Surveillance: 2022 Bulls & Bears

ball time. It's your outlook for on the SMP five hundred, will do bottom three, top three, bottom three, most bearish, less constructive, Morgan Stanley at forty four hundred, be about forty six, Barclays at top three, Credit Swat at fifty two, we've got Deutsche Bank of fifty two fifty, and then you've got Bemo Bemo at fifty three hundred, and then rounding it out, just shaking up the whole table, going number one, a new entry in the last twenty four hours.

John Stolfus goes to three thirty. He joined us now the chief investment strategist at Oppenheimer. John, let's start here, where did the extra thirty points come from? And what did Brian Baski do to you to upset you? Well? Belsky and our own pals from way back. Even though we haven't talked with each other for about a year, just pre pandemic, we ran into each other outside of the exchange. He was coming out, I was going into the exchange. But we haven't spoken. But when I looked

at it, I just looked at the numbers. We were looking at the momentum that we've been seeing in these rallies, the broadening of interest in equities and the propensity of the indexes to essentially self correct in the course of rotations and rebalancing. That can cabin day to day, not waiting for weeks to week or month to month. So a healthy market, the economy coming back, we just wanted to edge it up a little bit. John, what you

had to say about the Fed got my attention. We did not expect the FED to slam on the brakes, but rather we look for the central bank to pump the brakes as lightly as it can. John, What separates you and us? Why do you see it as a central bank that's gonna step on the break just pumped them as a loutly as they can, Jonathan. I think it's the context that we bring to it. You know,

this is a thirty eight years on Wall Street. So I remember the Alan greenspan era gas, I even remember Walter uh and, so you know, this is a this is the Bernankee legacy of Federal Reserve. It's highly sensitive when it when it addresses it's it's mandate of full employment uh and uh and and a stable economy to to achieve that. And so we think they're going to

be very careful. But the irony though of all of this is the market is freaking out because the Fed is getting really uh considering, you know, tapering at the more aggressive pace. The market has been dying for the

Fed to taper. It says that if the Feds behind the curve, give it a break and let it taper, and it'll get to actually probably tweet the the benchmark right the Fed funds right probably later next years and six months to maybe nine months on from where we are now, you're touching on one of the biggest debates on Wall Street right now, does a faster taper mean a sooner rate hike? And a lot of people seem

to think that the answer is yes. And can they potentially separate those two a little bit more at tomorrow's press conference is a key question My issue though, given this call, is that you're looking for twelve percent earnings growth for the SMP five hundred, a real robust consumer throughout, and yet a FED that remains patient and has the confidence to do so despite this robust data. Can you

explain sort of dovetail those ideas well? We we think that the right now, you know, we think people are overspending. We think the the the what you called the the stingy checks, uh, the the amount of people saved when they weren't commuting to work, what what have you. People have more money on a relative basis, depending upon or where they fall in the income strata. Uh, and they're spending it, you know, right now at a certain pace.

But the effects of gas, the gasoline pump prices going up, the effects of the prices of neat poultry and or etcetera. All of this adds up. The consumer will bring it in a little bit, but the consumer is not going to stop spending. My big thing has always been don't don't bet against the American consumer, as well as don't think that technology is gonna end. And we're going back to the abacus of the slide rule. Don't bet against the consumer. Don't bet against them. In some ways the

supply chain that's been affecting the consumer as well. John, I'm interested in whether you see any risk to your overall focus from omicron from any way or indeed the way in which the consumer reacts to that. I've gotta say the omicron risk is significant. Uh. In some ways, it's just as to how is uh it is uh looked at from afar by people who are not epidemologists. Uh, by the risk and and the the the element that can cause over over concerned. I say, let's leave it

to science. So far, science has done an incredible job. If we look back to when people thought it was gonna take two years, four years, or who knows when for a vaccine of efficacy, we've come a long way. Uh. Technology boosting that and UH. And then I'm sorry I missed the next part of the question. Oh, the consumer is that? Yeah? The consumer has shown you know, the consumer has shown a great desire to shop, whether they do it online or bricks and mortar, or a mix

of both. H. The consumer wants to get back to the next new normal, or get to the next new normal, because I don't think we're going back to what the normal was on the memory of this pandemic for quite a few years before people forget it. So are you gonna call for Apple to be a four trillion dollar company by the end of twenty twenty two? Well get you know, the firm doesn't like me to comment on specific names. But but but needless is it related to technology?

