Your 2020 Guide

about just trying to better yourself through the year. Um do you Well, I've got a teenage daughter who's going to be getting her driver's learning permit? Are you going to be teaching her very soon in the new year? So? Uh well, Luckily in New Jersey they forced them to take driver's ED so I don't have to do most of the teaching. But uh I think my resolution is going to be not to have a heart attack at any time during the new year. That's a good one.

Good luck with that. No drivers that in Florida, Yeah you can get away with it. But happy New Year to everyone who's listening. Right, And luckily we have a guest who's going to predict exactly what's going to happen in the new year to a correct rate of predictions. I assume is all right, Chris Harvey, head of equity strategy at Wells Fargo. Absolutely, we've got it down to a ti. Whatever you want to know, we've got the answer.

The shell answer man right now. I do I feel sorry for you guys because you have to make these predictions. Is this like how much do you sweat these things? Sometimes a lot, sometimes very little. And sometimes the funny thing is when things work, then people ask you, so what's next? And you said to yourself, well, I'm not really sure. But that's never a good answer. They demand

exactly what's going to happen. I've got to say I was looking over your predictions from the past year, and you guys really did do a good job at calling what was is a very unusual, unexpected year. I must say, sorry, you're not supposed to look at last year's predictions that they don't like that, but they were right. If they were wrong, maybe I wouldn't or maybe I would have saved it to the end of the podcast. But let's let's get into this year's I uh, some some I

poppers here one I think is very provocative. Expect of potential five to ten percent pullback in the first half of five percent pullbacks, Theoretically you should not be that uncommon, but we just have gotten used to not seeing them. What's what's the gist of why you think that could happen. So as we look in the market, there's a lot of things to like. Rates are lower, credit spreads are tighter,

the fete has been a combinative um. We've got some sort of resolution with trade and tariff, and sentiment has improved, and it improved greatly. And that's what we don't like. When everything starts turning positive, expectations go higher, it's usually not a great time for equity markets. And with a vix in and round twelve, you can see things change quickly. I'll quickly go back to fourth quarter of two thousand and eighteen, when the wheels were falling off the card,

the world was going to end. It was a fantastic time to get involved. You had returns that were well into the double digits um and you had great opportunity to invest here. Typically, when people are a little bit more what we would say greedy as as opposed to fearful, it's not always a great time, and so with expectations so much higher, we're just worried that things can change

and change rather quickly. It's that old Buffett trope, you know what, it's fearful when everyone's greedy, and greedy when everyone's fearfully and you know, it seems to play out again and again. It's one of those cliches that keeps

coming back for a reason. Um. I think the phrases buying when you can, not when you have to, and so when you can, not when you have to, and I think that applies here, so also fitting into that correction called potentially coming within the beginning of I also saw you mentioned and liquidity and the Fed's balance sheet. I saw a statistic recently. But if the Fed's balance sheet continues to grow at the pace we've been seeing it grow at, it will be at a new record

by May. Is it going to be very difficult once again for the Fed to try to wean investors off of this liquidity. I think that's a great question. And we've been saying at what point does the FED stop intervening? And you're right about the the massive amount of liquid in the marketplace, Whether it's um from the FED or whether it's from the credit market. If we look at half by the end of it or by the end of I think first quarter will have the balance sheet

grown by a half a trillion dollars. Interestingly, what what does that do? Well? That that shortens the duration of the balance sheet, which is good because what we've seen is the curve is starting to steepen. That's a very positive economic signal. But at some point we have to let the economy, we will have to let the markets stand on their own, and we need we need for more diversification, or we need things to be really priced more appropriately. And that's the issue where also having it

is everything is fantastic, everything's great. We need a lot more differentiation. Another thing that caught my eye in a recent note of yours downgrading semiconductor stocks, and I can't say, I can't tell you how many TV hits I've done this year where someone's been like, why are semi conductor stocks so still and so well? And you know, the sort of stock answer has been, well, it's the next big thing. If five G Internet of things that the

cloud is still has to be built out. But I've always you know, wanted to add sort of that Trumpian uh catchphrase. Well we'll see what happens, you know, because it does seem I mean, earnings for semis this year we're pretty abysmal um and there it's crazy to see this rally. And then what's is your main rationale for forgetting a little cautious on semmings. So in two thousand nineteen, we wanted to add cicklicality to the portfolio. We want

to do it in a stepwise fashion. So we came into the year overweight capped goods, we upgraded the semis, and then ultimately we we went overweight the banks. Everything worked quite well, actually I think too well, and so we on greaded the semis for three reasons. It was macro, it was sentiment, and it was relative performance and working backwards. Relative performance has been fantastic. It really has been a fantastic year. The semi some of the semi in dcs

are up. The second thing is sentiment. To your point, sentiment is turned dramatically. You had everyone saying that the cycle or the bottom of the cycle won't be for another twelve or twenty four months. Turns out it was a lot sooner. Maybe we have a different calendar than most people. And the last thing is from a macro point of view, as we go into and look into from a portfolio point of view, we want to start

laying off a little bit of risk. We think that the cyclicality that we told you to buy, we want to start harvesting at this point in time. And the move is just exceptional at this juncture. And does it all relate to the trade situation at all? I know something else you've written is that phase two could be elusive.

