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. Daryl Kronk of Wells Fargo saying this, as the odds of a Trump presidency increase, so do the chances of Republicans keeping the House and winning the Senate sectors that are likely to be received as winners under a Trump White House, Republican Congress, Our Defense, financial services, reads, and traditional energy. Daryl joins us for more Darrek and morning, It's got a Sailing Jack. Let's start with the energy piece of this perception versus reality.
When the former president comes in, it's a Droe baby trou Should I be buying Genijio running away from it?
Well, it's interesting It's a great point because during the past Trump presidency, energy was one of the worst performing sectors, right from a gets standpoint. Ironically, during the Biden administration, if you market as of the date of Joe Biden's election four years ago, energy has been one of the best performing sectors. So there is a little bit of
a contrarian element there. In fact, it's rivaled tech. Most people don't believe this, but you can go back and run the numbers that everybody believes Tech has been consumed all the oxygen in the room, and the reality is energy has done extraordinarily well in the last four years since the last election. All that said, I actually do believe that we're probably in a secular bowl for energy. It's our single biggest and best idea of high conviction
on the board. And it's not a conviction that we think, you know, fades in the next three six nine months. We think it's a multi year. You know, the world just has too much demand coming out of AI cybersecurity, defense spending. Right. I can go down a list of inputs coming in to the demand side of energy, and we just don't have enough supply. That's just the hard reality.
We should also say it's odd reality of American politics that you can come out and say drill, baby, drill. And there are very few progressive Democrats that are willing to come out and correct in because the reality for them is that actually we've got record output near thirteen million pounds a Day's a odd situation, isn't it. They almost don't want to talk about it, that we've actually got record output in America when it comes to crude, right.
And it is a sector that also has done very well under President Biden, which also gets to this idea of how much do you really want to trade the politics when they both have had the.
Same that result, we've been traded the politics the small caps as well. You've got rates, you've got earnings, and then you've got Donald Trump out of those three right now. And I know this is difficult to do, but just based on your conversations, what you see in the price the rally that we've had over the last week in small caps, is it about one versus the other or three combined?
What is it?
So we've had a lot of conversations that Strategy Committee about this, right, because it's to rip your face off rally over the last seven to eight trading days, and it started with the weak inflation. Then everybody believed the Fed was, you know, a go in September, No if sands butts and so here comes to the rate cutting cycle. And then of course the events over the weekend of the attempted assassination put a bid in a Trump presidency in a red wave basically, So it's those three combined.
I would tell you this, John, we're thinking about is it a reaction or is it a rotation? Because they're two different things. Right, reaction is a short term reaction in the last seven eight trading days, right that blows through some of the technical resistance levels and everything else. Or is it a true rotation where capital is believing that small caps can durably outperform over the next you know, six, nine, twelve months. We think it's the former. We think it's
a reaction. At this point. If you look at small caps, still forty percent are non earners, as everybody knows. What's interesting is if you look at the equity risk premium, right, which is just a function of am I getting paid to take the risk, It's at an all time low on smalls, all time low, right, not like a cycle low or anything else. It's an all time low today,
so you're not getting paid to take the risk. The leverage is still high as we know in small caps, so as they have to service that debt, right, that's hard on their earnings, and the earnings both today and going forward are still expected to decelerate relative to large right, so the fundamental story is not there now. What can change that? What will change that is if the Fed cuts rates faster and more than people expect. Because small caps are highly indexed to floating rate debt. Almost forty
forty five percent of their debt is floating rates. So if you bring the short side of the curve down quickly, that's a big tailwind right to small caps along with their highly leveraged so obviously the rates come down, it helps them in their business model, margins, earnings and the like today bottom line, we still think it's a reaction and not a full rotation.
What about the rest of this market because it's not just small caps that did better. It was basically everything but big big tit tech just kind of state flat is not more enduring that you have a market that has maybe gone over at skis with how concentrated it is and willing to look elsewhere.