We think technology continues to be something that the investors want to have exposure to. You have to you have to break up when you're looking at We like more established companies. We think the newer wins. It's it's terrific for risk and volatility. But if that's what you want, know that you're not going to get those steady earning, steady cash flow process of innovation and a uh within a culture without a corporation that's established and a certain

relationship with shareholders that gives you less volatility. Generally speaking, John, you squeezed down the extra thirty points. You are the most bullish on the street. Gun. It's the next year, John, It's great a catch up, sir, as always John Stelfas there of Oppenheimer. Thank you, John, Thank you, sir. We're

gonna talk to the biggest bill on the Street. A little bit later, we have to talk to the biggest bear on the street as well, Price Target over more than Stanley, and we can catch show with Dwann Scaley, the head of market research and strategy at Morgan Stanley Wealth Management. Different side of the business down, but you work very closely with Mike Wilson, who straddles both sides at a business. So let's talk about the call for

a lower equity market. What I hear from you guys going through the research, it's not a less constructive view per se on earnings, but it's about the multiple down. What's going to bring that multiple down down? What is it about the multiple that you're focused on at the moment. That's exactly right, Jonathan, Good morning and good to see you. Happy holidays to you and the team. So look, as we've been saying for the last several months, we think

there's more room to go on multiple contraction. And that has historically been the cage Jonathan, as we've worked through mid cycle transitions. We think it is basically the same scenario this time around. Okay, even though we've had extraordinary circumstances in this particular cycle, given COVID, given lockdowns and reopenings, etcetera.

We think things are somewhat tracking to a normal historical context, which has seen the multiple come down anywhere between ten to fifteen percent as mid cycle transitions culminated in the past. So we do think there's more room to go on valuation. And as to this point, you said, we recently haved our exposure to the equity like asset classes. Can you give us a sense of where you put the money as you took down your exposure? Sure, yeah, absolutely so,

so we put some money into alternatives. We've also put some money into a shorter duration credit as well, some high quality credit and look, valuations and spreads aren't exceedingly undemanding there either, but we do think that could offer some ballast in portfolios as we go into a little

bit more volatile period. You know, as you well know, we've been through this anomalous uh smooth sale upwards over the last call it, sixteen to eighteen months where we really haven't had your typical ten percent correction in the in the SMP, and we don't think that's going to continue through the winter months. Okay, brace for a ten correction? What gets us there? What's the snap element that suddenly drives us lower, is there? I mean we get PPI

data a little bit later today. I know inflation has been a key area of risk. You're looking at, correct, Caroline, And so we do see a bit of a gradual online here, and positioning has already started to move that way, particularly when you look at some of the faster moving institutional funds out there. Positioning as started to lighten up

more recently. But we think it's simply the market acknowledging that the Fed is about to announce this week the big event, of course, about to announce a much faster taper schedule that will conclude in March. That's gonna obviously remove the maximum accommodative stance that we've had. And even though folks have known about this, they've been preparing for it. I think there's a difference in terms of the actual effect and markets over the next several months down when

they secuity market do you like? I know there's going to be much more emphasis from you and the team at individual names, individual sectors. What do you like right now, Jonathan, and this type of backdrop. We favored defensive, high quality names. Okay, so from a sector's perspective. Think healthcare, which is shaded trading extremely cheap after underperforming this year, but has all the benefits of innovation and growth, but it's not priced

like many of the growth sectors. Think areas like consumer staples. I know pricing uh power was just mentioned earlier. You have to be selective. Not every global consumer franchise has pricing, so you have to do the bottom up work. And then Jonathan on the other end of the barbel we're actually not shying away from growth names either, except here's the nuance. We want to focus very much so at

