Markets React To Powell, Super Tuesday Results

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Because time horizons have shrunk two you know, nanoseconds. It's fine to talk about three years and five years. I think that matters, but a lot of the money in the market trades in a fraction of that time horizon. And you know, in the case of not just Apple, but Tesla and even Alphabet, it's the China tie. But it's not unhealthy that we're seeing some dispersion, not just among them Magnificent seven, but churn under the surface that in a stealthy way, there is actually some action and

So we've had Luziana such a great move in the stock market in November December last year, really driving the market high. We've actually started the year off very well.

If you look at the SFP at the index level.

At the index level, that's where I want to go. So we go beneath. What are you telling your clients like if they're saying, I don't feel it, you know, I don't feel it.

I know that.

Everybody's tell me. The s andp's up six seven percent this year. It rallied hard last year, but I don't feel it.

What do you tell me, well, I it's understandable because let's use the Nasdaq as an example, because the extremes here are are more significant. But that NASDAK, notwithstanding yesterday trading around highs and at the index level, that NASDAK has not had more than a three percent maximum draw down from a year to date high. Right, But the average member Nasdaq member maximum draw down from your to date highs is negative twenty two percent.

Really, wow, I didn't So what do you call that a bear market?

Well, it's it's churned under the surface, and it's draw downs at different times. But yes, you've had you've had bear market level draw downs among the average stock within the Nasdaq.

Jud John Tucker, that describes your entire tool one k. Right, would you say it's a duck market.

It's calm, that Michael Caine line of calm on the surface and paddling like the chickens.

Yeah, So listen, what do you tell folks? I mean, and maybe I mean Tom's been long magnificent seven, he's been clipping coupons. He's fine. How about the rest of us? Where do we go from here? If we haven't been long those magnificent seven? I mean, where do we go from here?

So I think I think there is money that is itching to find opportunities outside of that small group, also helping displain some of the dispersion that we're seeing there. I don't don't think though, that this is the time

And now, folks for Global Wall Street, all of you out on applecarplay and YouTube, the question that matters where is Lizion Sanders on rebalancing? How do we rebalance without over rebalancing or selling our winners. What's the sunders process.

Well, rebalancing is more about adding and trimming, not buying and selling. So that's that's the beautiful component of that discipline is it forces it's ad low trim high, distinct

I don't know. I can buy a two year treasure and get four point five to five percent, Why don't I just do that and get ready for my beach?

For some investors, that does make a lot of sense. But one of the reasons why, and you guys know, are fixed income my fixed income counterparts, particularly Kathy Jones, that when we talk about during extending duration, you get that natural question, well, why would I go to a ten year you know, four point two percent when I can get something much shorter duration at a higher yield. But there's the reinvestment risk, of course it comes into play.

You've been right on that. But what do you what is the action of the trillions at schwab What do you see people doing on a micro basis month to.

Month, Well, a lot more money in the safety of areas, like whether it's money markets or treasuries, and I think that's a good thing for that component of portfolios that they want to have that sort of high liquidity, fairly low risk. You know, we've been very factor focused on the equity side of things. You know, we have sector biases, but we think even applying it within individual sectors is focused on factors, which is just investing based on characteristics.

I got to exqueeze this in you provided a service to the nation with fiscal reviews for one of our presidents coming in years ago. Things have changed now it's trillions a month in debt and deficit. Should our listeners and viewers be concerned about the burgeoning deficits?

Absolutely, and I think the investor class is gravely concerned about this. I cannot remember the last time I did a client event or a webcast where the first question wasn't about the deficit and debt. The problem is that's the investor class. I think broader constituents don't seem to care much about it, which is why neither side of the aisle tends to care about it. I think, frankly, we need more adults in the room down in DC having this conversation.

We're gonna go out with this because Lizzie sent me a mean note I did nickelback one day. Ye oh yeah, she was just like crushed. Lizzienne Saunders, thank you so much. This is the conversation of the day on the arch theory that is out there, which is things are good because the wage growth after adjusting for inflation, is finally constructive. Jeff you with a chart of the week, chart of the month, chart of the first quarter. He's with bn Y.

