This is a tough market to understand, let alone try to predict
A late-cycle market is always tough to read — and the trouble is, that opacity may last for months, Morgan Stanley’s Mike Wilson says.
Photographer: Gabby Jones/BloombergWelcome to the Bloomberg Surveillance newsletter, a daily look at the best interviews and insights from Bloomberg Television and Radio’s flagship morning show co-hosted by Tom Keene, Jonathan Ferro and me. Sign up here if you’re not yet a newsletter subscriber.
‘Purgatory land’
This is a tough market to understand, let alone predict. Morgan Stanley’s Mike Wilson called it a “muddle,” which he says is typical of a late-cycle market.
Problem is, people can't even agree on whether it’s late cycle, or how close we are to the end. Wilson said who knows — it could potentially take up to a year before strapped consumers finally lead a broader economic downturn. And then if you do agree on that, it's hard to know how to position since the definition of defensive, growth and discretionary changes daily. (Is Apple's iPhone 15 a discretionary purchase or a consumer staple?)
Today's Surveillance guests lined up trying to explain why US bond yields have been breaking through new post-2007 highs and what the implication is for stocks.
“This is the most difficult part of the economic cycle,” Wilson said. “What you can argue is the late-cycle can persist for a lot longer than people have expected.”
Wilson contributed the phrase “purgatory land” to Wall Street’s burgeoning lexicon of a soft landing, hard landing and no landing.
“We’re just going to to slop back back and forth, and the market’s going to continue to gravitate to the lifeboats,” Wilson said. That would be the so-called Magnificent 7 tech stocks atop the S&P 500. (“You want to be more idiosyncratic this whole year,” Wilson said. “If you picked the other 493, you didn’t do very well.”)
Kathy Jones at Charles Schwab is skeptical that the Federal Reserve would want to drive rates much higher — JPMorgan Chase & Co.’s Jamie Dimon attracted a lot of notice overnight by floating a seemingly out-of-nowhere 7% figure — but acknowledged the confusion on Wall Street.
“Trying to pick the peak is really really hard,” Jones said. “It is in every cycle and this cycle has seen particularly unusual dynamics.”
The recent move up in yields, with 10-year Treasuries now returning over 4.5%, seems driven by sentiment and technicals more than real news, said Emily Roland at John Hancock Investment Management. While it’s important to look past September’s track record as a “notoriously difficult month,” changing the gloom trajectory won’t be easy.
“It’s just hard to see what the positive catalyst is for markets today,” Roland said.
David Page of AXA Investment Managers UK sees yields at a peak and inflation coming down, likely with a fourth-quarter contraction and weakness among consumers in 2024’s first half. But he’s also worried about the strain on credit markets from the Fed’s run-up so far.
“It’s likely that somewhere, something blows up,” Page said. “But identifying those ahead of time is always difficult.”
‘Come-to-Jesus moment’
Even photo ops sometimes matter, and that’s the case today with President Joe Biden preparing to join a picket line today in the United Auto Workers’ strike against the legacy Detroit carmakers, according to the Brooking Institution’s Elaine Kamarck.
“It’s a big deal and it’s probably long overdue,” Kamarck said. “Now is the come-to-Jesus moment where the president of the United States is saying, if a company does so well that you’re paying executives in the hundreds of millions of dollars, you’ve got to do something for the workers.”
Kamarck, a former Clinton administration official, pointed out the realities of a 2024 presidential campaign fought in the Electoral College, not across all 50 states. That puts the focus on perhaps eight key states — Michigan and Wisconsin among them — where it helps to show solidarity with blue-collar voters, she said.
Biden is aligning himself with the UAW but also is sensitive to automakers’ needs, Kamarck said, while an increasingly populist Republican Party is no longer a full-throated business advocate. Former President Donald Trump plans an event in suburban Detroit tomorrow instead of heading to California for the second Republican presidential debate.
‘It’s not the truth’
The US government is at risk of a crippling shutdown over relatively trivial issues. Maya MacGuineas of the Committee for a Responsible Federal Budget offered that takeaway against the backdrop of senators weighing a workaround that might topple House Speaker Kevin McCarthy.
While House Republicans demand huge spending cuts and the Biden administration says no, what’s most notable is the absence of the most-urgent policy needs, MacGuineas said. Reining in Social Security and Medicare spending is off the table, she said, as is any discussion of new revenue via taxes.
MacGuineas zeroed in on the higher-rate environment that is ratcheting up the costs for servicing government debt. On top of that, entitlement spending is ballooning even as Biden and GOP frontrunner Trump promise not to tinker with either Social Security or Medicare, she said.
“It’s not the truth,” she said. “We’re heading to insolvency in both programs.”
The tripwires ahead: The fiscal year ends Sept. 30. And if senators do craft a bipartisan bill to keep the lights on until November, McCarthy faces the likelihood of a vote to oust him led by House GOP hardliners.
‘Permacrisis’
Jon was off the set today but we aired part of his interview yesterday with Mohamed El-Erian, former UK Prime Minister Gordon Brown and Nobel Prize-winning economist Michael Spence. The three are co-authors of Permacrisis: A Plan to Fix a Fractured World.
You can watch the full interview here.
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