I think it's a great point, Danny. So you know, we are at a little bit of tenuous levels this morning, right, the S and P sitting right on top of its twenty day support level, but Big Tech more importantly, right mag seven top ten names sitting on top of its fifty day If it pierces its fifty day support level, right, I think some of that selling accelerates to the downside. We all know breath has been far too narrow right,
and that leadership needs to expand. So I would argue and postulate that if you can get leadership to expand right into financials, into industrials, right into other areas of the market, that's actually a healthy thing for markets. We know we've had too little leadership that's been too concentrated than on a market cap basis has driven that. So
it's a healthy thing if we can do that. But the question is if Because just a week ago before we started this rally, the index was set all time highs and the number of participants above their two hundred day moving average, we're at all time lows in the SMP.
Right. So here's the thing, I worry about that people are pan against a cyclicals just as a cycle is starting to turn the wrong way. Isn't that what you worry about too?
It is? I mean, if I was asked this question of the to day, you know what would make you buy small caps?
Right?
Which is a prime beta cyclical? It would be one of two things.
Right.
Either it has to be price compelling, which to me the Russell two thousand probably needs to be at eighteen fifty nineteen hundred before you're price compelling. Or I have to believe I'm early cycle and not late cycle, and all the data tells me that I'm still late cycle. Right, If you can convince me I'm early cycle, I'm a buyer or small capsule?
Because I've been asking this question for months, if not years now, do you really want to buy the recovery to the recession we haven't had?
That's right? Unless there's compelling evidence there right that we're truly that. I guess you can make the case. Here's the contrring case. You make the case we soft land so you never have the recession. You trough out a little bit, and then you reaccelerate hard to the other side of which then small caps make sense. I'm a little worried that people are jumping on small caps because remember small caps did well as we close sixteen and
early into twenty seventeen on the first Trump presidency. Right, so they're replaying the same tape, right, if you will, you know Bear Steepener, small caps outperform, you know defense financials rates. Yeah, the whole thing is the same playbook. If that same playbook doesn't play out in policy, right, and what let's say Trump two dot zho comes to fruition.
If that's how the November election goes, then you've got some risk in those trades and they become then the reaction and not a durable rotation.
Well, as we start out this conversation, Darryl, a huge part of it is what down ballot races look like, what the House and what the Senate look like. Does just the fact of Biden being more likely to drop out with this pressure make that up in play and maybe question some of this rotation.
Yes, and no. I So our thought all the way along is the Senate. Clearly the math is difficult for the Democrats to hold the Senate, right, and everybody knows that. So it's likely to go GOP. We've often thought the House goes the way of executive branch, right, so whoever wins the presidency carries the House on their coat tails. Right now, you have to think that the the the strength has been towards the President Trump and and weakness towards uh Biden at least in the intensity of voters
and what they wanna see. The Democratic Party seems to be united around one thing, which is trying to move to a different candidate at this point, what if and when they do that? The question then becomes can they unify from there or does that fracture the party?
Oh, it's been a massive distraction the focus. I have a Whamingley winning in November and not campenting for the next four and a half years.
That's right.
And policy, let's talk about policy. Let's talk about policy a little bit more now it's going to see it. Thanks, thank you, sir, Katrina Dampley Franklin Templeton with this to say. The biggest issue for investors is the concentration we have seen in the market that is driving returns higher but with significantly lower breadth. Katrina joins us now for more, Katrina, we've been trying to address that over the last couple of weeks. Do you think this move that we've seen is sustainable.
I think we hope that is sustainable in terms of the rally that we've seen in the small caps. And why do we think that? Well, as I said, you know, the concentration of the market and the amount of market cap that's represented either by the Magnificent seven as we call them, or tech generally is in historically very very high levels, and we're hoping that some of that can put performance can spread into the smaller cap area.
One of the.
Reasons that we're actually optimistic is our view on investment and investment spending, and we think that that will disproportionately benefit the small cap companies over those larger cap names.
