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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. We begin with our top story, the S and P five hundred posts and its best day in more than a month. As investors look through messy politics, Brian Leavitt of Investco rights in this I don't believe that these markets will be trading based on Trump's or Harris's prospects, but rather on the direction of the economy and FED action. I find the talk of the Trump trade versus the non Trump trade to be much ado about nothing.
Frank, good morning. That's music to the ears of a lot of people.
After politics has dominated the conversation in this country, in this market as well, for the last few weeks, what do you think is the number one issue right now.
I think it's the direction of the economy.
And so you may remember I was here about a week ago and I said, for the first time in a while, I'm getting a little bit more defensive. Then you have a big rally in small caps. In my thought as oh, these folks are never going to have me back. But I still continue to believe that we want to be a little bit more defensive. It doesn't mean equities can't do well. But to what you were talking about earlier, it's the larger cap, it's the higher.
Qualities because growth slowly.
Now, ultimately, I think the Federal Reserve pivots. So for the week after I was on the show, the focus was on the FED cutting rates. Now the focus is a back towards growth slowing. We'll get to the point where the focus is again on the FED. We've priced in the couple of right cuts now and things.
Will broaden out.
But in the near term it's more of a defensive environment as the economy slows.
I've got a quite in front of me from Morgan Stanley, and I think it might resonate with you. It's from Lisa Shanna she said, I'm like sickle and unlike cycles. When fed rate cuts procede, recession and reaccelerating economic growth sustainably impacts the high bit of small cap cohort. This time, a goldilock soft landing is apt to reward large cap quality names that can deliver margin gains despite modest economic growth.
Is that how you're thinking about things?
It is, although I wouldn't say that it doesn't involve the small caps because if you can get through this period with as without a recession, I agree, then large caps should do well.
The broad market should do well. But typically, if you look.
Historically, when the yell curve normalizes the ill curve normalizing, you tend to see more participation from small and value and investors have been wondering why.
This market's been so narrow.
We've had twenty months of an inverted yell curve, maybe twenty one months of an inverted yell curve now, so.
That's a challenge. This will change as we normalize the curb.
But the problem in the short term is that we've priced in the ray cuts in the economy slowly.
You know, we've priced in a couple.
So we'll need to see more carried through and more signs that this economy can be resilient before before things start to broaden again.
I like that the market message and the political message is the same. It's the economy stupid, and look at what's going on with respect to consumers and their happiness level. Are we getting a signal from the likes of vps, from.
The likes of the airlines, from some.
Of the commentary that we've heard early coming.
Out in this earning season that.
Highlights just how quickly growth is slowing.
To you, yeah, I think so. And look, we have to remember that was the wish.
You know, it was a year ago when things were robust and everybody was worried about inflation, and we heard things like hyper inflation and stagflation, and everyone was trying to be hyperbolic on these things. I was never going to be the case. The reality was the Fed was going to slow the economy, the fiscal stimulus was going to moderate, and consumers we're going to start to slow down. Inflation was going to come back into the comfort zone.
So that's where we are.
So we can't wish for something and then when it happens, be disappointed that it's happening.
And so, yeah, things are slowing in the US. The global economy slowing. The US is a big part of that.
Right now, how do you assess whether this is just one data point on a different kind of trajectory downward that's perhaps a little more traumatic versus simply the Goldilocks softening that everybody was hoping for.
Well, if you look for the guideposts on a path to recession, usually see cyclical access.
We don't have that.
We do have the inverted you'll curve, so so far we we're one out of two.
You see signs that the economy is.
Slowing, you look at survey data. It's not great, but it's not collapsing. And then the most important one is our credit spreads widening and our bankers tightening lending stand there's not really so you would look at that and say the economy is in reasonably good shape. It doesn't suggest a recession, but the survey data suggests things are certainly slowing down.
If you don't think right now, the Trump first non Trump trains much ado about nothing. When does it become something to do about something?
I'm not sure it does.
I know my big north star and that I've been watching.
It the entire time.