I mean, I'll put out phase one still is kind of elusive there, but um will uh sort of dumbling blocks on the way to phase two be as big of a deal as uh stumbling blocks in phase one, and and the semis play a role in in that at all. So so the first thing I would say is if this was your first day and the job and people said, hey, what a trade in tariff to the semi conductors, you would have said it really helped them,

which is which is odd. So now that we've had the semi we have some sort of certainty, and I agree with you, we're not certain what phase one actually is. Our our view on Phase two is you're not going to see a Phase two anytime soon, and so we will get a lot of bumps and we will get a lot of fits and starts with regard to it. If you look at what the Chinese are doing or what they're not doing, there's no behavioral change. They don't want it. They they've shown you no indication that they

want to change. And at the end of the day, I think Phase one was, Okay, we'll get something on the table, something moderate or small, you claim victory, will claim victory, and then we'll move on. And that's where

we are right now. With that said, do you think the improvement that we have had with the quote unquote elusive Phase one t a deal right now was enough to really lift CEO confidence again potentially lead to an uptick and CAPEX spending Because if now all of a sudden we're talking about phase two, what's the enforcement mechanism may be going to be. Is it possible tariffs go

back into effect again? In a way? Are we just in this circle where what we did see in where we saw a bit of a pause on business spending plans just continue through. So a couple of thoughts and I'll be a little bit all over the place. So we don't think trade and tariff did that much to the economy. It did slow things down, But what it really did when we look at earnings, when we look at stocks, the word the phrase we heard time and

time again uncertainty, uncertainty, uncertainty. So now we have some sort of certainty that does help planning, That does help people, um, maybe be a little bit more aggressive in their investment pattern. So at the margin, I think it is better, But is it a ton better? No, not really. There's not a ton of pent up demand. It wasn't as if we just went through some major recession. We didn't. We had a moderate slow down, And so what we should see on the flip side is something to improve on

a moderate fashion. Nothing more than that. Here's a line I love in your outlook. Banks possibly to become the new low volatility trade. Boy, if you had said that a ten years ago, I'd I'd like to see the reaction. But I mean, is this, you know, a function of just the capital return story at banks? That, um, why would they crash when you know, you know the dividends are coming, you know the buybacks are coming. The Feds kind of, you know, easing off a little bit on

those stress tests. You know that those capital plans are getting maybe a little bit easier of a look, so I hate to use this phrase, but this late in the cycle because we've been this late in the cycle for a very long time. Typically, banks balance sheets are upside down backwards and and can be rather toxic. Additional, in addition, they don't always do all that smart emin a activity. They've been regulated out a lot of these issues, and so banks balance sheees are actually quite good, one

of the things that we saw in third quarter. So we upgraded banks in September of nineteen UM. A lot of people said, hey, Chris, we like a lot of your calls, but this you want to rethink this. People are still shell shocked about the financial stocks. I feel like, I mean, look, it is just December that the S and P Financials finally reclaimed that seven records. That's remarkable to me, and and the bank industry group still has it,

which is also pretty remarkable. But the pushback at that point in time is Chris, credit costs are going to go up. Chris, you really don't understand anything about about an interest margins or the curve, it's just going to be horrific. And what I said is you're you're really not appreciating what's changed, how the fundamentals have changed, how lower risk, how much more diversified they are. And then we got third quarter numbers and everyone's like, oh, maybe

you are right, and so now you're starting. The run up that we've seen has been very aggressive. And we do like banks. We like them strategically longer term and and to your point, we can also see multiple expansion as people realize these are lower risk profile type companies. And we talk about banks and banks being low voless really the larger cap banks not so much the regional and the smaller cap banks, and so we expect longer term. But boy, you're right, they've had a heck of a

run over the last couple of months. But I mean, you think about how long were they trading below A lot of big banks were trading below book value for Pize's sake. I mean, that's it's remarkable. They were hated and when we we did the upgrade, there was a lot of pushback. A lot of fundamental players just said this isn't gonna work. And and even if You're right, the market is not going to price it correctly, or it's not going to price the belief that they are

are lower risk profile. What we said is we're seeing a lot of money going to these quant funds. We're seeing a lot of money going too low volatility funds. They will be your your marginal driver return or your marginal driver price. And so far that that's been more right than row Is it partially sort of the moving target of regulations? Who I mean banks obviously, like you said, they've kind of been whipped in the shape after the crisis.

