Let's start with you in the equity markets.
They seem to be relatively calm despite that talk about maybe some kerfuffle
down in Washington. Yeah, this is really interesting and I
think it's one of the most frequently asked questions that we're getting from
our investors. Why is volatility muted?
Why are we not seeing any stresses within the equity markets?
And I think there's a couple of explanations for this.
So the first one is when you look at the breadth of the equity market rally that
we've seen, it's really only seven stocks are driving 80 percent of the
year to date gains. So this is very concentrated.
This is very idiosyncratic. Another way to look at it is you have
about 10 companies that are driving 25 percent of the free cash flow generation
within the U.S. market.
So this is a story about the companies that are really well-run as opposed to a
breadth and depth of this rally. So listen, what about that?
Does that narrowness of the rally, if we can call them the stock market, does
that make you nervous? Well, it doesn't suggest as healthy a
market as if you had, you know, the soldiers at the front line and not just
the generals at the front line. I think there's a little bit of muscle
memory and a knee jerk move that goes back into names like this.
When people think back to those that group of stocks, many of the same ones
represented almost a defensive place to go during the worst part of the
pandemic. But of course, what it represented
fundamentally at that time was those represented the the only ecosystems in
which we were living when everything was shut down.
I think this time it's a bit different. Chris talked about the large size and
liquidity and cash generation of these companies.
You can also see the dominance of their outperformance really kick into high
gear when we saw the failure of SBB Bank and the ripple effects.
So I think that really was the push. There you can have an environment like
that last a while and it doesn't necessarily have to be calamitous.
There are times where you can see some catch down by the big dominant names
while you're seeing improving breadth and better participation on the way back
up. That's a bit of what was going on last
fall when the market had its low. But I think concentration risk in terms
of what is the manifestation actually for investors.
I think we have investors should be mindful of not chasing that and ending
up with too much concentration risk. So, Chris, the equity markets can't get
too far away from earnings and we're well into earnings now towards the end
of this season. And we looked at early was, you know,
that we have 24 ls, of which we have one from Citi actually.
And they're projecting overall I think two hundred and six dollars at the end
of the year earnings per share, which is down about 8 percent from last year.
Were you on that projection? We're very much aligned to that that we
started this year. About looking at about a 10 percent
earnings contraction, we're now in the ballpark of about 8 to 10 percent.
And I think when we look at Q1 earnings, they were certainly better than feared,
which is why we could see some reduction of that number.
But I think what we have to keep in mind is when we look at the U.S.
equity market, we have seven out of 11 sectors that are already in a profits
recession. When we look at what the Fed has done
already, the 500 basis points of rate hikes, the quantitative tightening, the
stresses in the banking sector that are all are going to lead to a tightening of
credit conditions. This is something that has us very
cautious. It's more difficult for companies to be
profitable in this environment. It's more challenging on the consumer.
And the idea that this isn't going to flow through to corporate earnings in a
more material way. It's something that we just don't
believe. So playing a little defense here and
expecting some downside is what we're advising are our investors.
Listen, I must say, when I listen to Chris, I'm reminded.
So you said on this program before, which is we may not have an overall
recession. We're having a rolling recession as we
talk about the seven of the 11. Is that still your position?
Are we ever going to have a real recession across the board or is it just
going to be one segment after the other? I think more likely than not will have
an actually officially declared recession by the NBER.
Of course, that happens well down the road in terms of just the process of
making the announcement and then backdating to when it started.
I think what what had been a missing ingredient for a traditional recession
until the start of the banking crisis was the absence of a credit crunch.
We had had the asset crunch part of this, but we've not had a credit crunch.
It's certainly a lot harder to bank on that at this point.
We certainly have a credit contraction likely to turn into a credit crunch.
And I think that ultimately takes down the segments of the economy that had a
revival at a later point in time because of just the rolling nature of the
pandemic, the goods orientation on the demand side, initially, even within
inflation metrics, many of those areas like housing, housing related to factory
sector went into recessions. We've just had the offsetting strengths
in services and that's a larger employer and that's helped keep the labor market
afloat. But I think that is set to falter and
it's unlikely that a recovery in. Those areas that already have gone into
recession will be sufficient enough to offset that.
So I think it's a it's a better shot that this ultimately goes in the record
book as a recession at some point.