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  • Deregulation Could Unleash 'Animal Spirits,' Hooper Says

Deregulation Could Unleash 'Animal Spirits,' Hooper Says

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Bloomberg Nov 30 11:47 · 6044 Views

Invesco Chief Global Market Strategist Kristina Hooper says the idea of deregulation under the incoming Trump administration has unleashed some animal spirits in markets. She talks about the risks facing investors in 2025 on "Bloomberg Surveillance."

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Transcript

  • 00:00 It's been a pretty good month.
  • 00:01 It's been a pretty good year.
  • 00:02 And of course, a lot of questions now about whether the momentum that we've been seeing in the US equity markets carries over into December and more importantly into 2025 or have we pulled forward some of those gains already?
  • 00:15 I think the momentum continues.
  • 00:16 We'll probably see a few sputters here and there.
  • 00:20 I used 2016 as a guide.
  • 00:23 What we saw there was a relatively strong rally.
  • 00:27 It peaked in mid-december, but we still finished the year with significant gains from
  • 00:33 the starting.
  • 00:34 Which I would view as Election Day.
  • 00:36 So I I don't think we'll see a dissimilar scenario this time.
  • 00:40 Certainly the idea of deregulation has unleashed some.
  • 00:45 It's kind of interesting to see that a lot of those animal spirits seem to be gravitating to
  • 00:51 the small cap, mid cap and just that cyclical space.
  • 00:54 The Russell 2000 outperforming the S&B by a factor of 2 to one in this particular month.
  • 00:59 But this is kind of been the story that's been unfolding for quite some time.
  • 01:02 People looking for a broadening of this rally beyond the mag seven that started off the rally this year
  • 01:07 into something that's more broader, but more importantly, Christina, something that's more sustainable.
  • 01:11 Do you see that rotation as sustainable?
  • 01:14 Absolutely.
  • 01:15 We've been anticipating this rotation for some, not
  • 01:19 for some time now, well before the election.
  • 01:21 And it was based on our view that we would see the Feds start to ease, We would see an economic re acceleration in 2025 and markets would discount that.
  • 01:33 So this is playing out.
  • 01:34 It's probably gotten a nice kicker from the election and expectations around deregulation
  • 01:40 and is certainly not being stopped by any kind of concerns around tariffs or restrictive immigration policy.
  • 01:47 So it's it's certainly moving ahead and I think it is very sustainable, although I do think there are certainly risks we can't ignore.
  • 01:56 Well, let's talk about some of those risks because you think about what could upset the apple cart here.
  • 02:00 And one of the
  • 02:01 answers I keep getting is maybe the bond market, specifically maybe the long end of the Treasury yield curve.
  • 02:07 We were having this conversation
  • 02:09 with Christian Nolting, but it seems like the bond market and the stock market aren't really talking to each other right now.
  • 02:14 But if you start to see the long end of the Treasury curve rise, 10 year yields maybe go north of 4 1/2 percent, maybe approach 5%.
  • 02:23 Again, what does this mean for this cyclical rotation and specifically this rally that we're seeing in the small caps?
  • 02:30 Well, I certainly think that when you get yields that move that high, if they were to do that, that would put significant pressure on stocks,
  • 02:39 although I think the greater pressure would be on a tech names and what we consider to be longer duration assets.
  • 02:48 But the reality is it could be problematic in general.
  • 02:51 I I think the bigger issue is what it makes the government do.
  • 02:57 At what point does the US government say, you know, we have a problem in terms of fiscal prudence and we need to cut the deficit?
  • 03:06 We've been here before.
  • 03:08 The Simpson Bowles Commission more than a decade ago
  • 03:11 proposed some really thoughtful ways to help solve, not solve, but at least ameliorate
  • 03:18 the kind of fiscal deficits we're running.
  • 03:21 And I don't think a thing was passed by Congress.
  • 03:25 So we could very welcome to a similar situation today.
  • 03:29 The question becomes how patient are bond investors?
  • 03:32 Thus far they have been,
  • 03:34 but we know from other countries there are significant fiscal issues going on
  • 03:39 that could cause some very significant belt tightening, which could create headwinds for the growth picture.
  • 03:45 Well, Christina, to that point, you think about
  • 03:47 Treasury pick,
  • 03:49 Treasury Secretary pick Scott
  • 03:51 Besen, and he has his 333 policy, of course, inspired by the three hours policy.
  • 03:56 And one pillar of that is that he wants to cut the budget deficit to 3% of GDP by 2028.
  • 04:03 So the intention is there.
  • 04:05 As an investor, do you have faith that something like that actually can be accomplished in this political climate?
  • 04:12 I think we want to be as optimistic as possible, and certainly I think the markets will reward any attempts to get there.
  • 04:19 Even if we don't actually see
  • 04:22 3%
  • 04:23 by 2028, I think it's certainly an admirable goal.
  • 04:27 I do think it's easier said than done.
  • 04:29 What the Simpson Bowles Commission found was that there are just so many sacred cows in the US budget
  • 04:36 so that while you can, in good faith propose a number of cuts that seem to make sense,
  • 04:42 there are a number of lobbying groups and areas of of
  • 04:46 interest
  • 04:47 that focus on supporting continued spending.
  • 04:50 Yeah, and that's a good point, Christina.
  • 04:52 I covered Washington for a long time, and I think a lot of people are kind of forgetting just how much power some of these industries have
  • 04:58 over our lawmakers, and they're not just going to.
  • 05:00 And oddly, by
  • 05:01 as you sort of, I guess, cut into some of those cash cows, it gets to the broader question, though, Christina, as to
  • 05:06 whether investors should worry too much about this in the here and now.
  • 05:11 There's
  • 05:11 a lot of talk,
  • 05:12 you know, about this idea of, you know, wait till the policies are
  • 05:15 passed in Congress or wait till they're implemented in the White House before you react to them because there still is so much uncertainty about whether these changes will ever really see the light of day.
  • 05:26 I think that's right.
  • 05:27 You should be aware that they could be on the horizon.
  • 05:30 But we just don't know what kind of impact.
  • 05:33 We, first of all, don't know the scope.
  • 05:34 We don't know the timing.
  • 05:35 We don't know the kind of impact they will have.
  • 05:38 So absolutely, we should continue to invest,
  • 05:41 stay invested, stay diversified
  • 05:43 and just be aware, but to a certain extent have blinders on.
  • 05:47 And
  • 05:48 I mean, heading into 2025, you think about the past two years,
  • 05:52 20% plus gains back-to-back.
  • 05:54 It's very, very rare to see that you wrap it all together.
  • 05:58 And let's set expectations for 2025.
  • 06:01 What kind of gains could we possibly be looking at?
  • 06:05 I think we could certainly see gains between 10 and 20% next year.
  • 06:09 I think that's very possible given the kind of environment we are set up for.
  • 06:14 But that assumes that tariffs are not applied, that they're just threatened or are very, very temporarily applied.
  • 06:21 And that assumes we don't have the kind of restriction, restrictive immigration policy
  • 06:26 that sends 15 to 20 million people away,
  • 06:31 because I think that could be very problematic for our labor pools, which are already very tight, especially in certain industries.