Now it seems like all the scorn in Washington is going in the other direction towards uh, you know, the big fang stocks that your your social media and your internet stocks. Is that part of the story there? So on regulation, one of the things we were saying, One of the things in our recent note has been that

we think that tech will be the new healthcare. It is scar I mean, just considering how how important tech has been to the rally and the underperformance that we've seen recently in healthcare due to talks of regulation and heading into the election, and now I don't want to say it's doom and gloom. But you're going to have some bipartisanship, which is very unusual in Washington because both sides and you can see it already are talking about tech in issues, whether it's privacy or what have you.

We have the California Consumer Privacy Act coming too effect next year and it's going to be on the forefront, and we do worry that it's going to put a fair amount of volatility into the names. And people are always an election you're looking at health care. But again, what I don't think what may surprise people is the amount of rhetoric in and around some of these tech companies, which in some cases isn't fair, in some cases may

be fair. When you say tech, do you actually mean tech as in it would be classified by the gig sectors or more so, you can think of it broader as faying and the internet companies as well. So, um, when we talk about tech, it is the broader indicries. But obviously there are going to be certain companies and certain subsectors that are more in the focus of the regulators, whether it's on the Internet side, the ones that have a little bit more pricing or a little bit more

information on your background as opposed to say a semiconductor. Um. So the things that we worry about are more the hardware and some of your portals, if you will. But overall, if it affects one area, it should affect all areas to some degree. Is there a chance of healthcare being the new healthcare? To watch these democratic debates and I guess the difference is that risk is to a large degree priced in already. Um It that again great, great question.

So bigger picture, what we think is political risk. We don't think it's really priced in at this juncture because if you think about its sentiment is so good, everything is so great. Um. If we look at the price action in some of the healthcare spaces with the HMOs or some of the providers, you saw this big sell off um when we had Medicare for all first bandied about. Now there's been a massive snap back in it, and that's not going to go away. At some point the

Democrats are going to get some momentum. This will come back to some degree, and I do think you're right. Healthcare will be healthcare and there will be some pressure on it. But ultimately with the valuations look pretty attractive to us, and you probably want to get aggressive on those sell offs. I want to get back to the

low all trade, which you had mentioned before. Where do you guys actually stand on that broader low all trade, because we just saw it grow in such popularity this year and now we hear a couple of people coming out saying, look, this has gone too far. We're going to see you oursel and you pounded the table a while is back on the trade. So where do you guys stand now? So again, bigger picture, we've liked low volatility low volatility sector for and we've been writing about

it for the last ten years. We got very aggressive in the summer of two thousand it was two thousand eight um but in the summer of two thousand nineteen, what we were saying is it's now pricing in a recession, and from a tactical point of view, we wanted to fade that. We want to fade a lot of your bond proxies, especially when the tenures in and around one and a half percent. At some point we'll want to

come back to that, but we're not ready. One of the things that we always talk about is the volatility of low ball and how people are whether whether they're discriminating or not discriminating across that volatility access Right now, they don't really care. We're starting to see opportunities, were starting to see low ball roll over, We're starting to see your bond proxies pull back, the tactical opportunities opening up.

But just not yet. We need to see people we see need to see a little bit more optimism, a little bit more speculation at that point in time will come back to it from a tactical, tactical point of view. What the issue that we have longer term is this space, whether it's some of the e t f s, some of the quant funds UM and even some of the fundamental funds UM are a lot more a u M is going into this space, and the opportunities are less

and less, and the valuations are higher and higher. So it's not what it used to be UM from five or five plus years ago. So if you boil it all down to a headline, uh, you're looking at an SMP five hundred target your end of thirty eight, about

a six percent gain. I always like to ask sort of what your confidence level is in that, and more importantly, you know, uh, everyone sort of has upside surprise in mind, and a downside surprise, which which risk is is greater and upside or downside to that um um, so a couple of things there, because because you asked and said

said a lot um. One of the things we have the most confidence in and one of the things that we expect to see next year is we expect to see a lot more spikes and volatility, a lot more training opportunities open, opening up the buying hold. I don't think is going to be your friend next year, and so ultimately we think we get to some sort of

mid single digit return. But by the end of the year, you're gonna need a drink because it's it's gonna be a long road, and there's gonna be times where people say where we here they are word again, where we hear recession um switching gears a little bit. What worries us most is we don't think the volatility in the rates market is over at this point in time, and we can make an equally plausible issue that rates go too high as well as too low, and so that

continues to trouble us, if you will. And it's just really difficult to handicap because you can trying to figure out the winners and losers. You know, the the index might be somewhat steady, but the the winners and losers inside will be flipping and flopping around. It possible. And then the other thing is that getting back to liquidity. At some point the FED will stop growing their balance sheet. We saw that in at the end of two thousand fourteen.