Well, just based on headline numbers, they certainly are looking are very good. And you know there were one offs in place heading towards December, so that generated a nominal wage of them seven point ninety percent. But there's genuine disinflation in Italy as well due to lower growth as you would expect, lower demand. So that buffer is in place right now and if you fink it's what several Eurozone policy makers are worried about. They're looking at real

Go to the other end of the spectrum in your magnificent chart, I'm still this church, and that is I've got inflation substantial in Japan, and I don't have wage growth. I got an ugliness. Is Japan borderline as you studied at LC nineteen thirties England.

Oh, I think those are going to be very different demographics to us start off, where than what is them driving things that you know net that's what you're hearing from Japanese policymakers. Japanese lawmakers. They want to see real wage growth, not just a one off bounce, which is maybe what happened in Italy, but so that to become entrenched,

So Jeffrey, we're going to hear from Fed Truman, Jpal today. What are the central banks in Europe? What are they saying these days?

Are they following the US FED?

Do they have some independent thinking visa v their economies and their rate structure?

Oh, totally be independent. But what is DCB thinking? What is the government council thinking? It depends on which Government Council member you are going to ask, right, there were some members which said March should be so tomorrow should have been a live meeting, and there others who question, why are we even talking about rate cuts this year? I think you know that's been brought onto the table for the FED as well. So very different views. I'm out there at this point, but we think Q two

And I know just kind of the expectations here in the US, Jeffrey, been tempered from early this year when maybe five to six rate cuts were priced and now maybe you know, kind of three or four as something similar happened in the ECB and the BOE from the market's expectations perspective.

Yes, totally so. Triple digits in total cuts were expected in Europe towards the end of last year due to the soft numbers. That certainly has them turned around as well. Right now, you're seeing energy prices, for example, contributing positively to headline inflation. And you know, funny that's going on now. You know, given core inflation was too high last year, now headline inflation is them too high, So what are

It's a great coverage yesterday, Jeff You and the NPC and basically three thousand people in a room with the President of China trying to move forward as a communist party. Jeff You, when you see a Bloomberg headline that says President g wants quote new productive forces to fit local conditions, What a god's name does that mean? Jeff you?

If you actually go back to an NDRC document, I believe it was from a month ago. They actually specifically cite the academic who came up with these theories are within the fifth and Dove sufctral Revolution and the like. So it really is basically about resilience. It really is about identifying aspects of the economy technology at its core being able to generate high quality growth, generate productivity growth, to compensate for things like soft demographics and also potential

Technologies in the news. Ed Ludlow, Sure, I don't know what to get the man, but Jeff, you technologies in the news, whether it's ASML in the Netherlands or you know you as Microme and litigation the other day, is the Taiwan magic of TSMC? Is it at risk?

So right now, China has said in the past that if let's just say supply chains are going to be at risk, then China is counting on its own innovative capacity, its own universities, its own education system to start to generate that innovation. And then if we look at what's happened over the last few decades. Of course, globalizations has helped being able to access and global knowledge, but should we also count China out in terms of its ability

Thanks for the brief on Europe with the ECB tomorrow.

We had Super Tuesday, but I don't know as far as Super Tuesdays goes didn't feel that super to me. But let's check in with somebody who thinks about this stuff full time, Jen Flinton. She's head of US Government affairs for Investco.

Jen.

We had fifteen States, and I guess Samoa as well, voting yesterday. Key takeaways for you.

Yeah, I think we saw what we expected to see, which was Donald Trump pretty much taking control of the fifteen states, all but one Vermont, which he seems to have lost to Nicky Haley. But the expectation was that after Super Tuesday, NICKI Haley would leave the race, and it looks like we're going to get that around ten o'clock today.

All right, So where do we go from here? For this is going to be a very long campaign because, as I remember, the election is not till November. So what do each of these politicians, these candidates, what did they do for the next you know, I don't know, nine eight months.

Yeah, this is going to be a really early start to the general election season. And we're already starting to see some of that momentum building up for the policy discussion. Right, and we have this State of the Union on Thursday, where I think the President's going to telegraph some of his messaging going forward into this very long general election season. And as we approach the summer, which.

Is the conventions.

In July, you'll have the Republican Convention there in Wisconsin, followed in August by the Democratic Convention in Chicago, and then we'll immediately go into general election season. I think the big question right now is are we going to see debates in the fall?

Okay, well, you know, I'll go with all that. But I think there's a lot going on beneath. And I know California got the Steve Garvey remember him on first base?

