Surveillance: Earnings Growth Not Significant, Levitt Says

Good mornitude. You'll take on that how well this market is holding up in the face of some bad news here and that through much of this week. Well, it's a better tone for the market. I mean, think about how negative investors were in the summer. You had seen interest rates go down significantly, we inverted the yield curve, and what you really need was policy to respond. So the Federal Reserve has responded and will continue to respond. We've seen some modest improvements in tone in the US

China trade such ovation. So I view this as the market had gotten very negative. The tone is getting somewhat more positive, and now the market is is really looking for the next catalyst to press higher. All the earnings through this week, for every Amazon, there is a Microsoft for every Texas Instruments. There is an insalet. It's been pretty mixed scratually through the week so far. Bron, it's

that your tight tip. Yeah, it's a very mixed picture and and earnings growth is not going to be significant. It's very consistent with a global economy that had slowed pretty meaningfully amid all of the policy uncertainty. So this is the third growth scare we've had in this elongated cycle. The first time the European Central Bank stepped in, the

second time in the Federal Reserve backed off. And now markets are looking for clarity on trade, which will start to improve business sentiment and start to improve capital expenditures, start to improve the manufacturing sector. So the market is dealing with a a flat earnings growth environment and we wait for the next catalyst to improve business comp it ends and start to improve economic activity globally. And Brian, at what point do you think we need to worry

or be concerned about valuation. We've had a nice run up in the market this year roughly, yet earnings have been kind of flatish. Where are we evaluation? Yes, So the market, Um, if you look at the broad SMP five, you're trading somewhere around nineteen nineteen and a half times earnings. So that is expensive compared to the long term average, but I think it makes more sense for investors to think about it within the confines of the current interest

rate and inflation environment. And so, you know, if you're if you say a nineteen times price earnings multiple on stocks, I'd rather think of it of an earnings yield, an earnings yield of you know, call it one hundred and sixty earnings divided by three thousand on the SMPS, around four and a half percent, compared to a one point each treasury yield. So yes, stocks are a little bit expensive to their own history, but are still cheap compared to bonds um at a time when investors really haven't

gotten euphoric about equities. So yeah, do we have significant multiple spansion here? Perhaps not. I suspect what drives markets higher is a better policy mix that starts to improve economic activity and ultimately drives earnings higher. In so, given that we're ten plus years into this economic cycle where valuations are not cheap historically, but we have the the low interest rate environment, are there certain sectors that you like right here? Because we've heard people talk about I

need to be safe. I need to be you know, kind of get into the less risky sectors. But those aren't cheap, and I think about reets in YouTube and things like that. What sectors do you think about at this point of the sector. Well, I think it's too late to get defensive. I mean the time to be defensive was when the tenure Treasury right was going from

three and a quarter to one fifty. And that was the market telling you we were in the throes of a policy mistake both from the FED and the administration on trade. You know, this back up in rates and a little bit of an improving tone that favors the more cyclical parts of the market. I don't think we're going into this environment where the u S gets to this new higher sustained level of growth and starts to

unlock the deeper value in the markets. I would favor in the near term the more cyclical parts of the market as growth improves as you get out into Honestly, I think we're just gonna get back into this slow growth world where investors are going to get back to paying these fancy multiples on true growth companies and discretionary names. And technology names. Market leadership tends to not change meaningfully later in the cycle. So we're in a period right now.

We're more value, more cyclical. But I think we get back to growth in a slow growth world type of environment, slow growth trend, growth that's sufficient for a sustainable break at three. Oh yeah, absolutely, um, you know this. We we we have been in this nice environment of two percent growth for a long period of time that didn't really please workers, didn't really please the voters, but it's

been fantastic for the equity markets. And the reason it's fantastic for the equity markets because it's strong enough to support corporate earnings but not so strong as to bring forward inflation and FED tightening, and so in that type of environment, you just don't want to upset the apple cart.

