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Char Jay Powell speaks later today, and that's ahead of Friday's all important jobs report.
Automaker, seeing a run of bad news to Lantis joins Volkswagen and Aston Martin and issuing the latest profit warnings, partly blaming sluggish demand from China.
And this on m and a Monday, DirecTV and Dish agreed to combine in a deal that we'll create the biggest PATV provider.
In the US.
All that and more coming up, But let's take a look at where markets are trading thirty minutes until the bells ring. As Matt mentioned, not too great on this Monday. Of course, we're coming off of several consecutive weeks of solid gains, seeing some of the steam come out of the market right now, out of that rally right now, even with that big run in Chinese equities, you're not seeing that good vibe music over there translate into the
US market. The S and P five hundred currently down about two tenths of a percent, the NASAQ one hundred, your big tech names which have been leading, currently down about three tenths of a percent, and still a little bit of a sell up in the bond market rate now right now, matt you're not seeing that haven rush necessarily. Ten year yields curly up about three basis points, all right, in terms of.
The runs that we've seen.
Mohammed el Area and, a Bloomberg opinion columnist and the president of Queen's College, Cambridge, highlighted this chart here on Twitter, showing the S and P five hundred has put up its best first nine months of the year since nineteen ninety seven.
The index is up more than twenty percent year to.
Date, boosted by the fifth consecutive monthly gain in September. The S ANDP has gained for ten of the last eleven months.
So we've been doing pretty well so far this year.
May ging me smarter this Monday morning, Matthew. Let's take a look under the hood as well. Here Stilantis, plunging at the carmakers said its forecast for the year would be lower as it plans to lower production.
Just taking a beating.
Now you have Stilantis down more than twelve point seven percent. You have Ford also down three point two percent, three point three percent, and it announced that it will install free home chargers for ev buyers as competition heats up in the auto sector. We'll talk more about that later this hour. Also watching shares of Echo Star Corp. Up
about seven tens of one percent. Remember, Direct TV and Dish, which is owned by EchoStar, have agreed to combine in a deal that will create the biggest pay TV provider in the United States. Interesting that it has been up more than fifteen percent since Bloomberg had reported that the deal would be happening.
Yeah, very interesting.
We're going to continue to talk about those mergers, but right now I want to talk about rather takeovers. Interesting as a merger. Right now, I want to talk about what going on in China. Six consecutive days of gains there, and they had a bomb today, nine percent up on the CSI three hundred.
Yeah, best run since two thousand and eight or so. It's been pretty amazing to watch the CSI three hundred. It's now up over twenty percent year to date. It's in a bull market. You rewind to just a week ago this index was done by more than four percent or just about so. I mean, the rate of change here has been just incredible.
You're not really seeing it though.
In US equities and I think a lot of that we can blame on Germany.
I think you also have to ask if it's real or if it's a head fake, because twenty five percent more than that over a five day period. The reality is it's driven by stimulus. The underlying data is weak as it is in Germany. I think the question is how much of that does that spill over that weakness abroad into the United States.
Yeah, Germany having obviously real problems, being the home of three automakers, all of whom have their own issues, but really it's Chinese imports and inflation that are the biggest issue there. We're going to talk about Folkswagen, We're going to talk about BMW.
We're going to talk about Daimler as well as Stilantis, which is.
Kind of like an Italian Dutch US automaker French as well.
Later on in the program.
Right now, I want to focus on the US markets with another chart Mohammed el Area highlighted on Twitter this week, and it shows the strength of everything Else, the everything else rally with the equal weighted SA outperforming by the most since twenty twenty two.
With US Now is Morgan Stanley's.
Chief US equity strategists and CIO Mike Wilson. Regarding the non farm payrolls number DOE out this Friday, Wilson says, we would need to see an upside surprise to drive a sustainable cyclical rotation in the US. And I understand that good news would be good news for some parts of the market. But wouldn't we want to see in some ways a miss because then we could get a bigger cut from the Fed in November.