Yes, first first base?

He is janormous. Yeah, and he did a genormous day yesterday, I guess. But Jen, what did you learn about like the future of the House off of Super Tuesday? Can you say tildmore Republican likely tilmore Democratic? Lady? Which way does that go?

Well?

I was watching some specific races a little lessoteric, but in Arkansas you had some fights for some of your more traditional Republicans against some type primaries to their right, most notably Steve Womack, and he survived with a nice little cushion there. Looking into Texas, some of those races you're going to have to have some additional primary runoffs,

And I believe after Duke takes the acc and we have selections Sunday, isn't there a Florida primary out there? Like within two cups of coffee?

That's right, Florida and last night was Texas.

These are the two states.

That are the most difficult states for Republicans right This map, this Senate map is really advantaged for Republicans right now.

So you know, if you think Texas and.

Florida are they're tough estates, you know that that's not really that tough. While you have the Democrats defending a number of states.

So what if Haley drops out, where's we come out? We got to justify a road trip down there. Jennifer help us. How do we what's going to be the tension of the Florida primary?

Well, I mean, look, Florida is a pretty ruby red state now. I mean it wasn't long ago that it was a purple place, but it's a pretty red state now.

I will say this.

You had the Biden campaign sort of telegraphing expanding the map into Florida, which kind of raised a question mark over my head.

I'm not quite sure how that's going to happen.

I'm really quite frankly focused in on these battleground states. I'm after, you know, Haley drops out and we start this general election and Trump probably takes the delegates he needs by next week. I'm looking at Arizona, Nevada, Wisconsin, Michigan, Pennsylvania, and ja.

I am honed in on those states.

I'm enough of a fossil where Florida was actually a.

Battleground bund exactly, all right, Jen, the Republican Party, it is the party of Donald Trump. My father, who would vote for Nixon today if he were on the ballot, would not recognize this party. What is the Republican National Committee, the apparatus, the machine? What does it do over the next eight months?

Yeah, that's a great question.

So what we're seeing is as Trump really consolidating his support there and turning over the leadership at the rn C.

This will now be his RNC.

He's putting his daughter in law at sort of the front face of the RNC and then moving Chris Losa Vida. He's one of Trump's co campaign shairs and runs the campaign there next to Susie Wiles. He's going in and he's going to be doing a lot of the operational work at the rn C, and what they will be focused on are those battleground states and getting really strong captains to those days.

Carry out suppose really important question, and I take your point. The leader takes over the party. That's the way it used to be. What's a Trump methodology in Pennsylvania versus Republican and name only Mitt Romney's methodology in Pennsylvania.

Right, It's going to be focused on those.

Suburbs right in the Pittsburgh area, in the Philadelphia area and trying to raise those numbers he has clearly has He clearly has a lot of growth that he needs to make there with suburban women.

Okay, this has been a great brief Selvita Supermanian who joins us now from Bank of America and Sevida, what's important about this conversation. If you've made the trek across a year and a half from a more measured, cautious XPX call out to well over five thousand, describe that trek. What was the path in the process to get to your new optimism.

Yeah, so it was it was a path that was paved with potholes.

You know, we I think at the beginning of.

Last year, all of our sentiment models were flashing green because everyone was so bearish on everything, and that was a point at which you know, we we basically saw that the real risk was being underinvested in equities. Then you had, you know, another bank blow up, you had some volatility.

Closer to the end of the year.

But I think it was really a year where most of our models were flashing green except valuation. And I think, you know, today we are still constructive on equities, but I would say we're less convicted in that outright. And the reason is, you know, we're at a more of a neutral point in terms of sentiment, and I think the market, you know, kind of optimism has built around themes and.

Stuff for Global Wall Street. Sevita, what methodology you are using? Are you bottom up, top down? Are you factor based? Is it some magical mathematics out of Berkeley? What's the Sevita Supermanian method to look out a tea months?

Yeah, so, I mean it's a lot of different reads. So what we tried to do is come up with different signals that are uncorrelated, so they give you a kind of a very diverse take on the market, and we ended up I remember when I got this job back in twenty eleven, back testing all of the market timing models that we've all heard about, like the FED model or dividend yields versus bond yields.

Et cetera.

