the margin be growth positive, but then we have tariffs, which are a massive headwind.
Well just on tariff.
So you're saying that the primary objective of tariffs will be for revenue raising purposes from the incomic administration. Is that what you're suggested when you're saying that two will be tied at the end.
Of next year.
I don't know if it's necessarily the primary objective. I think the primary objective is you know, Trump genuinely believes in tariffs, but then they do raids a lot of revenues, and that's something that they're going to need a whole lot of when they're thinking.
About the stack back.
But as you mentioned this, and I think it's important policy changes if one think anticipating the economic consequence of them is quite another. It's not obvious to me how inflationary or not tarris would be depends on how they're put together, how they're executed, whether you get retaliation also completely depends on what happens olsewhere in foreign exchange, investment decisions made by companies ousewere that want to be in the United States, and one exposure to the US economic story.
What kind of assumptions can you make on changes in consequences.
I think it's really challenging for Stephanie and other economists. Look are economists, I think have done a very good job trying to dimension, to the best of their ability what the key considerations are. But they'll be the first to tell you that the range of outcomes is extremely wide and that their confidence around these assumptions that they're making is extremely low. And you're right, Jonathan, there are so many other things that can impact the potential inflationary
consequences of tars. Look at CNY overnight right seven point three, So you're starting to see the FX markets some of this in and to have a lot of confidence around what the overall economic outcome will be is we think very very it's very, very difficult at this point in time now to be overly concerned around inflation. Yes, some of these policies could indeed be inflationary, they were not
terribly inflationary last time. And what we think the market should be spending a little bit more time is trying to think about, Okay, well, what is the Fed's reaction function. Last time, their bias was to look through any potential inflationary impact or released us what the transcripts tell us. This time, of course, the macro backdrop is different, core PC is more elevated. We just went through a very inflationary period. So will their reaction function be the same.
We don't know yet, but to me, that's what I'm going to be looking for to think about what the impact is to the bond market. And right now my bias is still to believe and our team's bias is still to believe that the fed's likely impact will be to look through to the extent that they can especially if they start to see that tariffs have any type of negative growth impact. Finally, look, just to go back to some of the points that Stephanie made, I think they're really good.
Just think about where the market.
Narrative is right now, and what Stephanie said, the policies are probably not going to be all that stimulative impact mostly in twenty twenty six, not twenty twenty five. Where is the market right now? Look, you two talk to a lot of people. You'll know probably better than me. I talk to a lot of clients as well. I generally think that client's mind frame is that these policies are going to be impactful near term and that they will be quite stimulative. And again that's where we think
market optimism is. Range of outcoms is a lot wider, and again for me as a rate strategist, I think that probably means lower rates as you see some convergence in this.
Well, we were just speaking of Edie Danny and he actually came out with this fantastic analogy, which is essentially that this is a doctor who prescribed all this different medication without running it through without running it through the computer to say which interacts with which raises this question of how important is that mix of policies based on where the economy is right now, Stephanie, from your vantage point, Mark's talking about how he things too much optimism is
baked in from policy perspective. Is there too much optimism baked in with respect to the economic data that we've already gotten in terms of where we are coming from and how much uh inflation is still in the economy and how much momentum there is.
Yeah, I think that's totally fair. The part part of this, these things go hand in hand. So what's making to the rates market is the expectation that the economy is running on all cylinders r quite quite strong, and like, yeah, it is, but it's probably not quite as strong as a as as the outlook suggests. And the FMC kind of introduced a little bit of uh uh, you know, extra optimism about the economy that's probably gonna gonna disappoint
to some extent. We'll probably see payrolls running a little bit slower, allow them to actually cut certainly two times this year, and the market's pricing in a little bit less than that.
So the economy's running just fine, but the expectation.
Is similar to what Mark just said, that Trump's policies are gonna be incredibly you know, growth positive, and they're gonna be happening right now, and they're probably not. It's gonna take a while for a lot of the stuff to play out.
Do you agree with Mark that the Fed's bias is going to be to look through any of the temporary effects of some of the tariffs.
I think that's what they should be doing, in the sense that if they don't and they start becoming notably more hawkish as a result, that could be a recipe for a recession. In the sense that we are largely of full employment, this.
Could become a real problem.
If we start to see, you know, the FED reaction function look quite different than what it was last time, we might have a real problem, in which case growth is likely to slow down notably as a result of these terriffs.
Sarah's are seculationary.
Mark, I'm just curious when you take a look at the fed's reaction function. We were talking with Claudia sam and she was saying that they have introduced as volatility.
We were just speaking about that.
She was saying that they should follow models a bit more and in particular some of what she's seeing in the employment market. What would you be following if you were on the FED as your sort of load star for where the economy was heading.
Yeah, look, in periods a very elevated uncertainty, which I think we are in and are going to continue to be in the early part of next year. We think the most basic monetary policy rules can be very instructive, like the tailor rule. Now, any model is only as good as the assumptions that you want to make and the inputs that you have into that. But we do think that tailor has been a pretty good guide over
recent years. The FED does not, nor should they follow it blindly, but they should use that as a meaningful input. Other FED officials Chris Waller has talked about how they do indeed do that, and right now at least they've pretty much converged to near where Taylor suggests that they will be. And the big question is what does the data imply from here? The market thinks that the FED will only need to cut about forty basis points more
and then they'll be done. But if you actually use the FED zone economic projections in their SEP, the medians and the unemployment rate as well as on inflation core PC, it suggests that they should really be cutting, probably something more close to one hundred basis points, And so it really depends upon again, what are the core you can assumptions that you have.
The market's very optimistic right now.
I think that growth is going to remain strong, the unemployment rate won't rise much above four point two, maybe four point three.
Inflation is going to stay sticky.
But if you do see inflation move down, or if you do see the unemployment rate tick up a little bit more, then the market's going to be talking about a FED that could potentially be cutting a lot more than what is currently pressed. Look just final point for me, when I think about the Fed's reaction function more broadly, and I think we in the rates team agree with this.
We generally believe that the Fed's going to overweight labor data, and John, You're right, the labor market right now is really strong.
Breadth is kind of narrow. We think that the labor market.
Can best be summarized as one where there's not a lot of firing, but there's also an increasingly slower pace of hiring, and the claims data very much points to that it's still a very healthy labor market overall, but continuing claims really, you know, if you look at a four week moving average, they continue to edge up over
time while initial claims stay stable. And if that trend continues, I do think that the Fed's going to be seeing a labor market that maybe has less breadth than a little bit more concern than at least what the most recent FED meeting will be.
This I'd be the first one we acknowledge that it won't say much much for downside surprise next week for a lot of people who start pricing in more rate cuts from the Federal Reserve.
Well, that's an interesting kind of dynamic that's changed in terms of where the bias is for this rates market and whether it's sort more for a rally than say a sell off.
Mark Stephanitie to the two of you. Thank you, go to see you both. Mark O Banner of Bank of America, Stephanie Roth of Wolf Research. This is the Bloomberg Surveillants podcast, bringing you the best in markets, economics, antient politics. 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.