growth at a reasonable price. We're looking at actually names we've added to our team's portfolios recently, names like MasterCard, names like Team Mobile. These are actually structural growers that are significantly off their fifty two week haus and if we do get into an environment where rates finally start to back up into two, they won't be as acutely sensitive to higher rates as some of the really high

multiple growth stops that work this year. Dan, you and others have been talking about a ten to fifteen percent correction, which is overdue. For a while a lot of people have been saying things have been flying a little, too high for too long to be really justified in any fundamental level. And yet every dip has been viable, and that dip doesn't matter how small it is, it is

a viable dip. Has that made you rethink your thesis based on the fact that you're seeing cash piles increase in the at least according to the fund manager survey coming out of Bank of America, and a sense of caution among some of your peers. Uh, you know, it's a it's a fair point least. One thing I would say is that particular dynamic innovo of itself has not made us back away from the call or change the call.

We do acknowledge that the individual investor, in particular, given the amount of in particular millennial wealth coming in and the new investors coming into access this market via technology and absence so forth, that has been a particularly strong force and frankly higher than we would have presumed coming into this year, But nonetheless that hasn't made us change

the call. What would help us change the call, make us adjust the call would be Number one, we're wrong on rates, right, So instead of getting to two percent or two point one percent, which is Matt Hornback's call, we we hang out around these levels and equity risk premium for the SMP aren't his challenge. And number two, we've been calling for a bit of a pushback or

a slowdown. And the consumer, the consumer is eaten through a tremendous amount of the savings that you just reference, and so they've also been pulling forward tremendous demand for particularly durable goods. Given we've been all at home for for so so long, we don't see some of those trends continuing as well, and that's part of our more near term caution. That being said, if we're wrong about rates, if we're wrong about the consumer, those would be some

of the aspects that would change our call. And can I just like thank you You've been a good friend of this show, what aful partner over the last year. Send up best to to Mike, to Ellen, to Matt two leaks of Shallott just fantastic down as alwise and good to hit from you my pleasure. That's Kelly, thank you, enjoy the holidays and send out best to the scene.

Let's begin with liftoff Mike McKee. We can do that right now with Mike Gap and the Chief US economist at Barclay's Mike Gap And I said, you were at May threatening to move to March. You've already done it. Marches the care now for liftoff, Mike, what separates you in the pack? You're at March, the packs in the summer. June out, two September. Good morning, Jonathan and Lisa, thank

you for having me on. I think we would say it's it's exactly what has been just mentioned, the concern about inflation, where inflation is coming in, and I'd say it's a twofold argument for for us. One is the November Minutes say risk management is now the guiding principle of monetary policy, and in the extreme that means you don't necessarily need to meet all your liftoff criterion to move rates higher. You can just be worried about the

risk of higher inflation. So that's one argument. The second would be that employment report that we received last week, very solid, a decline in the unemployment rate, a one percentage point declined in the unemployment rates since August. And we think other members will think, hey, we're probably a lot closer to maximum employment than we thought before. The economy is accelerating fairly rapidly in the in the fourth quarter, so o Macron concerns aside, which are certainly valid. There's

a lot of momentum. Labor market progress has been healthy. If you're concerned about inflation, we think that puts March on the table. So that would be our argument. Michael. We were just hearing from Jonathan Stole's first overt Abenheimer, and he was saying he thinks it's different to accelerate the taper from saying that we're going to raise rates

sooner at the Federal Reserve. What do you say in contrast to that, with your call going very much against that, given the fact that the Fed has basically been saying something of that nature until a sharp pivot in the past couple of weeks, right, So prior to this very sharp pivot, I would say that that was That was our view too, that you could do risk management to start taper to create optionality, but then you'd kind of watch the data under your feet as it came in

in terms of deciding when to lift off. So risk management was about the beginning of taper, not necessarily about rate hikes. But if risk management is now the guiding principle in the conduct of monetary policy. Then tapering, the pace of taper, the start of hikes, the pace of hikes, all that can be done for risk management purposes. Again, it's about the risk of higher inflation, not necessarily where

current inflation is. So you could argue that a decision to taper and taper more quickly does send a signal about your willingness to hike rates. So I think would be my response to that would be, it's about you know, how much you think risk management is the umbrella over

all policy choices at this point in time. How significant is it from your perspective, Mike, that we have seen such aggressive rhetoric from former FETE officials, including former uber doves like a former Minneapolis FED president Coachur of Lakota coming out this morning and basically saying the FETE is risking a five type scenario where inflation looks containable and ends up not being. So I think they're there. It's a reflection of the pressure that they're getting across the board.