From the day Trump was elected through the day Biden was elected, the market was up seventy percent. Since Biden's been elected, the market's up seventy something percent. So I'm not sure why people focus on this that much. And I'll give you an example. When it looked after the debate, post debate, and Trump's numbers are going up, probability of winning. I'm getting these notes in my inbox that say, okay, here's.
The Trump trade.
Crypto goes up, European defense companies go up. You want to be short Chinese equities, And I'm scratching my head saying, wasn't that the.
Last four years? Right? That's exactly what happened over the last four years.
The other thing is, if I were to have been here in November twenty sixteen when Trump won and I said what would win, traditional energy or clean energy, everyone would have said traditional energy.
Clean energy won by a lot.
The exact opposite happened under Biden, where.
Traditional energy one by Latin.
I have people saying to me, you know, drill, baby, drill, If Trump wins, surely we're going to get back to drilling. We're drilling more barrels of oil right now than ever before you US history. So I think people are looking at this wrong. I think people have their own perceptions, their own confirmation biases that they bring to it.
But when you dig deeper, right.
The Trump traders energy and financials, Energy and financials did better under Biden than they did under Trump. So it just doesn't add up when you look deeper into it.
Let's park history, and let's focus one specific thing, policy and where we are right now. If you come in now and cut immigration and put up tariffs and put wolves around the United States of America, do you not
see how that would be inflationary? If you extend the twenty seventeen tax cuts, do you not see that that would be boosting the deficit at a time at a time where actually they are things that people are nervous about, the prospect of inflation reaccelerating the ability of the treasury market to handle that additional supply.
Well, it may also be happening at the same time that the consumer's slowing a bit in here, so you know, the u of counteracting forces against inflation, things like AI, things like older population. So I wouldn't necessarily say it's
inflationary to the market. What's going to mapp most on all these things as clarity give us some understanding of what this looks like, rather than when we did it in twenty eighteen, there was uncertainty, and so business investment dried up for a while with the lack of understanding of what it was going to look like. So long as there's clarity, the business environment will be able to handle its, consumers will be able to handle it and
look the realities. Both sides seem to want to pursue somewhat of an American First agenda, So there's not a substantial amount of difference with regards to this America First approach.
All those conversations about politics you've been having on Wall straight frasing cub Water, Oh life from Brian Levitt, I'm investco Bran is going to see it.
Here's the latest.
An unofficial ap tally has harrised, passing the number of pledge delegates needed to secure the top of ticket. President Joe Biden calling into campaign headquarters to offer his support. In his first public comments since ending his campaign, Isa Bortansky Btig says, this, we continue to believe it will be a close race, and we maintain our view that Trump is the slight favorite. Isaac joins us now for more is so let's start with the numbers. Follow the money.
Eighty one million dollars race in twenty four hours, more than one hundred million dollars donated for the campaign since someday, and yet your fundamental view hasn't changed, Isaac White.
So look the.
Money that came in for the Harris campaign, I think is a representation of the relief that's washed over the Democratic Party given that Biden is stepping aside, and they think that they have someone who can prosecute the Kese against Donald Trump in this election. But our review of this is that we still have probably seven or eight
different narrative changes between now and November fifth. And when I peel back that onion, I look at the swing seats that are going to define this right, the ones that are going to actually decide this election, and you look at those six states. The issues that animate voters the most in those six states thus far have been immigration and inflation. And if that's still the case on November fifth, I think that Donald Trump is going to be the next president.
The caveat here is.
No one knows what we're going to be talking about in one hundred and five days. If I keep in mind, it was just twenty five days ago or so when the debate happened and it reset.
The entire election.
So we're going to have to deal with these narratives changing and during that time of great uncertainty. I'm just going to keep going back to what animates the swing state voter when you look.
At the issues.
This is why a recent poll showed that actually majority of Americans thought Trump's presidency was excess versus Biden's. If that's the case, then how does Harris differentiate herself from Joe Biden? He said there he wants to go on the campaign trail with her.
Does she want him there? Yeah?
