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00:00I'm Caroline Hyde. Welcome to Bloomberg triple take where we take One key topic and we split it into three unique angles and today focused on a wild rally to close the market. Well was it a rally. Was it a comeback at least. Bouncing off all those dramatic late session brought us up from the lows and the S & P 500. We actually managed to close flat having been on the brink of a bear market in early trading. Remember the index still sign for a seventh straight week. As Taylor was telling us it's the longest losing streak since 2001 from a weak perspective Taylor. Whatever the case volatility was certainly there. I know it's so funny because we were thinking well what if we end up closing up in the green today and then Caroline. That in itself itself is huge news right given that as you mentioned sort of the bear market territory that we had hit earlier today. So I think as we try to think about where we kick off for some of our key themes here. Caroline it is well at least for now as you mentioned stocks averting at those closing levels here for a bear market at about a 38 37. Consumer and tech have been the laggards though. And how are we thinking about the health of the consumer particularly as we look ahead to key economic data last week and havens. Yes right. They're finally catching a bit. Bond markets are coming back in full force. Now of course they'll Caroline Hyde things. The key read headline is we can see here where avoid closing in bear market territory but at least we're still down Caroline eighteen point seven percent from some of the recent highs that we got. Again that record high that happened in January as well. Let's dissect the technicals and the fundamentals. NIKKEI ARM Police is with us. Greenberg opinion columnist Net I mean what happened. Who defended this market today to think. Hi Caroline. Well you know I think there's a broader sort of thing going on which is you have all this volatility we have a bear market threatening and yet it doesn't seem like there's a lot of concern. It seems to me among investors and that might be what explains the late day bounce. And you know if you reflect on that. If I'm right about that one of the things that occurs to me is investors may have been conditioned to just believe that even if we do get a bear market it won't last long. You know the last bear market in the pandemic in 2020 lasted barely over a month. The near bear market in 2018 lasted about three months. Even the financial crisis. If you go back back that far was not that long in historical context. You have to go back all the way to the dot com crash to see a bear market of any real duration. And I think the reason that's important is because you know if if investors are conditioned to think that bear markets are not severe and not long lasting then there really isn't anything to worry about. But you know we are in a situation where it's too it's too early I think to say what's going to happen. But we certainly could have a situation where you have higher prices for them for a period of time. You have lower growth. And those are conditions where markets don't do great. If you go back to the late 50s early 1970s that's a period where you had five bear markets in a period of just 15 years. And you know if we go back to that kind of an environment it's going to be interesting to see how investors navigate that. What happens though if it does indeed last nine hundred nine nine hundred twenty nine days from March of 2000 to October of 0 2 or nine hundred and ninety eight days from September of twenty nine to June of 1932. What if it is longer than the thirty three days that we just had during the Covid pandemic. Right Taylor. I mean that's the that's I think the big question. And and I think we have to point out that one of the things that has happened in recent years is you've had a lot of studies that have shown that investors have really well behaved. I mean investors in general are notorious for you know just making ill timed decisions around the markets. But they've been great recently. I mean they hung on during the pandemic in general. ISE. Excuse me. Investor returns tend to be pretty good from funds et cetera. And all of that speaks to investors really hanging on in turbulent markets. But you know as you say that dot. That's a two and a half year bear market. That's a long time. And it's one thing to say I can live with this volatility for a few weeks but eventually it does start to wear on you. And it's an open question. I think what that kind of the NIKKEI experience will have on modern day investors. Talk to us about the difference between modern day institution investors a modern day retail investors name because a lot of people been trying to draw the line the sentiment line between what's happening in the markets whether it affects particularly retail traders and whether it affects that for us as a consumer base. I think that's a really important question Caroline because one of the things that I think we don't discuss enough is retail investors are in stocks and bonds and most of the volatility in their portfolio is going to come from stocks. So when markets act up like this they feel it. Institutional investors in recent decades have moved to the so-called