What do you think of earning so far? And maybe you can't name specific names, so I can do that for us, the likes of Delta United, PEPSI. It doesn't sound great on the consumer front, and when I think about small caps and I think about regional banks, it feels like we're piling into cyclicals at a time that some companies are telling us things aren't that great.
What would you say to that, Katrina this morning.
Okay, you are absolutely right that we have seen a lot of pressure coming from the consumer. But that pressure and that concern.
Is not new.
We have seen it for many quarters ahead of time, and so companies, when you are seeing these trends early, can prepare. So we've seen something like a McDonald's talk about, you know, bringing down the cost of its offering and adjusting to this new reality. And that is positive because as long as companies are able to adapt, what we see as a negative headline can actually be an opportunity for a company to continue develop and move their business forwards. So, yes,
we are watching the consumer. The second part of that is some of the pressure that we're seeing is at the lower end of the consumer. So if you rule, the bottom forty percent of income earners actually represent less than twenty percent of spending. So we need to really understand this kind of broad range of spending across our economy and who is really driving the numbers.
I mean, there are pockets, but there are pockets of weakness, Katrina. And if you just look at the fun flow, people have just been buying outright small cap ets. Big of America's latest note says it was the second biggest inflow on record over the past week. Do you think there's an issue with people just diving into the sector as a whole. Do they need to be more picky?
I like picky investors. They're my favorite type of investors, because a picky investor is really saying there are benefits to being active and to really understand what you're buying. Particularly in the small caps, you're kind of buying a basket of everything, and what we're saying is, actually, you do need to sort through that basket of stocks and identify those companies that are treating a good valuation. And that's something I always talk about. Your evaluation is one
of the key drivers of stock performance. But also you want to look and make sure that they've got strong financials, that they're not pressured, or that they're prepared for the interest rate rises that are in the past but are now really starting to come for our financials. So I think in the small cap plan, it really does pay to be an active investor, because otherwise you're just kind of buying what I would call a hodgepodge, but just a diverse and a highly varied range of investments.
But someone to argue Katrina that as long as it seems like Trump has good odds to be president, and that the FED is going to be cutting rates, that there are things that are under love that should be going up anyway. Are those two pillars of an argument to say maybe you can just buy it regardless that they're just so in love that it makes some sense.
But that idea that just because it was unloved and suddenly some macro factors are going to change and that's going to make everybody love a stock, I think that that's really not understanding the reality of what drivestock performance. Because just because people didn't like a company before, if you didn't like a buggy whip manufacturer when we had that transition to cars, it doesn't matter if we had one hundred or one thousand more cars on the road.
We still don't need those buggy whips. So you really need to understand the business. You can't just say that because it was I loved yesterday, I've got this positive mac or a backdrop that things are going to get better, because I just think that that is not the reality, particularly in small caps.
Katrina Well said, it's going to hear from your Katrina, don't be there of Franklin Templeton. I think we all need to talk about the process as well as Ama from the RNC and Marie. Thank you. Let's turn to Rob Casey now a signal Global Advisors.
Rob.
Great to catch up with you, sir. Thank you for being with us before we talk about the process. And I'd love your thoughts on the process because you guys specialize in this kind of stuff. I want to talk about how close we actually are now because it feels like you and a team have changed your base case about whether President Biden stays in this race. Where are we now?
Yeah, John, we have and thanks for having me on. You know, as of yesterday, I think that the tide really has turned. Anne Marie totally agree with her. This weekend is the most important of Joe Biden's political career. The issue for Biden for Democrats is we've essentially had three weekends.
In a row, or three weekends.
Out of the last four that are the most important of Joe Biden's career, after the debate, after the NATO summit, and now this weekend coming up.
We just don't think that that path is sustainable.