Look, I think that in certain places. Absolutely.
I think that President Biden's going to spend a whole lot of time in Pennsylvania over the next few months. But I think that the Biden and excuse me, the Heritage campaign got to get used to saying that now is going to enjoy some of those contrasts emory Like, I really think I don't think there's any example in modern political history of a vulnerability like age becoming weaponized this quickly with the switch in the top of the
Democratic ticket. Age was their greatest weakness. It is now the cudgel that they're going to use to push back against Trump.
So that's what you're going to hear a fair amount about.
You're going to hear the fact that Trump is a convicted felon, the vice president is a former prosecutor.
And of course we're going to hear an enormous amount about.
Reproductive rights, given that that's the one area that you've seen Democrats have success with animating voters in those swing states.
And she's been the face of that for this administration. But beyond reproductive rights, she was a prosecutor, but he was a vice president and a senator. But we haven't really understood what her core values aren't a lot of policy issues what differentiates herself.
Look at at the moment.
The way that I'm thinking about this is I'm telling clients that there really isn't much daylight between Biden and Harris. I think that a Harris one administration would look a whole lot like Biden won. There is good reason to believe that Harris is more progressive ideologically than Biden, but this has been a relatively progressive administration the past few years,
so I don't see much of a shift there. Furthermore, we've got to keep in mind presidents are often limited by the other side of Pennsylvania Avenue, right, and we still firmly believe that the Senate is going to switch to Republican control, So what can be done there is limited.
I do think that there are going to be subtle areas of difference in terms of trade policy and in terms of how they would push forward on the issue of fiscal fiscal policy in these firing tax cuts, but it's all very subtle when you compare it to how Trump would do those things.
Isaac markets would agree with you, and betting markets seem to suggest that generally people do believe that Trump still has.
The edge, although it has narrowed to slightly.
I am wondering though, about the bigger issue some people are saying, which is there is new energy in terms of bringing out voters that potentially that could affect the down ballot races for a congressional House, House and Senate.
See do you buy that argument for the moment?
Yeah, I mean, look, the most surprising stat of many over the past few months has been the yawning enthusiasm gap. When Biden was at the top of the ticket, seventy seven percent of Republicans were happy with their candidate. Only about a third of the Democrats were happy with their candidate when Biden was at the top of the ticket.
You're going to see that normalized and you're going to.
See that gap close, and I think that will have an impact on the House races. And this is something that I think is important to hit. The House is going to be closed no matter what. That is the reality from the gerrymanderd system that we all live in. So the House is going to be plus ten or fifteen seats one way or the other. So it will
be very very close. And in that instance, I do believe that you're going to have an impact from this, and I think that it pushes back against the red wave narrative that we had all been seeing over the past few weeks.
I think the House is going to be very very close. My bed is the house.
Goes whichever way the White House does, but it will be within a few seats.
I want to speak to what you're telling your client base, specifically the client base in the domestic community. When you put out the note over the weekend following this decision, there's a line that jumped off the page to all of us around this table, you said, focus on electability and not policy. Just build on that a little bit more. What have you been telling clients about that?
Well, I think after the disastrous debate, the performance, I think everyone was trying to parse where the policy differences would be between Harris and Biden, right, And we were all going through her Senate record, We're going back to her actions as age in California, And I just don't think that there's much value in that because they replace the top of the ticket on the Democratic side, not because of policy, but because of age and cognitive capacity.
Right.
And I think that the similarity between Harris and Biden is a feature, not a bug.
And so to me, it's just really.
A question of how she impacts this race rather than the policy substance. So is she able to change the dynamics in Georgia and get voter turned out within the black population, which is unclear that Biden was able to do in Georgia. It's unclear if that would have been there. How is she going to impact women and independent voters
in some of those swing states in the Sunbelt. Those are the things that I think matter way more for markets and all of us trying to get our arms around this election than subtle differences between them between Biden and Harris and their policy perspectives.
Isaac.
With that being said, was JD Vance the right pick for Trump at.