So you saw the comments from from Congress, both sides of the aisle stating concerns about inflation for for different reasons wanting the FED to respond to it. So it's this isn't you know, necessary what i'd say, a partisan issue. It's coming from your kind of you know, your traditional economists, your non orthodox economists. It's coming from Republicans and Democrats in Congress. There is a chorus of calls for the

FED to respond to this. I personally think, or we think, the risk of a sixties or seventies style inflation story is overblown. But that doesn't mean the FED shouldn't be responding to what they see are our risks to inflation in the near term. We think inflation ultimately will come down and and the FED will be will have its credibility maintained in terms of achieving two percent outcomes over

over the long term. I just think the risks of a wage price spiral are overblown, and the quicker the FED move of the less likely that that it's to come to play. Mike Caroline in London here, and I'm interested in how much the other side of the Fed's mandate was of course inclusive jobs market overall, and that's had to be to certain extent put on the backbone because inflation perhaps peaches into inequality even further. But how

much do you think that becomes a focus point once more? Caroline, that's it's a great point because risk management again, just to come back to this, means you may very well be lifting off even though you might not think you're at maximum employment. And the committees hasn't really gone to great lengths to clarify to you what broad based and inclusive means. It doesn't really even define what full employment

is and its statement of longer run policy goals. It's more of a we'll know it when when we see it. So optically it could look, you know, difficult for them where they're raising rates, but still several million workers are are out of the workforce and participation is subdued, so it's not a great position for them to be in, but it is the one where where they're in currently.

What I would say is if inflation does start coming down rapidly over the course of two then maybe they pause any rate hike cycle that they've started and and kind of shift back in the direction of saying, well, now it will be a little bit easier for us to ride out an expansion and improve labor market outcome. So right now it's about heading off risks of inflation, but there are worlds in which they could shift back

to to promote full employment. How much could the strengthen the dollar be the thing that eats away at inflation at that rapid rate. So that's a great question, because in the last cycle, of course, any kind of movement to high rates came with with a lot of dollar appreciation, which fed back into lower growth and lower inflation outcomes. Um at least the FEDS shift in kind of our change and call brings, brings our rhetoric and the FEDS

communication in line with where markets are. So we're not necessarily thinking a pivot at this point or rate hikes in two may bring about a much stronger dollar. H So I think you'd have to You'd have to have the FED maybe moving more rapidly than the market is expecting. I don't think that that we're there yet, so I think it's less likely, but certainly it's something that we're

watching out for. I would say over the long term, it's part of the reason why the market things the terminal rate is lower, that that the FED will be raising rates more than other developed economies, which would likely keep the dollar buoyant over time, So I think it is part of the story on the terminal rate, but maybe not in the near term performance of the economy. Michael cape and worked with me here year over at three thirty tomorrow. Yeah, send the team home. That we've

done for the year pretty much. Yeah. Wait seriously, of course, Mike, come on, what happens if something happens at ECB or Bank of ang are you? I'm the U S economist. Cathy Jones joined us now chief Fixed and come strategistic Chap. Kathy, We've got to talk about this bawn market. We went through it with Lisa. When we were at these levels, we were talking about a global recession. What are we

doing now? Yeah, it's really a conundrum, I think for the FAT because as they try to signal that their tightening policy, all we get is a flatter yield curve and lower long term rates. And I think that that tells you that the market's view is that inflation isn't going to last a long time and the growth will decelerate next year, and that we have enough demand at the long end of the curve to prevent yields from rising very much. So it places a lot of pressure

on the fat. How high can they go in terms of rate hikes and not invert the yield curve? And that's going to be probably the biggest problem they face over the next twelve months. Kathy, what would you say to the argument that the bond market, I don't want to say is wrong, but it's distorted by quantitative e sing, by the savings glut, by what's going on overseas. You know,

I don't think it's distorted, but those are certainly factual. UM, that's actual evidence for that can contribute to low bond yields. And clearly, if there's one surprise that the Fed could pull off, it would be quantitative typing. Right. If they really wanted to see long term rates move up, they could start selling bonds and reducing the size of the balance sheet. I don't think that's going to happen anytime soon, but that would certainly be one way to do it.