endowment model which is a huge allocation in private assets private equity and venture and private credit et cetera. I mean some of the big college endowments have private asset exposure in their portfolio. Upward of 50 percent. And the reason that's important to note is because those assets don't mark. Right. They don't trade on a public market. And so they don't mark. And because they don't mark when this volatility happens these big institutional investors generally don't feel it or at least what they feel is a lot less than what the retail investor feels. And so it's not surprising to me at all that it didn't step that institutional investors are shrugging their shoulders at this moment. It doesn't surprise me at all. It would take an extended bear market for prices to really be sustainably lower for that to translate into private markets for those markets to mark which would take several months several quarters maybe even for them for institutional investors to feel it. Talk to us about the private markets that haven't yet gone public. When we think about the still huge difference in valuations the public markets as we know we're having a big reset be of the private market that's not willing to maybe do a down funding round who is still trying to hold onto some of their big valuations. Do we need to see a further convergence perhaps maybe between the two. Well I think you'll eventually get it. If this last long enough I mean I'm not surprised that you know private equity venture etc. are not moving quickly to mark down. I mean I think given recent market experience it wouldn't surprise me if their posture is well let's see what happens if this bear market less a month or two or three then we never need to write down these assets and we're just better off doing nothing. But having said that you know I recently looked at the numbers in the Russell 3000 tech sector. And what I noticed was on average those stocks are down 43 percent from their 52 week high. And a quarter of those about 400 of them in that sector in the Russell 3 a quarter of them are down 60 percent or more. So you had this huge valuation contraction in the tech space but none in the private space. And and I think just the question now is how long this lasts if it lasts for another quarter or two. I think that the private asset managers will have no choice but to look at the value of their assets and to make some hard choices. Really appreciate it. Sara of course Bloomberg opinion columnists joining as always for well sort of a historical perspective. Caroline as we try to put moments like these weeks like these into perspective we want to move to our second take as well which are what sectors. Right that have gotten hit the hardest from S & P 500 Peak back in January. We think a lot about consumer discretionary and technology both lagging of course and that high. Let's bring in Kate Faddis Grace Capital president and chief investment officer. And Kate of course we understand the big tech sell off. It was trying to re-evaluate a lower net present value with a higher discount rate. But are you worried that that's now spreading to other sectors of the market. I am worried that it's spreading to other sectors of the market. And I think if you look at what happened to Wal-Mart and Target that was a big shocker and it was really quite a marker. I think it's over. I think things are going to be tough for a while even in the least beaten up names and industry groups like for example. What was notable was why even towards the end of day energy managed to catch a bit of a bed. But even energy has been under pressure of late and that's been the only place to hide from a sector perspective this year. That's right. And I would not overstay my welcome and energy. Remember energy is cyclical and the cycle always turns in energy. So I think I feel very insecure there. I don't think there's going to be anywhere to hide because you go and say well what do I sell. My client wants to raise cash. Do I sell what's already beaten down or do I sell what hasn't been beaten down. So you're going to see this rolling movement between selling the beaten down names for tax purposes and selling where there is value. So I think when you see this market it's going to be indiscriminate. So cash is then the place to hide. Cash is the place to hide. Maybe some unis I mean you can get a three know the three year bond you can get and a two point seventy five two point eight percent. And you might say well gosh you've got inflation. Why. Why hide in cash. I think if you have a modest cash position you're going to find some great values have time to take a deep breath wait for earnings to come out. Look at the fundamentals and find some great place to to to redeploy your cash. Kate how much are you having to talk to investors at the moment about the difference between short term investing long term investing about remaining committed about. I mean some people saying just close your eyes and great your teeth and get through this. But all a lot of people wanting to bail at these moments. People are nervous and they want comfort. They're not ready to bail yet which is what makes me nervous. Usually at the time we were ready to bail. That's probably the time they shouldn't. So that's another reason that tells me