Newscasts - Market Insight: Good, better, Bessent?

Nordstrom

25/11/2024 18:15

Click the following link to watch video: https://share.newscasts.refinitiv.com/link?entryId=1_q6al1ymt&referenceId=1_q6al1ymt&pageId=Newscasts
Source: 'Reuters - Business videos'

Description: Donald Trump's nominee for the post of Treasury Secretary is a
'good, moderate pick' whose agenda could boost confidence in the economy and
the stock market, according to Randy Watts, Senior Portfolio Manager at O'Neil
Global Advisors. Randy also also gives his outlook how this week's raft of
retail earnings fit in with the overall prospects for Wall Street's share
markets.
Short Link: https://refini.tv/3OptplO

Video Transcript:

Bessent at the US Treasury markets cheer Trump's pick. Welcome to Market
Insight. I'm David Pollard. US Treasury yields slipped back on Monday, after
Wall Street money manager Scott Bessant got the nod to be the next Treasury
Secretary, with markets hoping his take on tax cuts and tariffs may at least
be sensitive to edgy investor concerns. Well, Randy Watts, Senior Portfolio
Manager at O'Neil Global Advisors, is with us. Welcome, Randy. Do you feel
less edgy with the thought of Scott Bessent taking the helm?

I think Bessent is a good, essentially moderate pick that is going to come
markets somewhat in terms of who's going to be running the Treasury, and he's
got a very clear agenda. He wants to try to achieve. He talks about the three
threes getting the deficit down to 3% of GDP, getting oil production up to 3
million barrels and getting 3% GDP growth. So, if he's actually able to
achieve that, obviously that would be very good for the economy and very good
for the stock market.

And how do you think it will play into our view on inflation? This week, the
shorter-term view on price pressures will be a focus when the release of the
latest PCE Price Index is expected to show those price pressures building to
what extent? Will that be a concern for the consumer and the investor as the
US hits the holiday season?

So, obviously as you mentioned, we get PCE on Wednesday, that's the Fed's
preferred inflation measure. What that's going to really show, I think is,
it's actually is that inflation has grown slightly on a month-to-month basis,
on a year-to-year basis, it's forecast to be about 2.3% for the base number
and about 2.8% for core. I think what we're finding is that last little bit of
inflation is very sticky. Importantly, if you look at the US bond market and
the 2-year to 10-year US Treasury spread, that spread has really flattened out
over the last couple of weeks. And I think the reason for that is, is that
investors are thinking that inflation is actually going to be stronger than
initially anticipated in the short run. I think that is partially due to the
fact that Trump is likely to going to be very stimulative to the economy. He's
going to be pro economic growth. And I think because of that, inflation is
likely over the next year to maybe not come down quite as quickly as we
initially hoped.

Now, this of course is a very big week for retail earnings. Target shares were
badly mauled last week on its holiday season forecasts. What do you expect to
see from the likes of Nordstrom, Abercrombie & Fitch, and Coles this week?

So, in the consumer area, it's really been the companies that can deliver
value in terms of pricing and basic necessities that have been doing well.
High end luxury goods have been softer and companies that can't really deliver
what the consumer considers to be a value of not done well. And as you
mentioned Target, I think that's a great dichotomy you can see there. Walmart
had same store sales of 5%. Target's were up a little bit more than 1%. So,
you're really seeing that play out in the marketplace. We think companies that
can deliver that value are going to actually have quite good results and
companies that can't are going to see their same store sales actually be a lot
slower. This is also playing through into the holiday season. If you look at
Wall Street estimates right now for holiday sales this year, they look like
they're tracking in the low single digits, kind of that 1% to 3% type area.
So, we think there will be some growth in Christmas sales. We don't think it's
going to be a gangbusters Christmas by any measure.

So, what might that mean for earnings? Barclays has today raised its 2025
forecast for the S&P 500 to 6,600 from 6,500 on robust potential earnings
growth, in particular in mega-cap tech stocks. Does that fit with what you've
seen so far this earnings season?

If you were to strip mega-cap tech out of the S&P, then earnings growth would
have only been about 2% for this quarter. Right now, the S&P looks like
earnings growth is going to come in around 8% for the quarter. Again,
technology is a huge component of that. One thing that makes me a little bit
nervous is that if you look at estimates, investors are looking for an
acceleration in both sales and earnings over the next year, and importantly,
they're really looking for margins to expand as estimates have earnings
growing much quicker than revenues in 2025. So, I do think we're going to need
some productivity gains. We're also going to need a little bit better economic
growth outlook for these numbers to actually be achieved. This past quarter,
as results came in estimates for the fourth quarter of 2024 actually came
down. They came down from over 10% to closer to 7% to 8%, over the last
several months.

What about the fortunes of Wall Street more broadly? Under Trump, the focus
may well be on domestic manufacturing, and supply chains. Will that be enough
of a catalyst for a significant rotation from, for example, large to small
caps?

Well, one issue with small caps is though investors have been looking for this
rotation from large to small because of valuation, but also because small caps
are more focused on the US economy. We actually need to see that start to come
through in the numbers. If you look at the Russell 2000 revenue growth, this
last quarter it was about 0 versus about 5.5% for the S&P. So, we really need
to see an economic pickup and that actually translate into better sales for
small cap. One other comment I'll make with regards to Wall Street. Wall
Street is very optimistic that under the Trump administration, we're going to
see a big increase in both mergers and acquisitions, but also IPOs and
secondaries of US stocks. So that's been reflected in the investment banking
stocks doing very well since the election. And I think all of Wall Street is
hopeful. But this is going to restart the deal calendar.

Okay, Randy Watts, Senior Portfolio Manager at O'Neil Global Advisors, many
thanks for being with us today and sharing your thoughts. That is Market
Insight