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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. With us around the table,
Stephanie Roth of will three Search. Stephanie, good morning. And reaction to this data so far.
Yeah, I mean it's an interesting one.
And like Mike just said, a lot the weakness came from the Northeast, which is kind of interesting. It bounced back, it came week after a strong month in September.
There's just a lot of sort of noise going on in the data.
I think what we're going to see is it's the housing market's going to have trouble bouncing back with mortgage rates having increased after the even the FED has been cutting.
Why do you think rights have been going up, even though the Fed's been counting.
It's all about the election, and it's all about the market. Certainly, the market trades Trump as a yield curve steepener. We've seen that to some extent. There are concerns about the deficit. I don't think that's the primary driver. I think it's the market's getting excited about a better growth outlook, and for twenty twenty five, I think that's fair. For twenty twenty six, I'm worried about the tariff impact on the economy.
Okay, I'm trying to understand this.
So if yields go up, makes mortgage more expensive, makes it more difficult for people to afford homes because prices aren't necessarily coming down.
At the same time, we saw confidence.
Yesterday among homebuilders rise to the highest level going back seven months. And this whole idea is well, because of the election, regulations will be get stripped back, the economy will be going will be doing better than it otherwise had been. So which is it.
I think there's an element of this animal spirits coming back. So you saw for n to be it was driven by expectations. This week we saw Empire fed increase a
three standard deviation move. There's probably an element that people are feeling better about the Algho's right or wrong, but that actually has an important impact of the economy, and I think that's what's going to be driving an above trend growth for next year until we start worrying about tariffs again, probably not to the end of the year.
But why do you think the worry for terriffs comes at the end of the year twenty twenty six when that is the one thing we know that Donald Trump can do unilaterally.
So our base case is that one he probably wants to play this game with the number of the different countries like he did last time, having a number of meetings throughout the tariffs. We also think he'll probably wanta to attach it to some sort of investigation which will require comment period, And it makes sense for them to tie it to T to t extending TCJA, whether or not they explicitly included in a bill or he just there's a handshake deal about let's include the revenue savings for this bill.
It makes sense for them to do it around the same.
Time if that connected to the tax bill. What is the true objective of these tariffs?
I guess it depends who you're asking. I mean, I guess they're f From Trump's perspective, there's two benefits. I think they're pretty risky, but from his perspective it's too bad if it's one you can stick it to China and and two they can raise trillions of dollars on these on these tariffs at least a the way they if you assume sort of static estimates se.
So you see both the good things and the bad things that the market has to digest. When it comes to Trump policy being connected in terms of he wants to extend TCJA, he wants more tax cuts, and he's going to say I'm gonna pay for this with tariffs, so they all get rolled out at the same time, so the sequencing is actually in parallel.
Yeah, kind of.
I think for now it's a better growth outlook for twenty twenty five, better confidence, and then we start getting into the twenty twenty six tax cuts, and then I think it's it's a negative for the market because at.
That point it's tariffs.
And by the way, the tax cuts aren't really that large, right, They're expensive, but it's really just extending current policy. The incremental tax cuts that we're projecting is something like five hundred million dollars, which isn't that big. It's things like no tax on tips, or of the very narrow corporate tax rate cut which is just for domestic manufacturers.
The rest of it is just a very expensive.
Bill to extend TCJA, which is not a stimulus to the economy.
So, before we get there and going back to home building, because I'm still trying to wrap my head around Okay, you've got the tariffs and how this affects inflation, I'm trying to get back to does this cause a revival in the housing market at a time where everything that you just painted does not suggest interest rates going down
that much? At the long end, can you see a revival in housing in some of the basic staples that people have been basically complaining about that they don't have access to?
You?
Can you see a revival if you have mortgage rates that say at these levels?
Probably not. It's a tough one.
I think the part of the economy that's going to do better is on the investment capex investment.
Side, so less about less about housing.
I think mortgage rates are still going to be a bit of a headwind could see a bit of an improvement. The builders are excited from the regulatory front, and that's fair.
But I think the bigger stimulus.
For the economy is going to be on the corporate investment side, because that's where the deregulation is going to be important, and the sentiment is absolutely critical.
Before you go December portal cut.
It's a tough one base cases that they're gonna cut, but I think it's fair for the market to be pricing fifty fifty.
The most important thing is going to be.
Payrolls, and we'll get a hint of that today when we get SAT employment at ten.
Payrolls coming out a little bit later December sixth, in the next few weeks, and then December eleventh for CPI that FED decision December eighteenth, Stephanie could to see you to see it as I catch a number the Stephanie Roth of Wolf Research. Let's have that conversation right now which I've found of Tawsei Advisorycruit Joe, welcome to the show. Following those numbers from Walmart, I'm gonna still lease this question to kick off the conversation. What is Walmart these days?
