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  • Market Euphoria May Be Getting Carried Away: Rockefeller's Chang

Market Euphoria May Be Getting Carried Away: Rockefeller's Chang

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Bloomberg 04:17 · 1414 Views

Rockefeller Global Family Office CIO Jimmy Chang discusses the outlook for bond yields and financial markets under the Trump administration on "Bloomberg The Close."

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Transcript

  • 00:00 I thought we would be talking right now about a significant drop in yields.
  • 00:03 We got a bit of a drop coming off of that last rate cut.
  • 00:06 It's kind of stalled since and now you're seeing a lot of people
  • 00:09 close out long positions and now start to talk about this idea that Treasury prices will go down and yields might creep back up closer to 5%.
  • 00:16 Yeah, you may recall on Election Day the 10 year close at 4.27%.
  • 00:22 After that, there was a concern that the new agenda
  • 00:25 will likely Dr.
  • 00:26 inflation and growth both higher.
  • 00:29 So
  • 00:30 on the intraday basis, I think the 10 year peaked around 4.5%.
  • 00:34 And after president-elect Trump nominated Scott Besson
  • 00:37 as the next Treasury Secretary,
  • 00:39 that was well received by the market.
  • 00:41 So immediately the market reacted, the yield came down, went to around, you know, 4.15%
  • 00:48 in the last few days.
  • 00:49 I think is this growing concern that perhaps inflation is kind of,
  • 00:53 you know, sticky,
  • 00:55 it's kind of stagnating rather than heading lower.
  • 00:57 So I think that's just the usual trading.
  • 01:00 I think we're going to range so long you keep it under let's say 4.5%, I think we're OK.
  • 01:05 If yield spikes above 4.5%, that offers a clear path to 5%, at which point I think it will pressure equity valuations.
  • 01:13 Talk about how that correlation works.
  • 01:15 I mean, because we talked about this idea of a big rally
  • 01:18 in a lot of names that were benefiting from a drop in rates and what most people assume was going to be a continued drop in rates in 2025.
  • 01:25 If we don't get that, that's the end of the rally, equity rally.
  • 01:28 I think the dropping rate is more on the short end.
  • 01:32 The expectation is that the Fed will probably take the Fed funds rate to at least say 4% or maybe in the high threes.
  • 01:39 So the sure end will move lower along with the two year treasury yield.
  • 01:43 But the low, you know, the long end is really up to the market.
  • 01:46 the Fed has very little control over it and that depends on the prospect on growth, inflation and deficits.
  • 01:53 What happened if we actually
  • 01:56 don't get 4 1/2 percent with the 10 year, but we don't get materially lower, like we don't go to 3 1/2 save for the 10 year.
  • 02:02 Does that is that enough to say pressure equity prices?
  • 02:05 At the end of the day,
  • 02:06 I think if we if we stay in the range, let's say 4 to 4.5%, that will be OK to the market.
  • 02:12 That's probably fair value.
  • 02:14 So if you assume long term economic growth around 2%, real
  • 02:18 inflation around 2%, assuming the Fed achieves its target,
  • 02:22 you're looking at 4% nominal GDP growth.
  • 02:24 And in the long run, the 10 year tends to trade around the nominal GDP growth rate.
  • 02:30 How expensive do you think equities really are right now?
  • 02:32 They are very expensive relative to the 10 year yield
  • 02:35 at 4.3%.
  • 02:37 So I would say historically where we are with the loan bond yields,
  • 02:41 the PE fair value is probably let's say 17 to 19 times.
  • 02:46 We're currently at 22 * 2025 expectations.
  • 02:51 So that's expensive,
  • 02:52 but it doesn't mean
  • 02:53 it's not a timing indicator.
  • 02:55 So it doesn't mean that market will correct fairly soon.
  • 02:58 You can stay elevated for a while.
  • 03:00 A lot of that has been driven by obviously the euphoria and the fund flow and very favorable liquidity backdrop.
  • 03:07 I am curious, when we talk about this rally, obviously a lot of this rally, at least this latest extension of it, has been because of the election and
  • 03:15 the optimism around what a Trump administration might need for financial markets and
  • 03:20 more broadly, I guess, for corporate America overall.
  • 03:23 In a very symbolic gesture, of course, he was down at the New York Stock Exchange earlier this morning
  • 03:27 to get his time Man of the year award ring the opening bell.
  • 03:30 But really the excitement that you saw on the floor
  • 03:34 and as well as some of the reception that you've seen
  • 03:36 in financial markets,
  • 03:38 is that overly euphoric?
  • 03:40 Do you think that that optimism around what his administration could mean for asset prices, has that been overdone?
  • 03:47 I think that rationally everyone is is excited about deregulation
  • 03:51 and having an administration that's going to be probusiness,
  • 03:55 having a precedent that pays attention to how the Dow index
  • 04:00 does.
  • 04:00 But that said, the Dow, the Dow.
  • 04:06 But with that said, I do think the euphoria may be
  • 04:10 a little bit carried away
  • 04:12 just because some of these policies are going to be somewhat disruptive to the market, at least in the short run.
  • 04:18 Let's talk about tariffs,
  • 04:19 a tighter immigration policy.
  • 04:21 Both will likely need to potentially higher inflation, placing more wage pressure.
  • 04:25 And
  • 04:26 that will also affect several industry sectors, you know, talk about construction industries, finding qualified workers
  • 04:32 or multinationals, dealing with an appreciation, you know,
  • 04:37 an appreciating dollar
  • 04:38 and also potentially retaliation from other countries.
  • 04:41 Yeah.
  • 04:42 Are there pockets of this market
  • 04:43 that you're embracing as an investor that you think is think are going to directly benefit
  • 04:48 from his policies, or at least the ones that he's promised to implement?
  • 04:51 If you look at the America First agenda, I think that tends to focus more domestically focused
  • 04:58 companies and you find many.
  • 05:00 Of them in midcap
  • 05:01 quality small cap companies and they have been lagging mega cap.
  • 05:05 So from a valuation standpoint, from a regulation standpoint,
  • 05:09 both are in their favor.