Most of them don't work, surprise, surprise, which is why we're all here. But you know, what we did find was that if you use kind of different models for different timeframes, you see, it seems to.

Work out better.

So we have a sentiment model, we have a fair value model. Long term valuation is probably all that matters. Shorter term it's technicals, and then over the next three months we look for the probability of an earning surprise and.

A positive or negative direction. So that's the suite.

But then, of course, Tom, you know, it's more of an art than a science, and each of these models is basically as good as the inputs that you feed into it. So I think where we are today is an environment where our valuation framework for the long term says returns are going to be lower for longer.

I think we all.

Kind of knew that, but our near term sentiment and earning surprise models are telling us that things are actually the direction of the market is more likely to be up rather than down. So I think that's our net message to investors is stay invested. We're not at that point of absolute euphoria on equities. We've seen euphoria build around a few themes in the market, but we think that it could broaden out from here significantly.

So, Savite, I'm looking at your research note here, realistic bull bear case fair value forty one hundred to sixty five hundred on the S and P five hundred. Huge disparity there. What's kind of what are the key two or three drivers to push you between you know, your bold and bear case.

Yeah, so the bull case is really predicated. It's not even that lofty of a set of assumptions, but it's really the idea that you know, real rates stay lower for longer because of demographics, disruption, all the stuff we were talking about, you know, five years ago before COVID, and then on top of that, the equity risk premium actually settles a little bit lower than where it is today because companies are actually focused on high quality growth

So that's when that's one.

And then the other factor is just the idea that normalized earnings can actually be. You know, we're not necessarily at a point where normalized darnings, where earnings are peaked and likely to calm down significantly.

So I think our bookcase is actually pretty realistic.

And then similarly, the realistic bare case scenario is the idea that real rates subtle higher.

You know, inflation isn't controlled.

We have a and we also have ten year yields backing up on various drivers.

And then on top of that you.

Have normalized darnings coming back down to kind of the long term average.

Which I think is too punitive.

So one of the reasons I just just for you know, clarification, One of the reasons that we maintained our constructive outlook is that I think that valuation is particularly problematic because if you're looking at a long term valuation framework and you say the market is expensive today versus nineteen eighty or nineteen ninety or even two thousand, the makeup of the S and P five one hundred is so different today that it's almost like apples to oranges.

How concerned are you, Savita that you know a lot of folks tell you there's not a lot of breath in this market. Yeah, you know, the Magnificent Seven have everyonet to phrase it. There's not a lot of breath in this market, and a lot of market folks would say you that's not healthy.

What do you think, Well, again, we back tested this breath indicator and it's not necessarily bullish or bearish.

So narrow markets.

Can precede strong goal markets with broad leadership. Narrow markets can precede a downturn. There's no real rhyme or reason to just the fact that the market is narrow. I think you have to look at a whole bunch of other other factors. What makes me more bullish on the rest of the SMP versus the Magnificent seven is the idea that when you look at expectations, expectations for the Magnificent Seven are pretty aggressive, and we're now at point where,

One and the exuberance meter. We've seen that this week, Sevida, I've been dying to ask you this, and this goes back Paul to me and Sevida and Davos years ago talking up ESG and folks to give you a framework here. Miss Subermanian was the first to excel spreadsheet ESG just as simple as that in October. I believe it was in November and the ft one of our heroes. In Yours to Sevida, Astra Demodrad wrote an essay ESG is beyond redemption? May it rest in peace? Is ESG investing dead?

Look?

I think ESG is like anything else. There are good ways to do it, bad ways.

To do it.

I actually don't even think it is a thing or a concept. It's really just a new set of information that's become formally available to us. I mean, analysts always thought about governance. They always thought about companies with litigation risk around bad environmental practices.

But I think now what's happened is it's become a.

Little more transparent through companies telling us more about themselves, which is great.

I love data. Who doesn't love data?

So, you know, I think that's that's the crux of it, is that you now have a little bit more insight into the innards of a company beyond just the financials.

Savita, thank you so much. Savina Supermania and she is with Bank of America. This is a Bloomberg Saveillance podcast, bringing you the best economics, finance, investment, and international relations. You can also watch the show live on YouTube. Visit the Bloomberg Podcast channel on YouTube to see the show weekday mornings from seven to ten am Eastern from our