And how much has that company changed.
Yeah, So Walmart is a terrific retailer that's grown its ecosystem and it's much more than just a retailer these days. I think, you know, they have become more similar to what an Amazon is in terms of offering a marketplace, offering advertising, and effectively selling across the board online, in stores, and they've grown their whole ecosystem. As a result, They've
been able to capture a more affluent consumer. They're still satisfying that lower income consumer that needs the low prices on a day to day basis, and so they're really serving the American customer very broadly right now. And this quarter was very strong and I think it just shows those results.
Yeah, Walmart's online sales now represent about eighteen percent of the company's business. They also have things like coupons for loyalty members to places like Burger King. I'm just wondering, Joe, if there is still the read through from a Walmart results to the rest of retailers. Do we get a real sense of the consumer and the health therein Yeah.
No, I do think there's still a good read through. I mean, Walmart is still the largest retail in the world. And you know, they are still, especially in America, the largest, and they're capturing customers day to day. I mean, over around two thirds of their businesses groceries, and so they're seeing that customer come in once a week. And their grocery business was amid single digits in the Walmart US operations, so the customer is still coming in on a regular basis.
They're seeking value. Their private brands have done well. As I said, they've captured a more affluent consumer. So it just seems like I do think it's still a good read on the broader consumer. But what's really interesting here is they do so much more now than just sell stuff out of the store, and I think that's what's gotten investors very excited. And you can see the strength and the market share games that they've had with the reports that they just did this morning.
Is their gain taking away from Amazon or is it basically taking away from Target from all the other retailers that are a bit smaller and less advantaged than they are.
Yeah, I think that the big guys kind of go to battle with one another, but really the.
Share gains are coming from all those smaller, regional, local players.
I think that's where you still see a lot of it, you know, because Amazon's operating quite well. I mean, they have very good earnings recently, and they're expected to have another good fourth quarter.
I think Target's been operating quite well.
We'll see tomorrow for sure, but I would expect, you know, some similar directional trends that we got out of Walmart today. But it's really as you go down. You know, the dollar stores have been under a lot of pressure this year. A lot of people believe that the Walmart's taking share from some of the dollar stores.
I think that's somewhat true.
Again, they are capturing a more affluent consumer, so that's coming from somewhere, you know, maybe the traditional grosser out there. So the prices are so good at Walmart, they're so sharp, and what's amazing is they're driving their business with increased traffic, increased unit sales. Those are the good things you want to see. It's not just ticket. Ticket's part of it, but it's really because they're getting more people and doing more frequently.
Jill, I want to talk about strategy.
Is the new strategy to start Christmas shopping in October next year?
Is that what we're going to be talking.
About Yeah, I think we may be already happened this year quite honestly.
I mean with Amazon Prime Day back in October, and then Walmart did an event right around it, Target did an event Best Buy.
Everybody else in retail tried to capture that week.
And you know, we've been seeing Black Friday ads for quite a while now, and you know it started to kick in even a little bit more. Just yesterday we noticed a lot more emails and pushing that. So that holiday season has definitely gotten stretched out.
Now.
This year is kind of unique because there are five viewers days between Thanksgiving and Christmas, so that does compress the season a little bit, and I think that a lot of the retail has tried to take advantage by elongating it on the front end. But it just seems to us that you're going to see this continue for some time now. Where you made to late October is when things start really for the holiday season.
Joe, We're all living it. We're hearing the music. We start hearing the music about a month or so ago, Joe, I wanted to talk about a theme that we've been discussing on this program for quite a while now, is how battle hard and how battle test did these companies have been the retailers over the last let's say eight years. They had the pandemic in the Trump first term president like Donald Trump will get a second term, they could face the same again, the tariffs the pandemic as well
when they manage inventory. Joe, how have things changed over the last several years for these retailers given the tests that they've had, the unique tests over the last decade.
Yeah, one of the biggest things that's changed is that the supply chain finally normalized in the past two years, let's say, and as a result, the retailers have been able to get back to more of that just.
In time ordering.
And we've seen the inventories be run very lean really for the past year year and a half for many of the retailers. You saw that again today even with Walmart, where they don't need to necessarily order early. Now when events happen like you know, the East Coast port strikes that happened and by the way, we haven't resolved that the contract has not been signed in the next round is January. The retailers did bring in inventory a little
bit ahead of that. I know there's concern if and when the new tariffs get put in place by the new president Electroma. I think there is some concern that we might see some inventories get accelerated prior.
To those terrffs. That makes sense.
The retailers have definitely gotten smarter about how they're ordering, where they're ordering from. They've shifted their distribution or their supply chains beyond China. They're much stronger in other parts of Southeast Asia at this point and other parts of
the world. So there's a little less reliance than the first go around with the tariffs back in twenty eighteen twenty nineteen, but it's still going to be a big pressure and it's going to likely pass on to the consumer, and we see it as somewhat of attacks on the consumer quite honestly, because it does it's likely to raise prices.