What we've been dealing with since with stimulus and then FED rate hikes and then the trade war is upsetting this nice two growth, two percent inflation, no fed tightening environment that's been very good for equities and should continue to be good for equity. Let's wrap this conversation up the debate of the week for me, have we seen off the worst of it? Have we seen off the worst of it. Sometimes the information content and how a market response to information is just as important as the

data itself. And through this week, the p m ice haven't picked up in Europe. Business confidence in Germany a glimmer of hope, but it's not really that convincing yet. The stoxics hundred new height. What's the signal that, Brian, Yes, so the market is sniffing out a better policy mix leading to better economic activity. And so I believe we have seen the worst of him. And look, Jonathan, we we got to one and a half on the ten

year rate. We got to an inverted yield curve. That was the bond market telling us, well, is what happened with the dollar and strength the currency market telling us we're in the throw is of a policy mistake that's leading to a severe economic slowdown. As you start to change that narrative, fed steps in administration starts talking about skinny deals. We kicked the can down the road further.

On Brexit and this idea of a of a hard Brexit or no deal brexit, U brexit first just to clean now carry on, Brian, play the word of the day, um, and you know all of that starts to improve the tone in the market and market um so, I suspect you will see the purchasing manager in the season, the leading indicators of economic activity start to pick up again, just like they did when the European Central Bank responded in twelve and just like they did when the FED

backed off. In the debate we're having right now is so polarizing. I imagine there are people screaming, screaming, sang I agree with Brian. There will be other people saying I completely disagree. Let's put you on the spot. You think we've seen the loan for the ten year for this year? Oh yeah, I think we've seen the low for the tenure. Um. I don't think that we're going to see the tenure rate go meaningfully higher. This is a cyclical move up in tenure, but the tenure will

likely reflect where where real economic activity is. In the United States, call it, call it closer to two percent, but you know three was treasuries that had been oversold, one and a half was treasuries that were overbought. And two percent right along the lines of where potential growth is in this country, is a is a more reasonable rate for the tenure. Great to see you. Great to see you as well. Brian Levitt, Investar Global Markets, trying to just here is your two second Brexit warning. Now

we're going to discuss Brexit. Here's the latest for you. The Prime Minister has been forced legally to us for an extension. The EU has not said when that extension will go to because the Prime Minister is now asking for an election. Jeremy Corbin is so fast saying no. James Apy has the unfortunate luck of joining us on this program to talk about it. Aberdeen Standard Investments senior investment manager to join the Sound of London. Good morning to James. More than John, How you doing what is

going on in the United Kingdom? You could have eased me and gently with a question about something a little less ridiculous, but thank you for starting me with the the impossible task. I don't know, like I gave up doing what I normally do as an investor looking at the world probabilistically gaming this out. How do I know who's incentivized to do what? What does the world look like in all of these scenarios, etcetera, etcetera. It hasn't worked.

I you know, the normal motivations for political individuals and parties don't seem to be driving their decisions. And I think most confusingly, and most recently of all, the opposition strategy, which was opposed everything because you want an election, has now been well, you don't want an election either, so what do you want? And that means it's very difficult because of the Fixed Parliament's Actor. This is what's god

us into this mess. Really, the unintended consequences of that legislation unlesson until the Labor Party's policy is a bit clearer and easy to understand. We're trapped in this situation where the EU won't move until they know what we're doing, and we can't move until the EU is confirmed. So it's a tough one. I think essentially we're talking about

a general election, if that's mid December or not. I guess we'll find out more in the coming days for our listeners who might not be familiar with the Fixed Term Parliament Act, Essentially, to get a snap election in the United Kingdom, it's not enough the government calls for it. You need two thirds of MPs to actually vote for it. So for the Prime Minister to get what he wants, he needs the leader of the Opposition Jeremy Corbyn and

some Labor MPs to come with him. James, I was looking at the letter from the Prime Minister to the Leader of the Opposition on page two. In the first paragraph, the EU may offer only a short extension, say the fifteenth November. This would obviously be my preference, but I was illegally prevented by Parliament and the courts from suggesting this. James,

