Stocks to Rally in Q4, Morgan Stanley's Slimmon Says

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Bloomberg Aug 28 04:09 · 15.4k Views

Andrew Slimmon, Morgan Stanley Investment Management senior portfolio manager, says large-cap stocks have priced in Federal Reserve rate cuts but isn't sure other parts of the equity market have as much on "Bloomberg The Close."

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  • 00:00 Are you expecting 75 for this year or 100?
  • 00:02 And does it actually matter in how you're going to allocate an equities?
  • 00:08 Well,
  • 00:09 I think it matters because there's a huge amount of money sitting in money markets.
  • 00:14 It's been the fastest growing asset the last year
  • 00:17 has been money market funds and understandable because rates are very high.
  • 00:22 So it matters because the speed with which they cut rates
  • 00:26 is going to cause money markets to become less and less attractive.
  • 00:30 And could that be actually,
  • 00:33 you know, the the
  • 00:34 the
  • 00:34 gasoline that accelerates
  • 00:37 the market, you know, as rates drop, say below 4% early next year,
  • 00:42 I think that could be a big driver.
  • 00:44 So, yeah, the speed with which they cut
  • 00:46 is going to,
  • 00:48 you know, be directly linked to how fast money comes out of money markets.
  • 00:53 Why are we so convinced that that's actually going to happen?
  • 00:56 Like why can't the money just
  • 00:58 stay there?
  • 00:59 Well, because I I think just
  • 01:02 two reasons.
  • 01:03 Number one is
  • 01:05 unfortunately investors look backwards to frame their viewpoints on investing.
  • 01:09 And so
  • 01:11 5% of the money market looks
  • 01:14 attractive when
  • 01:16 when 20 the year 2022 of a bear market
  • 01:20 is still in the rearview mirror.
  • 01:21 But now we've got 2023, which was a good year for equities
  • 01:25 and when we also now 2024 Goodyear for equities.
  • 01:29 And suddenly
  • 01:30 you have a combination of returns for equities is far better than money market and the yields on the money market is going to go down South.
  • 01:39 Unfortunately, Alex, it's human nature
  • 01:43 to chase into better returning, especially when
  • 01:47 rates aren't as attractive.
  • 01:48 So I think that's what,
  • 01:49 you know, that's that's normal.
  • 01:51 And that's probably what will happen at some point late this year, early next.
  • 01:55 Yeah.
  • 01:56 I mean, at some point we're definitely going to get there, particularly if rates do come down as much as the market thinks they will be.
  • 02:02 Before we get there though, Andrew, there's is a big question here
  • 02:05 as to who is willing to embrace the equity market right now
  • 02:09 at current valuations, given what we know about the economy, given what we know
  • 02:13 out of this past earnings season.
  • 02:16 Yeah, I think that's fair.
  • 02:17 And a couple things #1 is
  • 02:19 I think the S&P
  • 02:22 has fully reflected
  • 02:25 the
  • 02:26 Fed beginning to cut rates.
  • 02:27 But I think that's why you're seeing a rotation
  • 02:31 into other areas of the market like
  • 02:34 the S&P equal weighted, like the interest rate sensitive stocks, utilities, Reit's
  • 02:40 are doing better small caps
  • 02:42 and with the dollar weaken, I wouldn't be surprised if international markets do better.
  • 02:47 So I think the large caps have priced in the rate, rate cuts, but I'm not sure other parts of the equity market have as much.
  • 02:55 Is is, are we looking at that proverbial soft landing that I know we had all kind of embraced
  • 03:01 a couple of years ago when this rate cycle started?
  • 03:04 Is that still
  • 03:05 a realistic
  • 03:07 outcome?
  • 03:08 Well, I think it is.
  • 03:09 But it worries me,
  • 03:11 Romain, that so many people now expected and,
  • 03:15 you know, we've just had this, the rally, you know, off
  • 03:19 we went 5670 to 5100, back to 5600
  • 03:24 awfully quickly.
  • 03:26 And
  • 03:28 and it's this expectation of everything's, you know, the soft landing and lower inflation.
  • 03:33 So
  • 03:33 could that
  • 03:35 that thesis be challenged in September?
  • 03:38 I think it's very possible.
  • 03:40 What
  • 03:41 worries me is
  • 03:43 the number one buyer of stocks, and I don't think this gets enough interest.
  • 03:47 The number one buyer of stocks is corporate buybacks.
  • 03:50 They were big, very aggressive buyers
  • 03:53 when the market sold off in August.
  • 03:56 But the window closes
  • 03:58 because it's coming up to
  • 04:00 third quarter earnings in the second-half of September for
  • 04:03 for over 50% of the corporate buyback.
  • 04:05 So
  • 04:06 they're not going to be buying back stock at a time when seasonally second-half of September is a very bad
  • 04:13 time of the year, right when the Fed begins to cut rates.
  • 04:17 I just worry that a lot of good news to your question is priced in short term and could we have a hiccup that cause who knows, maybe inflation print is a
  • 04:27 little higher or the
  • 04:30 economic data comes in a little weaker.
  • 04:32 That's the type of thing that could cause,
  • 04:34 you know, a pull back
  • 04:36 a hiccup.
  • 04:36 Is it going to be like what we saw in the beginning of August, that kind of hiccup or something more severe or just a bump?
  • 04:43 Well, I, I don't, you know, I, I think we're going to have
  • 04:46 a, a fourth quarter rally.
  • 04:47 I expect the market will end the year closer to 6000 because
  • 04:52 I don't see the corporate earnings story
  • 04:56 as weak.
  • 04:57 And that's,
  • 04:58 you know, that's kept me.
  • 05:00 Very grounded the last couple of years
  • 05:03 in avoiding kind of all the worries of the bear market has been
  • 05:07 this continuation of earnings estimate revisions especially for next year going up.
  • 05:13 And that's what's so important
  • 05:15 because on December 31st of this year, we're going to be priced on off
  • 05:19 of 2025 earnings estimates.
  • 05:22 And right now the bottoms up
  • 05:24 is $279 or so.
  • 05:27 So that's what
  • 05:28 analysts are got have been guided to by companies is $279 a share, but
  • 05:35 top down Wall Street is much lower in the 260 range.
  • 05:39 So I think just like last year, you're going to see a lot of strategists be
  • 05:43 forced to raise their earnings outlooks
  • 05:46 for next year.
  • 05:47 And so I do think fourth quarter will be strong, but it could we could we retest that 5100, I would be surprised.
  • 05:55 But I do think there is that commonality is usually when you have an earthquake, there are
  • 06:00 tremors after and boy boy, we haven't seen 1 yet.