All the retailers are telling us they're going to have to raise prices at the end of the day, maybe not for the full amount of the tariff, but definitely for a good portion of that, and we see that as an inflationary impact as well.
Just to build on that, there is this feeling and every time we see a tariff announcement retailers sell off the most, and there are view to sort of sort of ground zero when it comes to potential companies that are most exposed to tariffs. Are you saying that maybe that's already baked into some degree and that people have basically prepared for that and these retailers have already plans in place to offset that.
I think the retailers, the better ones at least, have definitely been planning for it. It was interesting, you know, the day after the election, the way the market trade, and I know there was that the Trump trade and everything went up. I think the market was up two and a half percent that day. The retailers that have more exposure to China were down that day in a pretty big way, and so you saw that initial reaction.
So I think the market is already starting to think that way, who has more exposure?
Where do they have to lighten up?
But we cover quite a few companies that, you know, there's one example I have where, you know, several years ago they had.
Fifty percent of their product coming out of China.
Today it's twenty Actually, it's probably getting close to twenty.
It was twenty five percent last year. It's probably twenty ish this year.
So like you see the retailers move and reposition through the past couple of years, and I think we'll see more of that accelerate over the next six months.
Job, it's going to hear from you, sir, good stuff. Joe Foundman there of TAUSI Advisory Group. We'll begin this out with equity's lower and bonds running as Ukraine carries out strikes in Russia using US weapons. Joining us now is Emily Rowland of John Hancock. Emily, welcome to the program.
I want to turn to a quote that came from Lori Calvicina of RBC to kick off the training wig and she said this about valuations and positioning and sentiment that the US equity market seems to have little capacity to absorb bad news. What have we learned this morning on that front, Well, we've seen the.
Modest bid John, for some of the geopolitical hedges out there. You know, you're seeing the dollar strengthen you're seeing gold catch a bid here, you know.
Notably, oil prices.
Are still looking at WTI below seventy dollars in barrel. So we saw a big move of course yesterday that's moderated a bit today and then again a modest bid for treasuries here.
I think the treasury bond market.
Has been focused on nothing but the potential for pro cyclical policies under the Trump administration. So you're seeing a bit of a shift here, but it's certainly nothing that's overly notable here given the prospects for heightened geopolitical risk.
When you think about all these issues on the table at the moment, emily, it just feels like it might be US driven in this case, a decision to allow Ukraine to strike Russia inside Russia with US missiles, but it's Europe's problem. Likewise with tariffs, tariffs ultimately Europe's problem.
This is just.
Reinforce the view of US exceptionalism. It's next year.
Well, certainly that's what markets are telling us.
You know, we've seen massive outperformance from US assets here again that dollar strengthening trade. We've seen this almost speculative frenzy across risk assets in the United States, everything from cryptocurrencies and crypto related assets to lower quality grows stocks. I think one of the things that we need to think about here is the consensus around the US is so overwhelmingly positive right now and when the consensus moves to one side of the boat, sometimes it can flip.
We want to think about, you know, potentially fading some of the move that we've seen into more speculative assets and redeploying assets into higher quality, more defensive options here, given the massive run that we've seen in more speculative assets.
So emily sell Tesla buy ten year treasure yields.
Well, you know, I think you got to own some of that stuff. You know, Tesla's certainly come a long way, you know. We look at, of course, the big event after the close tomorrow with Navidia's earnings. Navidia is the number one high quality stock. So we want to continue to embrace quality, and that's according to quality indices that
we look at. We want to look for companies with great balance sheets, good return on equity, a good ability to maintain margins here, but I think the name of the game right now is really quality at a reasonable price. How can we think about embracing those quality companies but not overpaying for them? And so we're following the earnings going to be really interesting to see if Navidia can once again deliver tomorrow.
Are we underestimating how much of a macro story and video is going to be then basically this could be the main event of the week in a pretty significant way to send markets in a direction about if they can raise and be in the same kind of way.
Yeah, I mean, I think it's just because of the sheer size of the stock.
It's got to be critical. You know. I've been spending a lot of time.
With investors over the course the last few weeks contending with some of the issues around, for example, emerging market equities and what to do with those positions. I've gotten a lot of questions about you know, India for example, and we've had those conversations. But it's like, look, Navidia is twenty times a side of some of these markets. So that's why it's so critical here to portfolios. Again, we want to be there because the earnings are delivered
and it's high quality. We've got to think about diversifying that exposure and finding areas of the market that are still going to give us quality. Make paps industrials for example, what that actually are trading at more reasonable valuations.
