Markets in 3 Minutes: US Stock Recovery Is Too Optimistic

Watch Markets in 3 Minutes: US Stock Recovery Is Too Optimistic - Bloomberg on Dailymotion

Transcript

00:00talk about the markets in three minutes and then your thoughts on the link

00:03between yields and stocks then I guess as we were saying maybe it depends what

00:06is driving yields to go higher and how robust should that connection be right

00:11now do you think well I think it's going to be working against stocks acting like

00:17gravity on valuations because you know it's one thing to have a strong economy

00:22a higher yields the stock market can withstand that because it means higher

00:26earnings but in this environment where you've got tariffs where you've got

00:30deficits under concern you've got the threat of inflation and a stagnant

00:35economy it's not going to bode very well for stocks because you're going to

00:38essentially discount the present value of future earnings at a higher rate that is

00:44going to pull down stocks as I was saying you know with the problem with this

00:47recovery and that we have seen since the April early it's in early April is that

00:52you know investors are too optimistic we have seen this movie play out

00:56before and it doesn't end very well because you know each time there's been

01:01a big crash in the markets whether it's the great financial crisis or whether you

01:05go back to the dot-com crash the markets always recover very enthusiastic to

01:10recover immediately after the drop but that proves always like a warning shot for

01:16investors and it doesn't work out very well now if you look at the earnings

01:20aggregate earnings per share on the S&P last year it was about $240 so

01:26if you lop off even just a mild 5% of those earnings because and that's very

01:31legitimate because the tariff concerns and all that that is dogging the US

01:35economy so if you assume an earnings per share aggregate of $225 and assume

01:40even a liberal price to earnings of 20 times you're talking about evaluation of

01:464,500 we are at 5,800 so there's plenty of way for the correction to go in terms of

01:56the data we're about to get we're going to appear my data what are you

01:58anticipating there out of Europe well guy I mean in the euro area purchasing

02:06managers are going to report that you know the economy did fine despite the

02:10uncertainty about tariffs but what matters is for the big the big picture is that

02:16look the ECB inflation is under control the ECB is probably going to cut rates

02:21twice more in that cycle what does that mean it means that boons are going to do

02:25well and front-end German bonds are going to do well as well now if you're a

02:30dollar denominated investor if your portfolio is denominated in dollars you

02:34are actually getting paid to hedge the currency risk for your exposure to the

02:38euro so the three-month forward premium on euro on the euro dollar is about 70

02:44basis points now if you annualize that you get about 240 basis points which is a

02:49fantastic pickup over and above the nominal yield on boons or front-end bonds so

02:56that means that you know even though the nominal yields are lower in the in

03:01Germany they're much higher than what they are what treasuries offer of after

03:08adjusting for currency the currency premium and therefore I think that those

03:13bonds are going to do well in the current months