We can't have every weekend the question of whether or not Joe Biden is going to drop out. Joe Biden can't have it. Senate Democrats, House Democrats, who are running very tight races. Nobody can have it. So we don't think it's sustainable. Clearly congressional leadership is thinking the same thing. Wefer from Chuck Schumer. We've heard from Leader Jeffreyes, We've
heard from Nancy Pelosi, all of whom you know. It seems that they're going more public with further pressure on Biden to step aside.
So let's go to the weekend. Let's assue this happens just for the sake of the following conversation. Let's see he sits there at the weekend and delivers an address to the nation and talks about stepping aside.
One done.
What does the process look like going into Walkers rob What do market participants in our audience need to think about?
Yeah? Absolutely, well, I think the first moment after that, there's going to be a scramble within the Democratic Party. Obviously, everybody's sort of preparing for this behind the scenes. Now nobody's able to explicitly prepare for it until it happens. We with very high conviction believe that Vice President Kamala Harris will be Democrats' plan b Now, it may not be that she is immediately coronated or Biden immediately says, you know, I'm moving on and handing it to Kamala.
There's a chance that we have sort of a mini contested convention in August, but I think very likely and almost immediately it will become clear that the Democrats are rallying around and coalescing around Vice President.
Harris, which they need to.
I mean, they can't have a contested convention after Republicans had, you know, one of the most successful conventions in recent history, entirely united around and behind Donald Trump.
Rob It's a catch twenty two though, because if you do have Democrats who are united against United under one candidate, presumably Kamala Harris, as you were talking about, then it gets back to this criticism that they face before that they're running an undemocratic like type process to have their candidate up on stage. How do they get around those sorts of claims if they do unite under her.
Yeah, I think it's a fair criticism, and you know, I think if we see a kind of backroom deal situation, there will certainly be more criticism. I think the way for Democrats to get around that is potentially say, Okay, we're going to have an open convention. Anyone who wants to throw their hat in the ring is more than welcome to. But you know, a little bit more privately, coming from Biden, Schumer, Jeffreys, Pelosi, that really the whole leadership gang a lot of pressure for people to stay
on the sidelines and let Kamala around her race. We've already seen Newsom, governor of California, say that he would not throw us hat into the ring. That's a surprise given he's essentially been campaigning for president over the past.
Two or three years.
We've heard similar from Governor Gretchen Wimmerre and others who it seems like they are not incredibly willing to challenge Harris in this hypothetical.
I mean, I can't help but wonder Rob if part of that is just they know they're going to walk into a very difficult campaign and it might bruise them for their chances in four years from now.
Yeah, I think that's fair.
I mean, one of the most important aspects that we have to remember is the Biden Harris campaign has raised hundreds of millions of dollars. They have about one hundred million dollars on hand as we speak today, and Harris would be able to use that money almost immediately. She wouldn't be able to use it immediately, but essentially it would be hers should Biden set beside, because her name is on the ticket. Newsom's name is not on the ticket,
Whitmer's name is not on the ticket. All of these potential candidates would be phenomenal candidates either in twenty twenty four or twenty twenty eight, but they just don't have the infrastructure, They don't have the funding available to them right now to immediately challenge Harris and then to immediately challenge Trump.
What are you thinking of in terms of a VP if it is Kamala.
Rubb, Yeah, governor and yoursheer from Kentucky, Governor Roy Cooper from North Carolina, potentially Governor Jos Shapiro from Pennsylvania. Of course, you know, it doesn't think a genius to know that the unifying factors among those three and others.
Moderate white male.
That is probably a necessity for Vice President Harris, who you know herself is not incredibly progressive on policy, but whose profile certainly groundbreaking, ceiling shattering, and thus perceived to be progressive by many Americans.
I have a feeling Rub, we might be talking again this weekend, so I'm looking forward to that. If we have to, Rub, Thank you, sir Rob Casey there of Signal Global Advisors. This is the Bloomberg Sevenants podcast, bringing you the best in markets, economics, an Giet 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 out
Mm hmm