I think it's pretty clear he's suggesting. Get I just wonder what the EU will come back with, because this is actually pretty critical for the next moves in markets and the next moves politically. What extension the EU actually gives the UK And so far, James, we've had no answer, no exactly. So the e used position is obviously that an extension is almost a foregone conclusion. But increasingly they recognize, and I think we all recognize that purgatory is suiting

no one. So they're not they don't want to be involved in UK politics, but neither do they want to be involved in just continually kicking the can down the road without any sign of resolution. So they want from us a plan. Why are we having this extension and therefore, what's an appropriate length of time. The problem is that Jeremy Corbyn, the leader of the Opposition, is saying I will not vote for an election, I will not vote

for this deal. I will basically not vote for anything until no Deal is quote unquote taken off the table, which is an impossibility because even if you could legislate to take it off the tables as they have, that legislation can always be undone when a government has a majority. So again we're sort of trapped in this situation. I think President mcquan is is an important figure to watch here.

He's the de facto leader I think of the European Union, and I think he's working well with Prime Minister Johnson, and I think they're trying to pressure together the UK Parliament to get its act together. When push comes to shove, I still think it's probably more likely that that we end up with an extension to the end of January than one to the middle of November. I say that with low confidence, with low comb James, I'll lay after brexit. Hook here, let's focus on the markets a little bit.

I'm inclined with indices at or near all time highs. I've got earnings tep it at best. I've got growth slow and globally, you know, I'm hard pressed not to just take all my chips off the table and go home. What are your thoughts? Yeah, I mean that's essentially not necessarily all of your chips off the table. I think there are still places that you can find value in markets, but those of that that value exists in defensive asset classes,

not in pro cyclical risky asset classes. I completely agree. I'd actually have a more negative categorization of the earning picture. I think the earnings that are being reported are not great, and the earnings that are being reported, you know, diverging hugely from the underlying profitability of films across the US

economy in particular. So to me, equities up here are incredibly expensive considering where we are in the economic cycle, and I don't see any evidence that the main macro themes which have driven this economic decline are going away or a changing course. So I think we're on a path towards recession. That's not imminent, but that's the path that we're on, and therefore I still want to own treasury duration and I do not want to own risk.

The efforts James Athey, thank you and I'm sorry that we started with Brexit, but unfortunately that's where we are in the UK no man's land, with the zombie Parliament and hoping for a solution. Cave all this morning one pound one two and down a quarter of one percent. That was James Ane from Aberdeen Standard Investment, Senior investment manager.

J want to us out of London. The politics of d C just over the last week's a few weeks relatively speaking, fading into the background on Wall Street just a little bit, just a little bit, but it's interesting. It's not just earnings, and it's not just the FED that investors have to deal with as they think about the markets. It's also geopolitics. We've got trade with China and we've also got some military situations in the Middle East.

To get a sense of what's going on there. We welcome Brett Bruin, director of the Global Situation Room, also former Global Engagement Director in the Obama White House, joining us on the phone from our DC bureau. But thanks so much for joining us. Give us a sense of kind of how you view the US situation in Syria, given that the US pulled out and all that's happened. Well, I think unfortunately, the US has shown increasing um issues

with its allies. We are not any longer a reliable partner, and that was clearly on display with terms decision to both pull out of Syria to back away from the Kurds. And unfortunately this has pretty far reaching consequences, not just for Syria, not just for the Middle East, but our countries. Groups are going to be reluctant to get into these kinds of engagements with the US, knowing that our track record,

particularly our recent track record, is pretty spotty. So, Brett, it's interesting President Trump, you know, made the clear argument that it's just time to bring our troops home. We can't be the policeman for the world. That is obviously, uh in contrast to post World War two policy for the US. What do you think in reality it means for some of the other hotspots of the world. I'm thinking Korea on top of mind. Well, I think what

we're seeing. And it's interesting you mentioned Korea because Trump's just vision to pull out of the Iran nuclear deal makes a nuclear deal with North Korea that much more difficult because he's shown how the US from administration to administration isn't necessarily going to honor the word of the last president. So the calculation for someone like Kim Jong nunn he is let me just see how much I can extract from this guy and not really make significant compromises.

