[Carl Quintanilla] Joining us this morning Andrew Slimmon, who’s Morgan Stanley Investment’s Management senior portfolio manager; Keith Lerner is SunTrust’s chief investment strategist. Guys, happy Friday. Good to see you both.
[Andrew Slimmon] Nice to see you.
[Keith Lerner] Happy Friday.
[Quintanilla] Keith, better trade headlines this week. Macro’s been at least less-worse, I see U-Mich coming in right now at 92. Do you think we get over the line and get some fresh highs?
[Lerner] Yeah, we do. I mean, so far this is playing out along the lines of what we’ve been expecting. When we were on the show back in early August we thought it was going to be a bumpy period and maybe a pullback in the five to seven percent range. We got that, but what was very interesting was how negative sentiment got in August, and people were really braced for a lot of bad news. We had the most outflow since December, the most hedging in the options market, and as we’ve seen some de-escalation on the trade side, we’ve seen stocks move forward.
And what’s really important, what happened on Monday, we had something called the breadth thrust in the market, which is really intense buying. When we look back in history, and it’s happened about 25 times, 24 times a year later the stocks were up, so that’s a good risk-reward in our view for the market. And we still think the path of least resistance over the next 12 months is higher, but we will still see these ongoing carousel of concerns and these periodic pullbacks.
[Quintanilla] How much is dependent on Powell delivering next week?
[Lerner] You know, I think by now the bond market’s helped him out a bit by just resetting, so I think the market expectations are baking in a 25 basis point. I think that’s going to happen. I think the market just wants to know that they will be vigilant. But I think the bond market and the ten-year movement back up has really actually helped the Fed out as far as the 50 basis point cut is likely off the table.
[Quintanilla] All right. Andrew, your thoughts as well.
[Slimmon] Yeah, well, so look, the market is vulnerable to some type of disappointing moves. Maybe it’s the Fed next week, I don’t know. I think the market’s overbought. But I just don’t think there’s a lot of down side in the market when August was a very interesting month. We had three really bad days and the market came rebounding back up. And I just think it’s a story of, there’s too much cash that’s been liquidated out of equities, there’s too much cash sitting in money markets, and so the down side is relatively limited.
So I agree with Jim Cramer, the market’s overbought short-term. I just don’t think bad news is going to lead to much down side. And your other guest is right. There’s, you know, the market ultimately will break to the up side. When you have a market that’s been in a trading range for a year and a half there’s two inevitable outcomes. Number one is the bearishness builds, and number two, the market ultimately breaks to the up side. So I think it’s just a question of when, not if, and with so much cash on the sidelines I just don’t see a lot of down side, although I can see, short-term, the market’s overbought.
[Contessa Brewer] Okay, if you don’t see downside and you see a lot of cash on the sidelines, if somebody’s looking to get in, where can they still find value?
[Slimmon] That’s the problem—well, the problem is, is they’re not getting the pullbacks that people want to get in, and that’s evidenced—we had a lot of bad news thrown at the market in August and not much pullback. I think, ultimately, we’re having a rally in the value stocks. But I think the leadership going into the fourth quarter is going to go back to the growth stocks, and I think those will be the leaders into year-end. So, value bound, but I don’t think it’s a question of growth or value.
What has been very overbought is the defensive stocks, and bull markets never end with people paying through the nose for stocks that they think will do well in a recession. Bull markets end with people chasing the growth stocks. And I think that’s going to be a resumption of the leadership in the fourth quarter.
[Quintanilla] Hey, Keith, you know, a lot’s been said about the last couple of weeks being largely technical, hedge funds unwinding, bearish positioning, and if it’s not met with more than that in terms of the business cycle and profits that we could top out here once again. What’s the danger in that?
[Lerner] That’s the danger, but our base case is that we aren’t going into recession, the market’s starting to bake in some of those expectations. And as long as the economy just grinds forward and earnings continue to move forward, I think that will be fine for the market. In fact, the S&P forward earning estimates on a 12-months-forward basis quietly just made a new high last week. And even with all those fund flows out, we haven’t seen that much come back in.
And don’t forget, we’re coming closer towards of the year, so there will be some fear of missing out, and also people, you know, trying to catch up because a lot of folks were too defensive. And the other part is, yeah, there’s all risk in different parts of the market, but the ten-year U.S. Treasury—this is extraordinary—we had the strongest or the widest deviation from its trend in several years. In fact, you can go back the last 25 years, and we were about 40% below the 200-day moving average for the ten-year Treasury, and we’ve seen that quick move up.
We actually think that the value trade has a little bit more legs here short-term. We’re bullish on financials. Another one that’s actually doing pretty well, even though rates are moving higher, is home builders. And I think that’s a sign that we’re growing confidence that we’re going to sidestep a recession. And you’re also seeing semiconductors do well. Those are things that are not consistent with the economy rolling over.
[Quintanilla] Yeah. To your point there, Keith, all time highs today—or I should say 52-week highs at least—Lennar, Pulte are both on that list. Kimco Realty is in there, too. Andrew, in terms of sectors, do you got favorites?
[Slimmon] Yeah, so I like the home builders a lot. So I think it’s a balance of some growth, some value, but you want to fade these, you know, the staples and these defensive stocks that I think are overvalued. So I don’t have a problem owning financials. I think it’s a balance between growth and value. It’s just less so on the defenses.
The last thing I’d say, Carl, is, you know, I’ve heard a lot of people come on and say, well, earnings estimates are too high, they’re going to come down. And, you know, my comment that I would love for you to ask the people who say that is, well, how come the market is up close to 20% on the year when we’ve had flat earnings growth on the year.
The point is, is the market is anticipating that next year we’re going to have positive earnings growth because we’re coming off a flat base. This is why the market’s rallying this year. Next year we’re going to have to worry about 2021, but that’s the story of this year. By the time it’s obvious, the market will be on to what’s going to come next, and that, I think, is going to be more bearish.
[Quintanilla] Yeah. 2019 clearly turning into a multiple story.
[Quintanilla] We’ll deal with what comes next later on. Keith, Andrew, have a good weekend. Thanks, guys.
[Slimmon] You too.
Courtesy of CNBC
Keith Lerner, Investment Adviser Representative, SunTrust Advisory Services, Inc.
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