Two thousand fifteen was not a great year, and so it looks like they've been helping to push price, push risk. Yes, trade and tariff has done its fair share, but if you look at what's happened to the shape of the yeld curve, interest rates and risk product, it's been very aggressive as a FED has put more liquid into the system. Is that balance sheet risks sort of? I would imagine that could be frontloaded towards the beginning of the year, just because you know, they want to get past the

term in the repo market. And I think I think that's fair and I think that's right as well. But the one thing that when I ask people, so where do you think they end? How big a balance sheet do you think they get to? And right now it looks like they're going to add about a half a trillion dollars, but that might not be the end of it. That's what we think, but it's not clear they're not saying okay, that's that's the level. We're done here. You

could see more um. Hopefully they end and and we can have the kappa markets start to stand on their own. But we'll see. So within your risks that you lay at in your look of first on, there is interest rate risks and volatility. At what point would it be an issue? Say we actually do see ten your yield moving to the upside, at what point do you think would actually cause an issue? Then? For the stock market, one of the things that we think about, yes, how

will they get UM up safe? Let's just choose a figure up fifty basis points and and taking a step back to if you look at the equity market in two thousand nineteen, we could say majority or more than majority of the return was because of multiple expansion, and that multiple expansion was predicated on lower rates and tighter credit spreads, and so at some point and maybe it's it depends on the level, and it depends on the speed. If it happens very quickly, then then the levels lower.

If it takes time, then it's probably fifty basis points or maybe more my guess. But one of the things we keep looking at, and one of the things that we know is that when we talk to investors, when we look at the capital markets over in Europe, people now realize or believe that negative just rates are found experiment and if all of a sudden German tenures are north of zero percent, which is a little difficult to see at this point in time, you would expect some

sort of backup in US rates. And then the question is you don't really know where the top is. Just like in August, I had a number of race players who are telling me the tenure is going to be a three percent. Now they're saying three basis points, and the swings that you're gonna have are gonna be quite great, and so it's gonna play with multiples. So to see these credit spreads at at these razor thin margins, um, what would it take for them to finally widen out again?

Would it be sort of a credit event that would cause it? Do you think we're some sort of deterioration in the data? I mean, what what what we look out for there? Um? So our credit team does think you're going to see about a twenty basis point widening and i G spreads Uh. Partly that they say, some of that is technical, some of that is just things are priced exceptionally well. We'll have some idiosyncratic risk that may push things down. And it looks like we've just

peeked on fundamentals at this point in time. We're not negative on the economy next year, but the economy is not going to be great. We're three yards in a cloud of dust. Right if choose choose a number, you're a two and change plush in minus twenty five basis points for a long long time. We're a low growth but roadbust environment and we have to get comfortable with that. Yeah. So a trade deal, even a phase eight or nine, whatever, we finally get to it, it doesn't get us past

sort of trend GDP growth. No, not really. It takes a ton to get the three percent as we saw with tax reform. We got there for a period of time, but we can't get there for a sustained period of time. We have bridges, we have roads, we have infrastructure and telecom. We have an aging population, we have little to no population growth or mature economy. You don't grow at three percent for the next day for a sustained period of time. I think we'd all hope that we don't have to

get to a phase eight or not. We're still dealing with that. I don't think we've been told yet, so maybe eight or nine is or something in our worst nightmares. If we get to phase one and a half next year, I'll be happy. I think we all will. I think we all will. It's just a phase, sir. Yeah, they're going to their phases all right. Well, Chris, thank you so much being our first guest for Happy New Year. Thank you, Happy New Year. To YouTube What Goes Out.

We'll be back next week. Until then, you can find us on the Bloomberg Terminal website and app, or wherever you get your podcasts. We'd love it if you took the time to rate and review the show on Apple Podcasts so more listeners can find us. And you can find us on Twitter, follow me at at Therapontech, Mike is at Reaganonymous, and you can also follow Bloomberg Podcasts at podcasts. What Goes Up is produced by Tofur Foreheads.

The head of Bloomberg podcast is Francesca Levie, thanks for listening, See you next time. Just