[Carl Quintanilla] In the meantime, investors are waiting the Fed decision later on this afternoon, any new details from the ongoing China trade talks. Headlines relatively quiet so far this morning. Joining us today, Stifel's Chief Economist, Lindsey Piegza and Keith Lerner, Chief Market Strategist at Truist, formerly known as SunTrust Advisory. Morning, guys. Good to see you both.
[Lindsey Piegza] Good morning.
[Keith Lerner] Morning.
[Quintanilla] Keith, let me start with you just to talk about the price action, where we are especially leading into not just the binary effect of today's Fed decision, but whatever we're going to get on these Sunday tariffs.
[Lerner] Well, I think the first thing is for some perspective. Since October when we were on the show, we thought that the selling back then was overdone. We've had a nice rally, about 8-or-9% markets consolidating ahead of this announcement. We still think though, as you look out next year the path of least resistance for the market is higher and on the tariff front, obviously there's a lot of uncertainty, unpredictability about this over the near term. But I still think that over the next year there's an incentive for the White House to have a ceasefire, because the last two presidents that were not reelected had something in common and that was a rising unemployment rate, and I don't think the administration is going to want to see trade remain an overhang for the economy.
[Quintanilla] I guess from an economic standpoint, we know sort of the basic narratives: consumer, relatively strong, seemingly unaffected by any handwringing over tariffs, whereas it's corporate that is a little more anxious.
[Piegza] Absolutely. We've seen business investment now trending negative, which is one of the big red flags I would say for the economy heading into 2020. The Fed seems very optimistic that we're going to be able to maintain this 2% growth rate with inflation pushing back to 2%, but I don't know if the data necessarily supports that rosy outlook. So when we look at what's happening in the economy, I think the Fed very clearly wants to move to the sideline, but I think we're going to need some more confirmation in the data before the Fed can really breathe easy that they're done easing after just three rate cuts.
[Quintanilla] Really? What do you think would prod them to ease at this point?
[Piegza] Well the Fed has set the bar relatively high for the economy: 2% growth, 2% inflation. Inflation's at 1.3% and growth, if we see begin to falter with the consumer as you mentioned is relatively strong for now, but if we start to see businesses pull back in terms of investment, in terms of hiring, in terms of wage pressures that could very quickly derail the consumer, which at this point is the sole support to the economy.
[Leslie Picker] And then of course you've got the potential risk for a hike on tariffs this weekend.
[Picker] There is so much expectation that seems to be built into the market. People expect those tariffs not to go into effect, that they will come up with some sort of a deal beforehand. People expect kind of Fed policy more of the same at today's at meeting today. Is there a risk that there is all of this consensus kind of built into the market for factors that, you know, on the surface are by their nature uncertain?
[Piegza] Absolutely. And in fact I'd like to hear from the Chairman today during the press conference really address how much of the Fed's forecast, again of 2% growth, 2% inflation, is based on a realized assessment of the data as opposed to unfounded expectations for an improved outlook, particularly based on some sort of near-term trade agreement between the US and China, which may or may not come to fruition at this point.
[Quintanilla] We're going to get his take on that, hopefully. Keith, I wonder, we've started to see some macro desks talk about repo disruption, the possibility for further repo disruption going into the back, the last few weeks of the year. How relevant is that to your short-term model?
[Lerner] I think the Fed's going to do whatever it takes to keep the repo market liquid and not be an issue into year end so it's not a big impact in our view. And I think we're a little more optimistic about the US economy as we head into next year. We just have the unemployment rate at a 50-year low, initial claims at a 50-year low, new home sales are at a cycle high, these are not things that tend to happen right before recession. Growth is going to be modest, we're expecting a little bit over 2%, but that's still relatively good and I think enough to help this market move forward. But I do think it's going to be two steps forward, one step back, especially as you have some of this policy uncertainty lingering into the new year.
[Picker] And, Keith, you also like high yield right now, you're not turned off by it being too expensive?
[Lerner] Well, more the portfolio context. There's this kind of push and pull between the demand for yield and these really tight spreads. So we're focusing on the fixed income side of portfolios more towards high quality, but a small portion for clients that make sense, there's still a decent yield pickup in the high yield space. I will say overall within a portfolio context, our general advice is still to be overweight in equities relative to fixed income.
[Quintanilla] We're going to get a UK election tomorrow, do you think the pound’s done doing what it's going to do.
[Piegza] Well, I think we've already seen a lot of volatility heading into the most recent analysis, which shows that Johnson may be losing some—
[Quintanilla] —it's tight for sure.
[Piegza] —traction in the polls. Absolutely. So I do think we're poised for more volatility in the currency market.
[Quintanilla] All right. Keith, how does that affect as a lot of the macro desks have to make choices about their 2020 playbook, US versus Europe?
[Lerner] Yeah, we are still landing with the US. I think the performance differential will probably narrow somewhat. In order for international markets to really outperform we need two things, we need the global economy to recover, and a robust recovery, and we need interest rates to move high because in Europe the financials are the big part of that market. So I think they will do better, but we're still skeptical that the global recovery will be as strong as the consensus thinks next year, which would really help power those international markets.
[Picker] Lindsey, we were chatting just a little bit ago about Chevron taking a $10 billion charge related to oversupply of assets in the shale arena. Is that a concern for you, especially as it relates to this overabundance in the US and how it could potentially spill over
[Piegza] In terms of corporate debt, I think that's absolutely a macro concern and the Chairman of the Federal Reserve has pointed that out as one of the concerns that he has going forward if in fact that is some sort of a bubble scenario, which could be the next shoe to drop and derail the US economy. So it's something we're keeping a close eye on but not necessarily something that we're factoring into our base case forecast as one of the primary risks to the downside.
[Picker] So even though it means that oil prices might be lower, that could help the consumer—
[Picker] —it's still a potential risk.
[Piegza] The fastest way to derail the consumer is heightened energy prices. On the flip side, lower energy prices can certainly help sustain the consumer going into the key holiday spending season, we'd like to see that.
[Quintanilla] Yep, since they're just below 60. Lindsey, Keith, we'll see what Powell says this afternoon. Thanks, guys. Appreciate it.
[Piegza] Thank you.
[Lerner] Thank you.
Courtesy of CNBC
Keith Lerner, Investment Adviser Representative, SunTrust Advisory Services, Inc.
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