Well, yeah, maybe it comes with a fine line. I mean, the good news is good news until it's not because then the fitness to raise rates too much. That was the story before. Now it's bad news is good until it's too bad. So look, I think there's three parts to what happened in the last two weeks. Okay, First of all, the FED gave us fifty. I think everybody was kind of expecting twenty five right up until the last minute, and so it was still an upside surprise.
And we had written about this.
We thought fifty going into the meeting, if they could convey that it was not being done for growth concerned reasons would be a positive. So we got that checked the by And I don't think that was a shocker, but it was a positive event. And then we got the China stimulus, but that came in two pieces, don't forget right. It came with the monetary stimulus initially, and I would say most people, including us, were like, well, that's interesting, but that's not going to do much. We
need we need fiscal stimulus. They're a deflation, right, We're not going to get any action in real economy. So then of course the policymakers came in because they listen, and they said, okay, we'll do some fiscal too, and then we got this massive move. So we've had a twenty percent plus move in three days, which I would say very few people captured.
All Right. The other thing you have to think about that read it? Whys it up so much today?
Well, Japan sold off sharply over the weekend, so I think you know, China has been a source of funds for the Japan trade, for the India trade, all the other em countries that have done well. Okay, and now you may see some reversion back, but that feels pretty overcooked to me at this moment. What we care about in the US as the following is this going to change the trajectory of growth in the US in a meaningful way.
And the answer really is no.
It can maybe get some excitement and things like materials, some of the industrial stocks who have direct leverage to perhaps the China stimulus of some kind, But beyond that, I think we need to see the labor market get better in the US and we need to see the policy changes from the FED have an impact on consumer.
Let's talk more about the labor market because clearly a lot of investors are hinging on Friday's report.
How much could that.
Move the needle? And if you have a significant miss to the downside, what that would would that mean for equities?
I mean for us. The labor market is everything now and by the way, it's everything for the FED. So you know, this is the sixty four trillion dollar question.
Did the FED cut fifty because they are actually worried about the labor trends, which I think they should be paying attention to that, or are they doing it because look, inflations come down and they're too tight to begin with, and so that they're able to it is effectally because they can or because they need to. So the labor market will tell us the answer to that. And you know, we've been pretty straightforward about this. If the unemployment rate goes up again, I think that's a clear negative.
If the undeplanment rate can.
Come down and jobs data is okay with any major revisions, that would be a positive.
That's where I want to go. And you make that point in your recent research that we need no material downside revisions to the prior months. Unfortunately for the bulls, we've seen that over and over again the past several months of NFP reports. I mean, when it comes to the quality of the data and these big revisions we still are getting, how much can you really trust it?
Well, even cher Paul said that right, he talked about the QCW revisions being so dramatic. This is what you get in a slowdown. You get revisions to the downside, just like when you have a recovery, all the revisions are to the upside. So this is not abnormal. And let's let's take a step back. This is what the FED was going for when they raised race. This once again, the big question is, you know, can they arrest the down trend, stabilize and then see labor markets actually improve next year.
We don't have the answer to that.
We're going to get two labor reports before the next FED cut, before the next FED meeting, We're going to get election, which you know, I think is probably slowing hiring in the short term just because there's uncertain around that. So yeah, it's going to be an interesting October, no question about it.
You also point out that you say earnings revision breadth is the best proxy for company guidance, and what exactly do you mean by earnings revision breadth. It's a little too much jargon for my mom, my mom, And you know, what do you want to see and what is it telling you?
That's by design, Matt, we have these special terms. You know that you have only I know the answer, but no. Earner's vision breath is very clear. So it's the leading indicator for earnings revisions. So when I say earning revisions, I mean our earnings going up or down, and revision breath we look at because that tends to be a leading indicator for whether it's going to be up or down.
Revision breath has been basically flat.