But I think the collective wisdom of the market here is that, yeah, we have a lot of factors holding down long term rates. The global um savings glut isn't going to go away tomorrow, aging populations aren't going to disappear tomorrow, and UM that continues to make demand at the long end of the curve. For you know, twenty thirty year paper very very strong, and that's the reality, uh in the bond market. I think that's reflective in this flattening curve, and that's why you cool a terminal

right at one point seven pc. Cathe talked to us therefore about looking out further along the risk spectrum. How much are we going to see in our performance of potentially high yield if you are going to see such tamed long end in government? Yeah, you know, high yield um and and investment grade have been doing great um. Again, credit has good, strong fundamentals here. The problem is of worth the yield, right, So you're not getting much spread

over treasuries to take that risk um. But it's hard to see in this environment that credit won't continue to outperform treasuries in two. It's really just a question of how much risk you want to take in terms of moving into the lower credits for the event that we get some sort of an accident in the market, or certainly if we were to get an inverted yield curve,

that would be a negative signal. So it's all good except the yield in the credit world, but I do think it will outperform in two Kathy, just finally something later and I talked about in the last hour, what would hawk Is surprise look like Tomorrow the Federal Reserve can just give us a little bit more detail on that on how they could surprise hawkishly the FMC. Yeah, I think you know, they could raise that terminal rate. I'm not sure that the result would be a sell

off at the long end. It might actually be a rally at the long end if they did that. But they could move up that terminal rate um or again quantitative tightening. They could start announcing a roll off sooner rather than later, and I think that that would be a surprise to the market. Kathy, A ton of people write again, do you know what they miss they missed the most. She knows the piano. They missed, the piano contro not let the piano win too. The office that

might be have you left open a window? We'll sort the crane out for next time. Kathy Jones and Kathy, thank you for everything this year. Just absolutely wonderful on this show and others. Just a wonderful partner as we worked through some really, really complex issues. Viser releasing two separate studies of the COVID nineteen pill. They talked about how they do seem to reduce hospitalizations and they prevent of hospitalizations and unvaccinated individuals. However, they do not reduce

symptoms and healthier individuals. Uh. Talking about this is the main key. How much do we start to pay attention to hospitalizations and not infections? When do we cross that threshold into treating this like the common cold rather than something that must be stopped at all costs. It's not a conversation right there with doctor Amish of down Chair, the senior scholar at Jones helpkin sense of a house security. Don't always go to cash out with you, said Telsa's question.

How much closer are we to the ultimate objective treating this like the common code. Every time we get a new tool to use to treat people to keep them out of the hospital, we get closer to that goal. And I think that the anti viral proviser is one of those tools because it has a tremendous ability to prevent people from becoming hospitalized. And that is what this is all about. That's what flattening the curb was about

because rving hospital capacity, So I do think we're getting there. Obviously, the vaccine is the best way to get there, and we still have about the population that's not vaccinated, including sixty million people eligible to be vaccinated. That's the biggest thing. But I think the anti viral does bring us a lot closer to that. We are looking also at the omicron variant and anecdotal data out of South Africa showing

that perhaps it is less virulent. How much are we looking at that being a breaking point to the upside and getting us out of the pandemic. Have you got enough data to get a sense of that yet? The fact that all we're hearing about are mostly milder cases, not completely mound. There are people being hospitalized, but less I see you use less oxygen used. I think that's reassuring because we haven't heard anything different. We know that in the US, I think only one of our cases

have been hospitalized. It's a little bit difficult though, to completely extrapolate that to the rest of the world, or even to this country, because South Africa is a country that's a little bit younger, has different comorbid conditions. We want more data on unvaccinated people especially high risk, But it does seem that for the unvaccinated, it's all might be just the same as delta, and we may be