So the art of the deal when it comes to President Trump is um pretty superficial. So Pratt, let me tread carefully on two of these issues, North Korea in the Middle East, and I want to lean on your expertise. Many people criticize the current president of the United States for his approach in places like Syria, in places like North Korea, but the previous approach didn't seem to be that too effective either. Can you walk me through what

you think the ultimate the optimal approach actually is. Well, and let me contrast to you, because there is this narrative out there. Well, Obama was reluctant to get into Syria. Obama pulled our troops out of Iraq. I was actually on a forward operating base outside of to create two thousand and eight two thousand nine. When we did that, the difference was there was a plan, there was a process,

it was orderly. In the Trump foreign policy world, these decisions changed from hour to hour, and that is what makes it so chaotic and and quite frankly, that creates this collateral damage. It ricochets around the region and the world,

you know, creating unintended consequences. So, Brett, if I were to pull a number of folks in the foreign policy establishment in Washington, professionals that have been there before the Trump administration are likely to be there after the Trump administration, how do they view kind of what our policy should be as it relates to engagement or disengagement. Well, there's

a lot of concerns here in Washington. I've started calling it a post American error where the United States is no longer serving as the guaranteer of security stability around the world. Our credibility um was really taking a hit under this administration. The challenge I think for the foreign policy establishment is how do you rebuild, whether it is

under this administration or a future administration. And I think it's going to become by showing that we can hold ourselves to certain standards and others to those standards, and we will become more reliable. Policy can continuity and a doct democracy, Brett, You'll Apprecia is incredibly difficult, and I just look at the situation right now and think, well, isn't this what people voted for In the last election.

The president was pretty clear about how he would handle foreign relations, that he wouldn't want to get involved in places like the Middle East. In fact, he wanted to pull back. Should we be surprised, Well, I think there uh is a difference between political rhetoric and national security implementation and toward you know, Trump has always had his isolationists tendencies. He's always talked about America first, but there is a way of doing it. It's not as destructive.

And if we just look at his record over the last two and a half years, there's not much that he has built on the world stage. He's bulldozed a whole lot. But we also need to have trade deals, we need to have um these institutions in place. And I haven't seen it anything that the Trump is actually been able to accomplish for all of his you know, bombast and Brett, give us a sense of what you

think Russia is doing here? Does Russia you the American pullback off of the global stage to whatever extent we are only back what extent is Russia viewing it as a real opportunity to reassert itself on the global stage. Oh, it's a huge win. And let's just take what recently transpired in Syria. Russia has moved in asserted themselves over the territory um in the northeast of Syria. These um Putin who was meeting in soci with Urdwan. They sort

of divided up the spoils. And ironically, Russia has become a more reliable ally for countries in the region than the United States. Bashar al assan um and and other leaders in the region are now looking to Moscow and saying we can get a better deal. We can get a more reliable deal from Putin than we can from a Trump or or any American leader. That wasn't the same true under Obama, you say, under any other American leader, Brett, and I wonder if the same was true under Obama

as well. Why is that different this time around? Sound Well, Look, I think the Obama foreign policy certainly had the shortcomings, and I witnessed many of them firsthand. I mean, when we looked at the rise of Isis and we were reluctant to engage, and even when Obama came out in a primetime addressed and he was still quite cautious. There is undoubtedly errors that were committed under the last administration, and we're talking on a whole different spell when it