that there's probably more to come. But I think in these moments you have to take a deep breath and say what has really changed what the fundamentals have changed. And if there's been no change in fundamentals no change in strategy you kind of have to you do have to grit your teeth and hold on. Did fundamentals though change this week with the big retailers. They did not. I think what changed. What has changed in my mind is valuation. Valuation hasn't mattered for the past five six seven years. Everything was overpriced. I mean everything not just the tech crazy tech. Everything was overpriced because the discount rate. But now valuation is starting to matter again. So this is the question is how long are we going to be in the situation where valuation matters. The fundamentals are strong. The economy is strong. We have employment. We still have. We're losing employers. We're losing employees every year. Baby boomers retiring. The economy is strong. You still can't get a plumber. You can't get housing is strong. The real question is. What is this recession going to look like if we are going to have a recession. It's going to be a recession unlike anything I've ever seen before. Because housing is strong employment and strong. I don't see layoffs down the line. I think this is really a valuation game. The market just got way ahead of itself. Way ahead of itself. We could speak to you for ages. Kate CFA. I'd like to say and indeed a lover of Muniz. You've got everything that I didn't. She's amazing. Kate for come back. Thank you. Wish you a wonderful weekend. Putting it really clearly and in perspective from Grace Capital. Meanwhile coming up we're staying on the market action. We speak with a key market strategist from PIMCO. Next general portfolio manager to me on the outlook for don't wait for it bonds Taylor Riggs. You're just totally taken over. I know I know. I messed up on 30 seconds and I took over a visibly mad. This is Friday's triple take on Bloomberg today we are focused on of course the market volatility so far. We've discussed the S & P 500 falling for that moment past the bum bear market territory but then of course rallying into the close to finish flat. We've looked at the hardest hit sectors as the S & P peaked back in January and Taylor Riggs third take where. Aware of the havens. Yeah. You know Caroline when we think about the havens I think we smartly pointed out that you had the correlations the 60 40 actually kind of working back together. Right. But when you think about cracks in the economy what are lower yields telling us. Is it lower inflation good or is it lower growth bad. This chart actually might give you some reprieve. We're taking a look at spreads over Treasury investment grade and white high yield in blue. Now you're rising but you were nowhere near the huge spread blow up that we had in March of 20 20 nowhere near the levels that we've had in 2008. So are there cracks or this normal healthy behavior. That is the key question. That is the key question. And we get to discuss it all from a bond perspective Tony. Chris Enzi is with us PIMCO market strategist general portfolio manager. Wonderful to have you with us. Late on a Friday whenever one wants to be sort of taking a little bit of time out. But talk to us like Tony about this bid. Finally this change in the narrative. We've seen everything killing in the last first part of the year. We saw bonds fall with stocks but now suddenly the haven big comes into bonds. Is that sustainable. Tony. It's a big silver lining to what we've seen recently in price action between stocks and bonds. For some time consider the move in the 10 year yield 10 year treasury from one and a half to two percent from two to two and a half in two and a half to three. What was the reaction in the stock market. The credit markets and elsewhere. No. Now that's what I would call burden sharing in terms of the Fed's tightening being distributed amongst the other parts of the financial markets. And that enables the Fed to do its handiwork. So there are five transmission channels in monetary policy the way the Fed gets things done. Its stock prices. Bond yields. Credit spreads. The value of the dollar. And bank lending standards. And it was all wrong. The burden was all on the bond markets back. All the stores were put there. So what we've seen recently is a self stabilizing effect of rising yields pulling down stock prices causing yields to stop rising. And so that's a change in correlation that equity investors probably should be happy with because it suggests that yield climbs from here will be more difficult to occur because of the influence on other markets. Tony does the why though behind the yield moves matter. I was reading a note from the economists over at Piper Sandler. This time when yields are moving lower they're actually lower since the May 3rd Fed meeting. It was indeed lower inflation expectations but it was also lower growth expectations. Does the white matter. It certainly does. I'm sure what we're hearing from the Federal Reserve is a hawkish attitude toward what it expects to do but it's a good thing in a sense. The last major battle of the Fed had as an institution against inflation and inflation expectations was in 1994. But back then inflation was not high was around 3 