Now for the S and P five hundred for quite a while, and for the Russell two thousand and small caps, it's been negative. That explains a lot of why smaller, low quality companies have underperformed, because the revision breath and the earnings revisions subsequently have been poor.
So here's the thing for October.
Typically, seasonally, revision breath is negative going into or third quarter earnings.
Why because fourth quarter estimates are always too high.
That's why stocks tend to that trade great in the first half of October. So we'll see if that pattern is changed. If we get positive revisions in the next two weeks, boy, I'm going to be that's gonna be a real big positive because that would be going against the seasonal trend.
I expect them to be negative.
The question is will the market care because that's normal. We'll see it's going to be once again a very idiosyncratic earning season like it has been the last two or three.
Well, that leads me to the question. We hit forty two record closing highs in the S and P five hundred last week Friday, and to today you have seen a cooling of that upward trajectory. Is there any more upside left in the S and P five hundred for the rest of the year. One selection volatility cools.
Yeah.
I mean we wrote about this this weekend quite frankly. I mean, this is our bulk case, which is that the mount of policy stimulus, okay, has been tremendous, particularly in the US, both fiscal and monetary, and that seems to be somewhat coordinated now not only in the US but also in China now and other central banks are cutting rates, so that tends to allow multiple to expand further.
You know, I would say three weeks ago, myself and most of the clients I speak with were in the camp that we would have a tough four or five weeks into the election and then you'd get a strong rally into year end. But I'm starting to think maybe it might be more the opposite. We may stay bid into the election and then I think we get some disappointment post election on the idea that fiscal's kind of peaked right into the election, and also the FED then
is in fully priced. And then it comes down to the numbers. Can we continue to deliver the numbers that justified the multiple EXPANSI.
We've really had.
Well, we're going to talk more about politics in the election in the next block. I want to go back to what you were saying about earnings though, and the earnings breath revisions. There was a really interesting note oubt from Torsen slock Over at Apollo this morning, saying that forty two percent of companies in the Russell two thousand have negative earnings for the S and P five hundred. For contrast, those big caps, that number is just six percent.
So even with these revisions that you're watching so closely, in the idea that maybe the FED could cut more aggressively from here, I mean, how careful do you have to be about where you're picking your spots?
Absolutely, And we talked about this last time I was here.
We don't hate all small cap stocks, right, I mean we hate the rustle because it's a low quality it.
We don't hate it. We think it's a low quality index.
And therefore, in this kind of environment, that's not the instrument you really want to be long. That doesn't mean
there are some wonderful small cap stocks within that. And this has been a very high alpha generating environment for a lot of our clients are doing quite well generating alpha this year because there are some very good lungs and there are some very good shorts, and I think that's the way we're continuing to approach it, whether we're talking about small, large cap indicies or even within sectors, and there we've been very clear we want to continue
to stay up the quality curve. We're not willing to go down the quality curve. We don't think things are cheap enough. We don't think the FED is far enough ahead of the curve yet to stimulate interest there. That could change if we see the labor data improve.
And Mike, I want to talk to you about the potential impact of a strike along the ports. Of course, you have union workers along East Coast ports and Gulf ports coasts threatening the strike starting tomorrow October first, and seems like there is a lot of daylight between the two sides. To put it mildly, so if we were to see a strike, if we were to see a prolonged strike, how much of an economic impact could that have?
I think it's the second part what you said, it has to be prolonged. I mean the good news is that inventory levels are still quite high kind of across the retail channel, so in some ways it may provide some relief potentially that inventories can come down. Maybe there's some extra pricing here as supplies get short. But if it persists beyond a month or so, then it becomes a real constraint and the cost start to really build up,
and then we have a margin pressure. And for the FED, I mean, the FED then has this If let's say this thing doesn't get negotiated, or it does get negotiated in a way where wage increases are significant, does that factor into twenty five or fifty next meeting. So there's a lot of implications here. These are messy situations.