Emily, in your notes you talk about and you're talking about here that you push back against this consensus, this idea against higher inflation, higher growth narrative.
Then what do you.
Look at when you think about these policies that potentially we're going to see next year, which many say they actually could be inflationary.
Well, Amory, I.
Think potentially is the right word, and I think a lot of us have been paying the word potentially over the last couple of weeks.
Here.
You know, we looked back at the last Trump administration and yes, there were some different dynamics from a macro perspective, but core PCE, which you know is a FED preferred measure of inflation average one point seven percent in the last Trump administration. If these tariffs are more targeted, you may see the impact to inflation be much more muted, maybe a.
Tenth of one percent.
Per a lot of the economists that we've talked to about this issue, the impact of these potential immigration issues actually are going.
To possibly way on growth. So we're looking at some of the.
Things that the bond market's really not sniffing out right now. For one, wage growth that is coming down meaningfully, quits, job quit rates are down, which should put downward pressure on wage growth and corporate profits. Housing supply is increasing significantly right now, which should cause that tricky shelter component of inflation to finally moderate in our view. And then
the commodity story, which we mentioned earlier. If you're expecting some kind of nineteen seventies boom and inflation, that has to come alongside higher commodity prices, and we simply aren't seeing it now, especially given more muted demand out of China. So we think every backup in bond yields represents a nice opportunity to lean into the income that's available, which is now close to five percent on the aggregate bond inducks.
Two policy proposals you didn't mention. I'd love to get your view on the idea of we're going to see tax cuts at the end of next year, and also that this is a president that wants to see deregulation throughout the Washington complex.
Yeah, the deregulation story, I think you're primarily seeing in the outperformance of financials. Regional banks are on an absolute tear. Same thing happened post the twenty sixteen election. That trade lasted for a couple of months after the election and then basically moved sideways.
Not to say there wasn't value.
There, but really the bulk of the outperformance came on the news. You know, we're also looking at corporate tax cuts potentially again potentially, and that one's very accreative to corporate earning. If you look at the S and P five hundred next twelve month earnings growth, you saw spike in twenty seventeen once those once those tax cuts went through.
So I think investors are betting on that.
The challenge is a lot of this great news, whether it's continued stock prices running, whether it's the economy doing well.
A lot of that is in.
The price on the equity side, with the S and P five hundred trading at about twenty two times forward earnings twenty seven times trailing, which is expensive as stocks have ever been third most expensive in history. So we want to think about the fact that, you know, can we get much more multiple expansion. We've just seen a massive ball market that was all driven by multiple expansion. Earnings have actually gone pretty much nowhere over the last couple of years.
That's the reason we're thinking about bonds.
We don't think that their price appropriately for what comes next.
Ducks are already there.
Emily I have to say.
What I'm hearing from a lot of different investors is a desire to try to get out from under the whipsaw headlines of you know, the Treasury secretary race and whether we will get tariffs and how much or how not to and all of these kinds of things and figure out what you can lean into. That's just sort of a constant, is that basically what you guys have been doing. How do we strip out the signal from the noise and really figure out our strategy independent of what some of these policies might be.
Yeah, and Lisa, You're right, it's tough and it might be a little boring to people to you know, kind of try to stay away from some of the conjecture and think about what really drives markets or time.
You know, you look at some of the.
Relative performance under the last two administrations and it's actually exactly the opposite of what you might have guessed. For example, under the Abiden administration, the best performing asset class by far has been energy, Probably not what you would have thought given the green energy policies that have been put in place under Trump. The first Trump one of the best performing asset classes you could have owned was Chinese stocks.
It's because we were in a period of global sannchronized growth. That macro story was far more important than what was happening from a policy perspective. So we think if you can try to cancel out some of the noise, focus on earnings trends, focus what's happening from an economic standpoint, that's going to lead you to a better path forward.
As far as cross asset performance, we.
Did just get Walmart earnings, we get Target tomorrow.
We also get in video.
We've talked about in Vidia. Other than in Vidia, is there an earning story that you think is kind of a north star of some sort of signal versus just simply noise.
Well, I think it's really about the broader story here, and the bar is just going up. You know, analysts are penciling in fifteen percent earnings growth in twenty twenty five, and we think that's an awfully high bar given the fact that we're seeing decelerating growth trends. It doesn't mean that there aren't pockets of the market that can achieve that, but you've got to be really, really mindful here in terms of reaching too far for risk, And again embracing
those higher quality, more defensive options. We like areas like utility companies. We continue to like technology companies at a reasonable price. It's really about that internal market rotation and frankly, finding an active manager that can identify those stories.
Emily, I appreciate your time this morning. Thanks for catching up with us. Em Many run in there of John Hancock. This is the Bloomberg Seventans podcast, bringing you the best in markets, economics, an gie 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 Sounds
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