Citi's Wieting: The Bear Market Journey Isn't Complete

and I'm looking through your notes and this line jumps out at me that while the worst looks to be behind us the bear Market journey is not yet complete walk us through that call why is that the case well look we think that the Federal Reserve is not entirely done with tightening monetary policy trying to restrain U.S economic growth they're not going to be satisfied unless the unemployment rate Rises more significantly now how that can happen I think varies a lot from from people's expectations I think that if you look at our mid-year Outlook report at City Global wealth we've seen investors believe that their singular moment in which the entire economy collapses financial markets uh collapse and suddenly all of the risks will be behind them instead we think that there are really rolling recessions that are ongoing in some Industries right now manufacturing trade and some components of construction this is helping get that behind us in fact and leading to a period of growth but I think you will see employment which has been outperforming the expansion in the economy by far we're going to have a period in which labor Mark it's actually lag behind the economy I think that the FED will achieve its goals that way but are we feeling as if there's a period of just a really depressed economic activity and it can bounce back with very rapid growth for the next couple years that's unfortunately not the case when are we going to start to see that because we've been waiting for that labor market weakness to show up for months now and it kind of has defied expectations I believe we're 13 11 12 13 months running where economists have trailed the uh the estimate for non-farm payrolls well can go on for some time uh still and I of course if we just look at the very latest claims data you would think something is brewing if you take a look at the layoff announcements a gross layoffs I have picked up in a way that's consistent with a mild recession but if you think about what's happened to a few Industries I think economists have wanted to say well this is labor hoarding and but if you look at it industry by industry there's some reasons to believe that the effects of monetary policy tightening are going to take longer this time rather than shorter Cycles where everyone's focused in on in terms of Market expectations moving rapidly just take a look at what's happened in the Housing Industry traditional cyclical we've moved up multi-family apartment construction to about 135 percent of the level of single-family construction we're going to see the delivery of a million new apartment units over the course of the next year takes 17 months from groundbreaking to completion of those units versus seven for single family homes uh and that by the way is going to help take down shelter inflation I think very sharply in the coming year but it's longer cycle greater impact then of course you just have asynchronous Cycles in terms of services there's no doubt that there's an absolute boom going on in Leisure and Hospitality very labor intensive there's very little Automation and Innovation going on on there to automate that type of output right and it doesn't look like a recession at all it looks like we're in the midst of the a pretty good recovery so explain how you want to be positioned because in your note you mentioned that in 2022 you basically look to be defensive but perhaps now it's time to consider being offensive what does being offensive right now look like well it's interesting because the our initial take on this has been that some of the defensive trades of 2022 have worked as well as they could for example Pharmaceuticals we don't think it's an overvalued industry these are great long-term defensive income-oriented stocks they fell two percent last year uh and if you think of the s p down 20 the rate victims uh in the large Cap Technology space now you're wondering why they can rally back on some good news so sharply now well they were down very very hard last year with some real Innovation and with some relief on the inflation and interest rate front no doubt they're going to climb so we think that some of the opportunities that are really interesting right now are in some cyclical areas that we've wanted to avoid if you think about small cap growth stocks the valuation Gap to large cap us growth stocks has opened up to the point where it may be worth taking that risk talk to us a little bit about the cross asset landscape though because you mentioned rates in talking about large cap technology and of course coming into the Year this was heralded as the year of the bond when you're looking at you know the treasury market when you're looking at the credit markets what's your weighting there uh it's overweight in treasuries and being 300 to 400 basis points higher than a few years ago I think is quite rewarding if you take a look at real interest rates take a look at tips it's not as if the bond market is incredibly cheap overall but the value can add to portfolios to diversify them to dampen the volatility uh in riskier parts of the market whether that's really high risk credit or Equity markets we're at a yield level and a point in the economy where they should have some negative correlation again and they have you know we were driven down in 2022 by a singular Factor the FED going from incredibly accommodative to restrictive and lagging behind the inflation of 2021 saying we're going to put a stop to this and that really knocked down all these asset classes the impact in the valuation of bonds was worse than in the equity so I think if you are using bonds now to manage volatility to drive some income in portfolios and to improve your risk-adjusted returns is very much a a place actually to put fixed income back into portfolios again and Stephen we only have about a minute left with you but when you're talking about the bond market and the overweight that you have particularly in the U.S treasury market where on the curve are you talking about you know this is really important because no single Bond can provide everyone what they need in a portfolio so many investors think well I just own a six-month t-bill with the highest yield that somehow all of my problems are solved I'll get a two and a half percent for six months and it's all over with well you know the problem will be is reinvesting and you won't find the negative correlation the price appreciation the hedging property without some longer duration bonds so in the front end of the bond market has great yield uh we're overweight there but we want to also have some long-term duration yield and weigh that out and again to have an average maturity that's kind of intermediate and what do you do again uh to have that in a portfolio and still have equities or you can avoid the Japanese government bond market and a whole variety of really awful right

Channel: Bloomberg Television

Views: 24,597

Keywords: Bloomberg

Id: LUy032Pb43I

Length: 7min 0sec (420 seconds)

Published: Fri Jun 09 2023