I do.
I'm not optimistic unfortunately, that it gets resolved this week. Probably needs some more action before the two sides come together. But as I said, I think it's the length of the strike that will then determine the magnitude of the impact.
You're not known for your optimism, It's that true.
I'm generally a half class full guy. But in this case, they think this is a tough one.
Yeah.
Well, I was thinking, what impact could this actually have on the markets? An interesting story, you know, politically and economically, But then I remembered what happened when that Evergreen.
Boat got stuck.
It was amazing, Yeah, in the Suez Canal and those supply chain reverberations lasted for more than a year. Sure, you know, I mean Aston Martin right now is its profit warning is because of supply chain problems more than it is China. Do you expect this could be a real problem at that scale?
Well, sure, I mean we had the report issues during the pandemic where you couldn't get workers to unload the cargo. So it's just one more example of how fragile some
of these supply chains have become pre pandemic. Right We've gone just in time inventory system globalization and manufacturing goods halfway around the world and then shipping them from there, and so you know, I think this is part of the bigger question like how are companies thinking about managing inventories, managing production, reshoring, etc.
Going forward? This is just one more example of that.
And labor costs has been something that's been a real tail wind for thirty years, and maybe we can't be that confident about that anymore.
Well, as you both point out, I mean we've been through this before, We've seen this movie before, and the argument is out there that companies maybe are a little bit more flexible in their supply chain, so that maybe they know a little bit more how to handle these sort of crises.
Well, here's the question on that note. If you're worried about wages going up being potentially inflationary, if you're worried about inventory shrinking here to this extent that you have to raise prices, then wouldn't both things be inflationary at the end of the day. Do you still worry about the trajectory of inflation when nobody seems to be as worried about it anymore, except maybe if you're Michelle Bowman.
Yeah, I think, I mean the inflation situation short term, I feel fairly confident and about But I think if we don't have a further like, let's say things reaccelerate here because China stimulus, which is a surprise we get perhaps you know, gas prices continue to come lower. That's helpful, and then the FED gets really ahead of the curve and they start cutting rates again in a way where people feel optimistic. Well, then, yeah, I think, then you're
going to be back into the other camp. This gets back to our original thesis coming out of the pandemic, which is going to be we're in sort of these.
Shorter hotter cycles.
We don't have all these tailwinds anymore, these relief valves that we've had for the last thirty years of falling inflation, falling interest rates, falling labor costs, outsourcing a production and so these are all things that make the supply side of the equation harder to manage, and that creates this boom bust almost in the inflationary cycle. I'm not worried about inflation right now, but I think it's a great question for twenty twenty five.
And Mike, just quickly here before we let you go, let's talk a little bit more about the US election. There was an interesting note doubt from Evercore saying that, well, in a century of returns, so that united government handley outperforms divided this time could be different, that in this specific scenario, actually a divided government might be better for markets. And with that in mind and that history that we have here, how closely are you watching the down value races?
I mean, I think the congressional election is way more important for markets than the presidential election, Okay, and the main reason is because of legislation. I would say that a unified congressional outcome is definitely bad.
For bond markets. Okay, I'm not so sure about.
Stock markets because you'll probably get more stimulus, which is going to be bad for the fiscal situation, but that may be okay for stocks, right, because the stock market likes growth. The stock market likes inflation. I mean, it's a misunderstood concept, right. People think, oh, inflation is terrible for stocks. Actually it's not true. When inflation was booming, that's when we had the best breath in the stock market.
That's when the Russell two thousand was doing really well because that's their pricing, that's their nominal GDP, that's their nominal revenue growth. So I think to me, unified government on the congressional side, you get more stimulus, probably better for stacks and bonds. You know, if rates go up too much, obviously it's not great for stacks.
Mike, great having you in.
Thanks so much for joining us.
Mike Wilson there from Morgan Stanley, US Equities Chief, US equity strategist and CIO