percent. So the Fed under chair Alan Greenspan started slowly. So-called Greenspan gradualism at 23 25 basis point moves followed by to 50 basis point moves in May and August of that year. But yet the bond market is still worried about inflation with yields above 8 percent. So Greenspan decided on a 75 basis point move in November of that year that ignited a bond rally. So what I'm suggesting is we'll get a Seinfeld like opposite episode. George Costanza doing the opposite this time starting with aggressive moves that taper off into something less. And so the more the Fed is hawkish today the more beneficial it will be toward the inflation outlook in the future. And so that silver lining is within that it's a sort of short term pain long term gain to a certain extent. So is there any point do you think that the Fed can blink. The Federal Reserve in looking at the stock market probably will not be too concerned just now in looking at the Federal Reserve's so-called flow of funds statement which is released each quarter. The summation of flows within the economy of money and stock of money in different parts of the markets banks etc. households held had about 50 trillion dollars of equities under their belt as of the last quarter with a 20 percent decline. You could just on the back of the envelope say that's a 10 trillion dollar hit. That is significant. Keep in mind over the last three years household net worth has increased. Thirty five trillion dollars to one hundred fifty trillion. So while a big head don't want to understand to dismiss the importance of that in terms of the overall picture that oil reserves are not likely to be concerned. Finally the Federal Reserve is intent on bringing the inflation rate down. And most importantly keeping inflation expectations anchored because without that the inflation rate could stay high for longer than the Fed wants. And then the markets want. So what the Fed is doing is likely to be beneficial longer. Really appreciate your perspective. After a wild day. In a wild week. Tony Crescenzi of course there. Thanks Joe. We'll be back with our final take next. This one Mark. Time now for our Top Take this week. We have taking you everywhere. Boston Panama. Right here in New York. Missing now some of the top voices discussing the big issues. You have all this volatility. We have a bear market. Threatening and yet it doesn't seem like there's a lot of concern. It seems to me among investors and that might be what explains the late date bounce. The stocks that had held up this year are really beginning to weaken. The market does not believe that housing is going to stay strong. The market does not believe that some of these consumer related areas even if they're not the low end consumer that they're going to hold back. This is a really interesting time for investors to go through all of their earnings reports that are coming out seeing where there are still areas of relative strength and where the companies really aren't pointing towards those signs of weakness. For example both Home Depot and Lowe's said that they are not seeing any signs of trade down. That's really different from what we've heard from a lot of other retailers so far this season. The store is not dead. The store is theater. And and you know we're seeing this move to shop locally and also a move to what we call circular retail. We have had to pass along some price increases. We're trying to be very selective about it. But we don't think it's hurting our demand so far. The man is holding up. So so far we have not seen a slowdown in demand because of the higher prices. Definitely we're struggling with with a new populist wave in Latin America. That is as I was saying canceling the institutional building that we have done in the last three or four decades. Sparks generally are down about 45 percent. We're feeling like this was a frenzy. It definitely signals frothy ness and we're not really viewing them as a viable investment anymore. The IPO market is is a vibrant market. It's one that can provide for opportunites for companies to go public. But we think the stock market is is just as good of an opportunity for especially smaller companies to consider going public. What a range of conversations we've had whether it be about proxy voting whether it'd be about Latin American whether it be about sort of consumers and what's going on in Boston as well. Some great conversations you have there. But we all still right here right now worrying about across the globe recession inflation and what it means for the markets too and how the market sort of digested recovery. Thank you. So rightly point out some of the options activity that did that give us a false narrative as we start to think about the setup for next week. Yeah. We look ahead to how fourth the market trades over the weekend. If you look at credit that is finished this spring that tech next.

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Bloomberg Markets: Triple Take (05/20/2022)

Caroline Hyde & Taylor Riggs discuss one topic from three different angles after the closing bell on Wall Street. Today's show tackles the wild week for markets Guests Today: Cate Faddis of Grace Capital, Anthony Crescenzi of PIMCO (Source: Bloomberg)

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