The moment, But it sure doesn't look like it was right. I mean, I think that hindsight is something that really underscores the humility that all of us should have here. But at that moment, I think that Trump wanted to run up the score with his base, right. He wanted this to run up the score in Ohio and Pennsylvania and Michigan and Wisconsin with white, non college educated voters. And I think that at that moment he didn't worry
too much about some of the other subsets. And Jade Vance really does not help you with many other voter groups, and so at the moment, it.
Sure doesn't look like the right one.
But I think A Marie really underscores the importance of who the vice president picks as her running mate, and I think that she is going to focus intently on someone that can help her in one of those swing states to broaden the base. That's why you're looking at Joshapiro, the governor of Pennsylvania, or even Andy Bisheer.
Isaac, thank you, sir.
Just want to flo over the last couple of days on at both times Kid of BTIG. With earning season ramping up, Jill Careyhole of Bank of America writing this, we still think pockets of small caps are poised for continued down performance. Be selective near term, focus on value stocks where we'd still stick with quality or profitable value.
Jill Joonice.
Now for more, Jill, good morning, this is your turf, this is your world, so let's get straight into it.
Small caps.
When I buy the Russell, what am I buying and why should I be buying it at the moment?
Well, I think you know, we had gotten more cautious on the Russell two thousand as an index back in April when the inflation data had continued to come in stronger, and you know, really we highlighted there was two things that we need to see to get more bullish on the Russell as an index, and one is you know, more confidence of the FED will be able to begin that cutting cycle, which now is what we've started to see in what was a big driver of the rally
we've seen over the past week or two. I think the other is fundamentals and profitability, and that's where you know, the Russell does have a high proportion of unprofitable stocks that saw much bigger earnings recession than the S and P five hundred, And that's where I think investors are a little bit worried because when you look at the beginning of the year, investors were expecting that by this earning season, small cap profits would have come back, recovered
been better than large cap profits growth, and that's not what we've seen. We've seen, you know, a lot of hope held out for fourth quarter this year, a very strong recovery, but the first, second and third quarters of this year estimates have gotten revised down significantly. So I think that's what you know, we really need to see
if we want to see if this rally sustainable. Is you know, can we get good earnings day to this earning season not only surprises to the upside, but the guidance that supports that the fundamental backdrop is healthy for sus.
So let's pick a sector, a dominant sector on the RUSS, the financials. We can talk about a financials. The regions have been a big part of the story. Now for the best part of twelve months, we've had a big rally there. Do you think this reason to believe earnings will pick up and reaccelerate as we start to interest rates at a federal reserve, that things get better for that cohort of companies, right?
Yeah, I mean financials has definitely been a big leader of the rally recently, and certainly, you know, if we see an outlook where we're looking for FED cuts, where we're looking for soft landing, you know, no significant deterioration in the economy that should be supportive for financials. I think, you know, when you look at factors like the regionals and credit conditions, that's still a risk that's out there.
So you know, if we're in a backdrop where where the Feds cutting because economic conditions have deteriorated significantly, credit spreads are rising, that would be more negative versus a backdrop where the econ is still supportive. But certainly for financials, you know, I think we've been due for a catch up,
you know, especially within small caps. You know, looking out, I think we still would be more cautious on some of the regionals in its scenario where you want to be selective in relative to the large caps, which you know, large already got regulated, they saw their multiples contract for a number of years after the financial crisis. Regionals still could be subject to that. You know, if we see greater focus on some of these regional banks that haven't had the regulation that the larger cities.
Have, there's sort of a tortured relationship a lot of investors have with these names is simply because they have gotten so beaten up that on a valuation perspective, they look great, and then you look under the hood and you start to see a lot of concerns. One of these numbers, I'm talking more generally, not just the financials, more generally. You put this out that only thirteen percent of second quarter reporters of small cap companies have beaten
on earnings for share and sales. That compares to fifty one percent of large caps. Can you give us a sense of why why smaller companies are struggling to really meet some of the expectations even as large caps continue to outperform.
