Morgan Stanley's Wilson on Stocks, Fed, Inflation

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Bloomberg Aug 14 03:11 · 25.1k Views

Mike Wilson, chief US equity strategist at Morgan Stanley, talks about the latest market selloff and why it's smart to be defensive. He's on "Bloomberg Open Interest."

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Transcript

  • 00:00 We thought it happened in the third quarter.
  • 00:01 So it just happened immediately and there's always different reasons for why it happens.
  • 00:04 Like our general take on the correction that we've seen
  • 00:07 is that we're probably going to be stuck in this range now.
  • 00:10 I mean, we had a pretty big shock.
  • 00:12 It wasn't just
  • 00:13 the correction we saw in the equity markets, but then we had the, the carry trade kind of unwind
  • 00:17 and I don't know how people can sit back and feel comfortable with that.
  • 00:20 The, the main thing though is what you guys have been talking about this morning, right?
  • 00:22 The consumers slowing, right?
  • 00:24 The
  • 00:24 like all the consumer services companies in particular, it's not just the goods companies
  • 00:28 and that has to be resolved here.
  • 00:30 So the way we think about it is in order for markets to to kind of make a,
  • 00:34 you know, a new high, I mean, you need multiples to expand and that's going to be very challenging in a world where growth is slowing.
  • 00:40 OK, earnings expectations probably are still too high for the for the second-half of this year here
  • 00:44 and a Fed that's reluctant
  • 00:46 to be proactive, OK.
  • 00:47 And I don't disagree people are criticizing the Fed.
  • 00:50 I'm like,
  • 00:50 well, look, they're just being data dependent.
  • 00:52 I mean, and and so they're doing their job.
  • 00:53 They're they're going to react if they need to.
  • 00:55 If they overreact,
  • 00:57 then that probably exacerbates the carry trade problem.
  • 00:59 So they're not going to overreact.
  • 01:01 Whether you think you're going to get that 25 or 50 basis point cut over in September, it's still more than a month away.
  • 01:07 So is rates remain elevated.
  • 01:09 How much more pain does the consumer see?
  • 01:11 Do you think investors are perhaps under appreciating how much more pain there's left in the plus?
  • 01:15 They're lags, right?
  • 01:16 It's not like the Fed cuts.
  • 01:18 It's September 18th and the consumer goes to Home Depot and buys
  • 01:21 a new washing machine on September 19th, right?
  • 01:24 Well, that's generally been our view, right?
  • 01:25 I mean, we've been underway consumer discretionary and sort of overweight the later cycle groups and defensives
  • 01:30 on that premise, meaning,
  • 01:31 you know, we, we think being defensive right here makes a lot of sense for, for all the reasons you mentioned it.
  • 01:35 All these things work with a, with a big lag.
  • 01:38 And I, I completely agree.
  • 01:39 In fact, our note this week, we discussed this in detail, particularly housing,
  • 01:43 right?
  • 01:43 We like 2550 basis points isn't going to do anything, mainly because most people's mortgage rates are sub
  • 01:49 four, if not sub 3%.
  • 01:51 So you need 2 to 300 basis points of cuts to really get some of these interest rate sensitive areas moving.
  • 01:57 And that that's just going to continue to weigh on consumer sentiment sent away on consumer stocks.
  • 02:02 And so that's, you know, that's how we're set up.
  • 02:03 We're set up to be sort of underweight that space.
  • 02:05 And Mike, I want to get your thoughts on some of the technicals here, specifically when it comes to positioning in the big tech sector, because there's a note out from
  • 02:12 Citigroup this morning saying that there's still 22 1/2 billion dollars worth of long positioning
  • 02:19 the NASDAQ 100.
  • 02:20 And in their view that makes the
  • 02:22 index still pretty vulnerable here to any sort of sentiment shock maybe at 8:30 AM tomorrow morning.
  • 02:27 What are your thoughts on position right now after the few weeks that we've seen?
  • 02:31 Yeah, I mean, the faster money crowd has adjusted significantly, even the systematic strategies and some of the longshore community.
  • 02:37 But the the asset owners, right, retail long onlys that that crowd is still very exposed.
  • 02:42 And so there is length in the marketplace.
  • 02:44 It's not just NASDAQ 100, it's kind of equities writ large.
  • 02:48 So the way we think, think about right now is the valuation is just inappropriate, right?
  • 02:51 Valuation doesn't matter until it matters and then that's all that matters.
  • 02:55 And we've been very adamant that 19 times is kind of a fair market multiple in a soft landing, OK.
  • 03:02 So today we're north of 20 times still.