trading Delta for O macron. But if it's if it's more transmissible, but even just just a little bit less virulent, and may end up being a wash overall from what we're dealing with. So it all depends on how this all plays out in the US. We've been talking about how the two course dose of either the Fizer BioNTech or the moderna A vaccine does seem to have some preventative aspect against O macron in terms of how ill you get, but not necessarily infectionate. It seems a lot

less efficacious. People are saying that the booster is really important. I know you said you did not get a booster. Have you changed your mind based on some of the incoming data. No, I haven't because I'm forty six years old, I don't have any come morbid conditions, and I think that a booster will just inevitably just kick a breakthrough

infection down the road. With these first generation vaccines. If you're somebody that's above the age of sixty five, have a high risk condition, got the J and J vaccine. Those people absolutely should be getting boosted today before I help you people. I think that's not going to change the trajectory of omicron. It's not going to prevent omicron from hitting our hospitals. What's going to prevent omicron from

causing a problem our first and second doses. And as you said, the Fiser data shows that people are protected against what matters severe disease with a two dose regiment if you're healthy. And I think that's what we need to be emphasizing, because if we continue to boost to prevent mild illness, I don't think that this ever really ends. And I think we really have to focus on severe disease.

And maybe there'll be a second generation vaccine that gives us different types of protection than our first generation vaccines and and and that that will change the equation. But right now, I haven't seen anything that changes what I would say for healthy, healthy people. I might be in the minority, but there there are a few of us that that really are focused on hospitalizations and not so

much preventing mild disease with these vaccines. Okay, so Dr Adlger, as I sit here in the United Kingdom, and I see the absolute focus on booster shots, perhaps over and above getting the unvaccinated with the first realm of injections.

How does that pan out in the UK? Because we're talking to Robert Read a little bit earlier, who's one of the advisors to the government, and is saying that the reason is to stop the transmissibility, to prevent people getting and being able to spread if you help with the boosters. But does that not work from your minds on, it's not going to be the most significant way to stop spread. The best way to stop spread is going

to still be to get the unvaccinated vaccinated. Because if you look, it's not a surprise that this variant arose likely in Southern Africa where vaccination rates are very low. So if everybody in the UK that was eligible for a booster got boosted today, you would still have an omicron problem. And the same is true in the United States of everybody that's eligible to get boosted, we still would have hospitals busting at the seams in many rural

up counties. This is this is really about reaching the unvaccinated, and many policymakers have given up, so they continue to boost the people that are already vaccinated, but that's of much less value than getting first and second doses into people. And I think that we they've recalibrated to focus on cases because they've given up on the unvaccinated. And I think we can't give up on the unvaccinated because I have to work in the hospital and that's all I

deal with. I don't deal with boosted people coming into the hospital or fully vaccinated people come being into the hospital. I deal with people who lack first and second doses. And if we want to end this pandemic, we have to get first and second doses into people in the US, the UK, and all around the world. DCOR, what have been the most effective ways of doing that bar making

it illegal not to? From your perspective, what are the ways you convince your patients who are still thinking and on the on the fence about it a certain degree? The only thing you can do is talk to them one on one and try and figure out what bit of misinformation they swallowed, Offer them alternatives, look at their concerns. Maybe they don't want an m R and A vaccine, so you can you can direct them towards the J

and J vaccine. Or vice versa. Get them to get at least one dose and then maybe wait a little bit longer to get the second dose. There's ways to work with people, but you have to actually sit down and do it. It's not me on television that gets people vaccinated. It's actually when I'm sitting in a room saying, what are your concerns and let me let's go through

the ingredient. Let's let's go through this. That's how it really works on a on a detailing basis, just like if someone is making up a purchase that you have to go through all their questions and then you I think you do nudge them appropriately. But we didn't do that, and we did a lot of pontificating and talking on high and I don't think that really moved that group of people who were vaccine hesitant. Doctor, appreciate you at times and always your perspectable mos Hammnig inside the room.

Don't amish it down to that of John's Holkins. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten a m. Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course, on the terminal. I'm Tom Keene, and this is Bloomberg.