Yeah, I mean it's been still pretty broad based, where just that that overall profits recovery has been much much slower to come to fruition in small caps, and the earnings decline was pretty much across the board, And when you look at second quarter expectations, pretty much most sectors are expected to still see negative earnings growth this quarter. So,
you know, smaller companies have been more challenged. And when you look at the large caps, obviously a lot of the Magnificent seven, some of the big tech stocks have been the drivers of earnings growth. We do expect that to slow and see a broadening out to the rest of the you know, other four ninety three of the SMP of five hundred. So it's a similar story for small caps. But a lot of these smaller company companies have still been challenged. You've had less profitable companies within
the index. You've had sectors like healthcare where you know, that's been one of the sectors that's all the biggest decline and now is expected to see among the biggest recoveries. So I think when you're thinking about buying the fundamentals of these companies, that's why we've been you know, still more cautious on the overall index, but I think in pockets of small caps there's still a lot of opportunity. And you know, as you've pointed out, the valuation backdrop,
the positioning backdrop is very supportive. Investors have been very underweeks under allocated to small caps. You know, we've seen investors want to get more more bullish on small caps. They've they've been such a laggard for such a long time. So I think the areas that are you know, perhaps less sensitive to to refinancing risk if there's still some uncertainty on the FED could be a good area. Areas that are sensitive to you know, still cheap but have
positive estimate revisions. If we're in a backdrop where that's still.
Uncertain, you went to the area that I wanted to go to. At the three pillars of economy, earnings, and politics, we're focusing on the first two. We've talked about earnings, but what is the read through to the economy This question of small caps ostensibly have more floating rate debt, are more sensitive to perhaps higher rates by the Federal Reserve.
Is that a key.
Reason why you're not seeing earnings increase at a faster pace. Akin to some of the larger companies, they were able to lock in some of those funding costs that were really cheap earlier on.
Right, Yeah, small caps definitely have a lot more as you pointed out, floating rate short term debt. About almost about half of their debt falls into that profile, whereas large caps about eighty percent of their debt is that you know, long term fixed rate debt. So, you know, I think the fact that we've seen inflation start to come down and the Fed could be on track to
begin cutting rates. Our expectation is in December of this year, but obviously the risks have been pulled forth that maybe maybe a cut in Septembers possible, So you know that that eases some of the risk. The fact that we've seen credit spreads have been low. You know, some companies have been willing to refinance even though rates are high
because you know, credits backdrop has been supportive. So you know, that's the risk as if we see credit spreads you know, start to rise again, that that could become a headwind to the to the profitability as well. So you know, I think this is a backdrop where you want to be selective within small caps and not just by the rustle which you know, we think further clarity on the profitability backdrop could help. But for now, you know, our and also be AVAG cover about a thousand small and
mid cap stocks. I think there's a lot of opportunities for for alpha if you can focus on you know, like I said, the names that actually just have positive Estimer revisions and a backdropper revisions have still been coming down. Guidance has been weaker in small caps some of the value stocks. But you know, we're watching what companies are saying this earning season. If if guidance can can get a bit better, it's still been a bit weak, you know,
within small caps. Then you know, companies beating and raising I think could be supportive of a broader you know index rally and you know, similar to the risk rally we saw over the past week or two.
Joe, I have to ask about the third camp that Lisa alluded to, the politics. How much is small caps a bet on Trump vance?
Well, I think when you look at you know, the rally over the past week, really some of the initial drivers were more on positioning and you know, risk on We saw financials as a big rally deep value stocks.
We saw stocks with high short interest rally as we saw some initial short covering, and what we've looked back really, you know, while while certain political factors or political policies can certainly impact small caps when you're looking at tax rates or when you're looking at policies that could impact growth, overall, we found that profits tend to matter more than politics
for small caps and for equities. So, you know, I think what's going on with GDP and interest rates is going to be a bigger driver of the index than necessarily which political parties in office.
That's the piece of a story we're waiting for. Jill.
Let's try to catch up Joe caerry Hill there of Bank for America. This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, angiot 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.