  • 03:04 So I just, I don't it's very hard for me to get excited about the index, which is why we're really focused at the stock level and the sector level trying to make money a little more on the carry trade here because the carry trade is not really isolated to the yen.
  • 03:15 I think that's an important dynamic of this.
  • 03:17 The other important dynamic I think is how much investor didn't realize how much leverage was under the system.
  • 03:22 If you think about kind of what is left to unwind these kind of exogenous shocks, do you still worry that there could be another one this year?
  • 03:30 Well, there's still a lot of leverage in the system.
  • 03:32 I mean, so that that I just sort of spoke about equity length is high, OK, Bond
  • 03:37 length is low.
  • 03:38 So I mean, people are skewed to having more risk on.
  • 03:40 Then
  • 03:41 you take into account the leverage in the system through products like triple levered ETFs or,
  • 03:46 you know, daily expiration options.
  • 03:48 Just the leverage in the system as people are doing carry trades of all sorts.
  • 03:51 Yeah, they're still allowed.
  • 03:52 There's more leverage in the system than there should be
  • 03:54 given the uncertainty still of the eventual outcome
  • 03:59 of the economic, you know, events that are that are still in front of us.
  • 04:01 Speaking of those, you said you expect earnings to be weaker in the second-half.
  • 04:04 We've had
  • 04:05 an excellent earnings season in the second quarter.
  • 04:08 I think 11% is what we've seen in terms of profit growth year over year.
  • 04:12 Why is the second-half going to be harder do you think tough comps from last year?
  • 04:17 Do you think we're not going to see a continued broadening out of earnings growth?
  • 04:20 So
  • 04:21 one part of his expectation so that there's a
  • 04:23 big hockey stick in the fourth quarter and there's been a lot of discussion around a pick up in orders in the second-half of the year that continues to be elusive.
  • 04:32 So as we come into September, this is when we read about this this week to
  • 04:35 the key data for us is going to be what are companies saying in September about order books.
  • 04:40 If we don't see order books pick up in September,
  • 04:43 your year is kind of shot in terms of seeing a reacceleration that's now in the numbers.
  • 04:47 So we're open minded.
  • 04:48 It could change.
  • 04:50 I don't think it's going to be because the feds cutting rates, it's going to be perhaps maybe
  • 04:53 people hunker down a bit and now we can see a reacceleration.
  • 04:56 But the the comparisons are difficult as you mentioned, particularly in the fourth quarter for the for the mag.
  • 05:00 7
  • 05:00 And that's part of the story too.
  • 05:02 And so look, the, the, the key thing that we look at is forward
  • 05:06 next 12 month earnings growth
  • 05:08 that is now peaking.
  • 05:10 And when that peaks, that means multiples come down.
  • 05:12 And
  • 05:12 that's as simple as I can make it.
  • 05:14 So 20 times to 19 times, that's our baseline.
  • 05:17 That would be kind of the lower end of that range we were worried about this weekend.
  • 05:20 And that would be a place where I would get interested at the index that's still 456 percent away.
  • 05:25 And then if it gets worse than that, it gets cheap, then we'd get really interested.
  • 05:28 But that's like 1718 times.
  • 05:30 And so tying this into some of the economic data that we've gotten in the past 24 hours, of course, we had the NFIB
  • 05:36 Optimism Index come out.
  • 05:37 That was good news and interesting detail within it.
  • 05:40 Though.
  • 05:40 If you take a look at the report, it showed that the share of firms planning price increases dropped to a net 24%.
  • 05:47 That's probably good news for the
  • 05:48 inflation picture, but I read that as basically these firms are out of pricing power.
  • 05:54 It's a really good point.
  • 05:55 And and I think this is,
  • 05:56 this is be careful what you wish for on inflation.
  • 05:58 We've been talking about this for a while.
  • 06:00 You know, the market did sort of make its top
  • 06:03 OK.
  • 06:03 Part of that was on a good lower CPI number and we worried about that in early July.
  • 06:08 You know, weaker inflation data now is potentially bad news for stocks, good news for bonds.
  • 06:14 OK, bad news for stocks.
  • 06:15 Why?
  • 06:15 Because that's pricing power to your point.
  • 06:18 And the PPI in particular is more aligned to
  • 06:21 revenue growth than even the CPI.
  • 06:23 So I'll be interested in, we'll see if we get the same data point.
  • 06:25 You know, I'm not, I'm not excited for stocks because inflation is surprising in the downside.
  • 06:31 I'm excited that maybe my trade in bonds looks better
  • 06:34 and that's why we like defensive stocks.
  • 06:36 And I think that all kind of sinks nicely.