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A
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Bloomberg Audio Studios Podcasts Radio news this is Bloomberg Daybreak.
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C
I'm Nathan Hager with Karen Moscow. As we get ready for the first trading day in which the federal government will be open in 43 days, we're joined by Mike Wilson, chief US equity strategist at Morgan Stanley. Really great to have you with us on this first day after the government shut down, Mike, now that it's over, now what? Good morning.
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B
Good morning, Nathan. Yeah, well, I think most people probably won't feel the effects. I'm sure the government employees are happy to get back to work. And look, I think from our standpoint, from a market standpoint, I mean, this, the longer that this kind of lagged into the holidays, it definitely became a risk factor from both a growth standpoint and also from a financial liquidity standpoint. So, you know, I think there is a bit of a sigh of relief. You know, the markets have traded better into this, into this now that it's behind us. But, you know, let's be honest. I mean, I don't think they've really solved some of the main issues. So this is one that could pop up again as early as January. So, you know, we'll keep an eye on it, but I think we averted the worst of it.
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C
Could there be a lag when it comes to releases of government data? We heard the White House say that October CPI and Jobs might never come out. Could that have a market impact?
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B
Well, it's just more of the same, which is there is this tension, and we've written about this, we think there is this tension between the market's expectation and what the Fed is doing. And part of that does relate to the data itself. I would say that the issue with the data is twofold. Number one, we may not get it, and just a further delay, which will delay the Fed's ability to cut rates maybe as much as the market wants. And also, you know, I've made the case, and I think other people have, too, that, you know, this, these data are somewhat, they're very lagging and they're not, they're not as accurate as they had been, you know, pre Covid. You know, since COVID some of these Data, the collection of themselves has been a little bit erratic and a little less reliable in that regard. So, you know, we do have a little bit of a data problem with or without the shutdown. And I think this all stems back from COVID and I think this is making the Fed's job harder.
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C
Does it change your view on what the Fed does on interest rates? I think you were calling for something like what, six, maybe seven interest rate cuts next year. Does that change now?
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B
Well, I think it's 5 to 6 now are kind of over the next year, but still that's a, that's more than what the market's anticipating. You know, right now the market is anticipating about three, three and a half cuts between now and the end of next year. So I mean, look, I think the issue, said issue, but I think one of the concerns that the market has had, one of the reasons why it's been narrow is that, you know, the market kind of wants more Fed cuts in order to get the private economy really moving. We do need kind of that base rate a bit lower and that's why we've kind of stayed at the quality curve and why the market performance has been quite narrow. So, you know, look, I think, I think because of the effects of COVID the kind of the boom bust on inflation itself, the Fed is probably going a little bit slower than they would normally, which I don't think is necessarily the wrong decision. But there is that tension, as I mentioned before, between the market and how fast the Fed is moving.
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C
It's been an interesting move in the market in the lead up to this shutdown coming to an end. While the broader market's been moving lower, we've seen the Dow Jones Industrial Average hit new record highs. Does that point to a new direction, a new narrative for the market?
- [04:09]
B
Yeah, we think so. I mean, we've, we've, we've kind of held back on trying to make the kind of small cap, mid cap broadening call. But now we think we're, we're getting closer to that moment where, you know, we do think we're going to see, you know, broader performance in 2026, mainly because the earnings story now is improving, as we've been saying for quite a while. You know, a good chunk of the private economy has been in a recession for many years and we think that's now emerging from that. Some of that's due to some of the policy changes and quite frankly there's just pent up demand. But you know, the missing piece, they're going back to the Fed. Again, not to put too much pressure on them, but we do need lower rates for that private economy to get moving. The good news is, Nathan, is that in the third quarter so far the reporting season, we are now seeing double digit earnings growth on a year over year basis for the median stock. And that's the first time we've seen that kind of growth in four years. So, so I think there are early signs that we're seeing a broadening of the earnings story and that's what ultimately will lead to better broader performance in the stock market next year.
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C
Are you starting to think about a number in terms of where earnings revisions could go into next year?
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B
Well, I mean, I think the consensus right now is low double digits and we think that's very achievable. We'll leave it at that. We're actually working on our, on our year ahead piece that will come out at the end of next week.
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C
Okay. Is the, is the need for interest rate cuts there for the market or can the market continue to rally higher even if its expectations aren't met in terms of monetary policy?
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B
Well, I think, I mean, I don't think the market's necessarily in trouble if they don't exceed expectations. But I do think the broadening story requires the Fed to get ahead of the curve, as I'd like to say. And I measure, you know, kind of the Fed know, in market terms, are they ahead or behind the curve by looking at the two year treasury yield. So right now the Fed funds is still about 40, 50 basis points above the two year treasury yield. And I would like to see the Fed get below that level and then you'll see that broadening out. But you know, you know, the economy is not in bad shape at this point. I think, I think the worst of the economy sort of slowdown is behind us. And that was, you know, we priced all that in April. We've written about this, that was the end of this rolling recession and we're into a new bull market now. So, so, but you know, I mean, markets like to challenge authorities, you know, monetary policy, et cetera. And you know, they're not happy. They'll, they'll make the, they'll make that, they'll make them. No, and then they'll get what they want, you know. But right now it seems like we've got a decent balancing act that's going on.
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I'm Alex Rodriguez. And I'm Jason Kelly. And we're back with more episodes of our show the Deal We've got behind the scenes, conversations with sports, greatest business people and athletes from Serena Williams and Stephen A. Smith to Bill Belichick and Melody Hobson.
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I got dangerous in seeing up arrows. Up arrows.
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Catch up on the interviews you've missed and listen to all new episodes every Thursday on Apple Podcasts, Spotify, YouTube or wherever you get your podcasts.