00:00Memorial Day, very, very close, not even a week away.
00:03What are the biggest risks to the summer vacation over the next few months?
00:06Look, I think the one that got activated over the weekend was, you know, long-end bond term premium kind of blowing out a little bit.
00:12I think a lot of investors had that on their radar, excuse me, but thought it was going to kind of be more of a mid-summer type issue.
00:18You know, the Moody's downgrade and now, you know, that kind of failed committee vote late last week, I think kind of brought that to the forefront.
00:23To your point, price action is also kind of demanding people focus on it.
00:27And so I think the number one risk right here and now is that long-term bond term premium.
00:31As you get into the summer, I think, as we mentioned there, you know, corporate America sort of punted last quarter.
00:36I don't think during July earnings, you know, the streets can allow them to punt again.
00:40So I think as you get into the summer, these potential downside risks to both EPS and GDP become a real issue.
00:45But for now, it's all about these negotiations on the bond term premium.
00:48Let's deal with one at a time. Let's start with bonds and the negotiations down in Washington.
00:52It's not just the U.S. Japan, messy auctions, the U.K., hot inflation.
00:56Yields are up around the world. What do you think is behind some of that and what does it mean for stocks?
01:01Look, I think our view coming into the year is that long end of the bond curve is going to be impacted both by the deficit and budget tax negotiations as well as tariff policy.
01:09I mean, I think there was a view that tariff policy disrupts kind of long term, you know, steady state trade trade policy.
01:17And to the extent that that gets disrupted, you can get people a little uncomfortable owning that longer term U.S. credit.
01:24So I think it's a combination of both. We have, you know, a 20 year bond auction later today, which is clearly going to get a lot more attention than it normally would.
01:30So, yeah, I think it's a combination of the deficit.
01:32Look, a deficit to GDP is like six and a half percent.
01:35Back in 2011, when the S&P downgraded the U.S., it was eight and a half percent.
01:39The difference there is valuation was half what it is now.
01:42And you were also coming out of the financial crisis.
01:44So that deficit, that deficit was high for a reason.
01:47The issue now, which a lot of economists have highlighted, is the fact you have a very large deficit on the back of, you know, a few years of really strong economic growth.
01:54So that, you know, that's really concerning people, I think.
01:56We have price to equity multiples or something, price to earnings multiples or something above 20 times right now.
02:01It is pretty remarkable.
02:02And you point out we still face trade headwinds.
02:05Even if things stay as is, that is a significant increase in what tariffs look like.
02:09Are we underpricing the real economic damage, the real damage to corporations that might come from having to pay higher prices?
02:16You know, I think investors are really concerned about that.
02:18Just because you, even if you're a 10 percent across the board and call it 25 percent on China as a broad number, that is still a significant increase.
02:26And it still has, you know, potential downside risk to earnings in particular.
02:30As I mentioned, I think people were comfortable allowing companies to punt for a quarter to get a little more information because investors themselves didn't have enough information to kind of argue with them, I guess you would say.
02:40You know, as you get into July, I think that's really, you know, really going to come to a head.
02:44And, you know, we're going to have to see what happens.
02:47To be fair, though, there are there's a group of investors that believe we're going to recession.
02:51Right. And, you know, an economist probably tell you that number is between 30 and 50 percent, give or take.
02:55There's also, though, a group of investors that say, look, that risk is well understood and fully priced.
03:00Are we underpricing the idea that this economy, you know, may be more resilient than expected?
03:06So you've kind of ended up with these two camps out there and those folks are the ones that are are creating the volatility in the market.
03:12Well, one of the other arguments that had started out this year as to why perhaps U.S.
03:15equities wouldn't do as well is because the money was flowing into other markets.
03:18But even though U.S.
03:19equities have started to rally, the DAC still closed at another all time high.
03:24The stock 600 that's closing in on its records, too.
03:27What do you make of stocks in Europe still exhibiting so much strength at the moment?
03:31I think part of that is, frankly, the fiscal.
03:33You know, a lot of people did not expect Europe to do fiscal and defense spend, and they were able to kind of push that through in Germany.
03:39And I think that was a little bit of a game changer for longer term investors and real money.
03:42So I think you're seeing seeing that go in there.
03:44And some of it, you know, to your point, is just a little bit of discomfort with the U.S. and the uncertainty here.
03:48So you sort of have an uncertainty bit taking money out of the U.S.
03:52You have, you know, potential game changer on fiscal in Europe kind of, you know, pushing them higher.
03:56And that combination has been really powerful.
03:58You know, we're going to have to see.
03:59You haven't had an extended period of Europe outperforming the U.S. for, geez, almost 20 years at this point.
04:04So it's going to be really interesting to see three months from now what that conversation looks like.
04:08Morgan Stanley capping it at half a year, mid-year outlook.
04:10They say this this morning.
04:11U.S. over the rest of the world.
04:13U.S. stocks to benefit from earnings revisions truffing in the near term and dollar weakness.
04:17How important is the dollar weakness coming forward?
04:19You know, I think it's why you get in that dollar weakness.
04:21You know, when you get gold moving as aggressively higher as it has been, I think that's viewed as sort of I want to be short the dollar, but I'm not sure what other currencies I want to be long.
04:29So, you know, to the extent that you keep getting gold higher, then I think the dollar weakness is arguably a risk factor as opposed to just sort of being driven by fundamentals.
04:37So I do think the why will matter there.
04:39You know, in terms of earning revisions, we'll have to see.
04:41I mean, U.S. numbers have not come down that much quite yet.
04:44And if the two-thirds of companies that didn't guide down ultimately get forced to by tariff policy, then you might not get as much of an earnings uplift as you're hoping for.
04:54But again, investors we talk to, I think, generally have said we're a little more – we're less overweight in the U.S. than we have been a while.
05:01And it makes us deeply uncomfortable.
05:02We've got to cut to guidance this morning.
05:04Target, sales weaker than expected, cut to the outlook.
05:07Stock is down in the pre-market by 4.5%.
05:09What's your read on retail?
05:11What's your read on the U.S. consumer?
05:13Yeah, I mean, retail is an interesting one.
05:14If you go – you have Target and Walmart.
05:16I've kind of met, you know, two of the big bellwethers there.
05:18I think, you know, Walmart's message was in a post-tariff environment, our pricing advantage is at least as wide.
05:23And maybe what you're seeing from Target's numbers is a little bit of a confirmation of that.
05:28You know, I do think investors are sniffing around for what in the retail space can I own?
05:33And Scott Cronin on our equity research team has kind of done that work.
05:37And there are stocks there.
05:38The question is, you know, how much bravery do you have to kind of step into those stocks ahead of what could be, you know, a difficult summer from a spending perspective?
05:47You know, the tough part here is if the unemployment rate ticks higher in early June, is that signal a noise?
05:53And again, I don't know how the market's going to deal with that.
05:55And I would assume – and Bill Dudley out later may have, you know, a lot more insight into this than I would.
05:59But, I mean, it seems like for the time being, the Fed is going to get a little bit of a pass on this data, at least for a couple of months.
06:07So it makes it even harder to read the consumer because the incoming data, you know, again, could be signal, could be noise, and it's hard to determine.
06:13So it's hard to see if you're going to get a little bit of a pass on this data.
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