00:00We're joined by Mike Wilson, Chief U.S. Equity Strategist at Morgan Stanley.
00:04Really great to have you with us on this first day after the government shut down, Mike.
00:10Now that it's over, now what? Good morning.
00:14Good morning, Nathan. Yeah, well, I think most people probably won't feel the effects.
00:18I'm sure the government employees are happy to get back to work.
00:21And look, I think from our standpoint, from a market standpoint, I mean,
00:24the longer that this kind of, you know, lagged into the holidays, it definitely became a risk factor
00:32from both a growth standpoint and also from a financial liquidity standpoint.
00:38So, you know, I think there is a bit of a sigh of relief.
00:41You know, the markets have traded better into this now that it's behind us.
00:46But, you know, let's be honest.
00:47I mean, I don't think they've really solved some of the main issues.
00:50So this is one that could pop up again as early as January.
00:55So, you know, we'll keep an eye on it.
00:56But I think we averted the worst of it.
00:59Could there be a lag when it comes to releases of government data?
01:03We heard the White House say that October CPI and jobs might never come out.
01:08Could that have a market impact?
01:11Well, it's just more of the same, which is there is this tension.
01:14And we've written about this.
01:15We think there is this tension between the market's expectation and what the Fed is doing.
01:20And part of that does relate to the data itself.
01:24I would say that the issue with the data is twofold.
01:27Number one, we may not get it.
01:28And so it's a further delay, which will delay the Fed's ability to, you know, cut rates maybe as much as the market wants.
01:35And also, you know, I've made the case, and I think other people have too, that, you know, these data are somewhat, they're very lagging.
01:44And they're not as accurate as they have been, you know, pre-COVID.
01:49But, you know, since COVID, some of these data, the collection of themselves has been a little bit erratic and a little less reliable in that regard.
01:59So, you know, we do have a little bit of a data problem with or without the shutdown.
02:02And I think this all stems back from COVID.
02:05And I think this is making the Fed's job harder.
02:08Does it change your view on what the Fed does on interest rates?
02:11I think you were calling for something like, what, six, maybe seven interest rate cuts next year.
02:16Does that change now?
02:18Well, I think it's five to six now our economists have over the next year.
02:22But still, that's more than what the market's anticipating, you know, right now.
02:27The market's anticipating about three, three and a half cuts between now and the end of next year.
02:31So, I mean, look, I think the issue, it's not an issue, but I think one of the concerns that the market has had,
02:37one of the reasons why it's been narrow is that, you know, the market kind of wants more Fed cuts.
02:43In order to get the private economy really moving, we do need kind of that base rate a bit lower.
02:48And that's why we've kind of stayed at the quality curve and why the market performance has been quite narrow.
02:54So, you know, look, I think because of the effects of COVID, kind of the boom bust on inflation itself,
03:00the Fed is probably going a little bit slower than they would normally,
03:02which I don't think is necessarily, you know, the wrong decision.
03:06But there is that tension, as I mentioned before, between the market and how fast the Fed is moving.
03:11It's been an interesting move in the market in the lead up to this shutdown coming to an end.
03:15While the broader market's been moving lower, we've seen the Dow Jones Industrial Average hit new record highs.
03:21Does that point to a new direction, a new narrative for the market?
03:24You know, we think so.
03:26I mean, we've kind of held back on trying to make the kind of small cap, mid cap broadening call.
03:32But now we think we're getting closer to that moment where, you know, we do think we're going to see, you know,
03:38broader performance in 2026, mainly because the earnings story now is improving.
03:44As we've been saying for quite a while, you know, a good chunk of the private economy has been in a recession for many years.
03:50And we think that it's now emerging from that, some of that's due to some of the policy changes.
03:55And quite frankly, there's just pent-up demand.
03:57But, you know, the missing piece there, going back to the Fed again, not to put too much pressure on them.
04:01But we do need lower rates for that private economy to get moving.
04:04The good news is, Nathan, is that in the third quarter so far, the reporting season,
04:09we are now seeing double-digit earnings growth on a year-over-year basis for the median stock.
04:14And that's the first time we've seen that kind of growth in four years.
04:17So I think there are early signs that we're seeing a broadening of the earnings story.
04:22And that's what ultimately will lead to better, broader performance in the stock market next year.
04:26Are you starting to think about a number in terms of where earnings revisions could go into next year?
04:32Well, I mean, I think the consensus right now is low double digits.
04:35And we think that's very achievable.
04:37We'll leave it at that.
04:38We're actually working on our year-ahead piece that will come out at the end of next week.
04:43Okay.
04:43Anyway, is the need for interest rate cuts there for the market?
04:50Or can the market continue to rally higher even if its expectations aren't met in terms of monetary policy?
04:59Well, I don't think the market is really in trouble if they don't exceed expectations.
05:05But I do think the broadening story requires the Fed to get ahead of the curve, as I'd like to say.
05:10I measure kind of the Fed in market terms.
05:15Are they ahead or behind the curve by looking at the two-year Treasury yield?
05:19So right now the Fed funds is still about 40, 50 basis points above the two-year Treasury yield.
05:25And I would like to see the Fed get below that level.
05:28And then you'll see that broadening out.
05:30But the economy is not in bad shape at this point.
05:33I think the worst of the economy sort of slowdown is behind us.
05:38And that was – we priced all of that in April.
05:40We've written about this.
05:40That was the end of this rolling recession.
05:43And we're into a new bull market now.
05:45But, you know, I mean markets like to challenge authorities, monetary policy, et cetera.
05:52And if they're not happy, they'll make them know.
05:57And then they'll get what they want.
05:59But right now it seems like we've got a decent balancing act that's going on.
Be the first to comment