comes to this administration. We've got to leave it there. We'll continue the conversation another day. Brett Ruin there, director of the Global Situation Room and form a Global Engagement Director in the Obama White House. There is a question, what do you do at this point? You have a bunch of cash, you're heading into the end of the year of people have been fairly conservative. Do you just buy the dip? Vanila right, Richardson joining us now she

is Edward Jones investment strategist. Uh and Nila, it seems to be that that is what you're recommending by any dip. Is that correct? Yes? And in a word, so, we know that the growth pattern in the economy is slowing. We see weakness and manufacturing, but we still see some bright lights when it comes to the consumer. The consumer has been resilient, so that's that pillar of the economy

we think remains. We're also going to see a downturn in terms of earnings growth, but not earning so we think that earnings will slow, especially at this quarter, and then pick up in the fourth quarter and into next year. So what does that mean for the investor. It means that we expect more volatility, but we expect the bull market to continue. So this is the time to put that cash that's been sitting on the sideline to work

to buy quality of the investment at more attractive valuations. Well, Neil, let's talk about valuation a little bit. We've had the s and p up, you know, rough this year, but essentially no meaningful earnings growth. So I need to be concerned about valuation. That this market is rich, We don't. We think that the market is reasonably priced. It's not cheap like it was in December when we had that big stell up, and that was a good time if you put money into the market, then you saw a

very very strong first quarter. So it's not cheap, but it is reasonably priced. And so that's why with that combination of expecting more volatility as we get all these headlines from trade and geopolitics, these are times to be opportunistic and you're buying and look for those times and when the market might be uh going through a bit of a dip to really put that cash in. What would make you change your mind? What would make me changeable my mind and be more embarrassed. I would start

being more bearish. When I look to the consumer, I go back away from the market. It's interesting how much of our market outlook this year is based on the macro economy and not very real Idios Cristi desocratic risk in the corporate sector. It's really about interest rates, the

consumer growth and global growth. If consumer confidence started doing, if I saw a slowdown and hiring, if I saw a slowdown and wage growth, then I start to get concerned about the ability of this economy to keep expanding and it being supportive of equity returns over time. That would confirm me. Right now, we're not seeing that. We're seeing a deceleration but still growth, and so for that reason we think that equities are are set to climb

this year and next. So, Nila, I'm wondering about certain sectors that maybe I should be looking at if I'm thinking about getting into the equity markets. You know, here a lot of folks saying, you know, we're ten plus years into the cycle's time to get defensive. But the defensive sectors are rich biastorical level. Should I be thinking defensive or should I be thinking about maybe even some more cyclical type sectors. So we are slightly more defensive

than we were earlier. This year, we took some UH money out of energy because we don't think that is an opportunity anymore. We've been waiting for those valuations to pay off in the energy sector. But if you pair what's going on there with a slow down and global growth, we don't think that's a good place to be. We're still favorable tech U. There are multiple avenues for continued business growth. Now you're going to see UH some volatility

in that sector, especially tied to regulation. We saw that with Amazon UH not as smooth in terms of earnings when they reported, But tech we think is still strong. We are favorable healthcare as well, UH because of long term demographics. So if you take a long term view, there are opportunities in this market to really put that cash to work. Again that's a recurrent same, but you have to be more strategic now than you have an

earlier in the cycle. Cash to work is is an important point here, and and I guess that the other point is what kind of returns should people be expecting over the next twelve months from US equities. This is a time to really have a realistic perspective. We are not going to see year over year earnings growth like we did in twenty seventeen eighteen. We are in a

period of very low interest rate environment. We're seeing a slow down and growth both in the United States and globally, so we expect earnings returns to mimic that slow down that we're seeing in the macro fundamental flower returns than we've seen in previous parts of this cycle. La Richardson, thanks so much for joining us. Niela's at Edward Jones Investment Strategist, joining us on the phone. Thanks for listening

to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple, pod Cast, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio.