Sara Eisen: Joining us here at Post 9 now, Shawn Matthews, Chief Investment Officer and Founder of Hondius Capital Management and SunTrust Bank Chief Market Strategist, Keith Lerner. Gentlemen, good morning.
Shawn Matthews: Good morning.
Keith Lerner: Good morning.
Eisen: Keith, is the bar now higher going into this week of earnings because what we have seen so far has been pretty good?
Lerner: Yeah, I think the expectations coming into this quarter are relatively low. We saw analysts cut back estimates quite a bit in the fourth quarter and into the first quarter. We thought they overdid it. Now we’re seeing forward earnings estimates start to rise. The bar does get higher. I do expect some consolidation in the market but overall, the tone of earnings is still relatively positive in our view.
Eisen: So if someone asks you is it too late to get in on this record rally—we’re hitting now records after records—what do you say?
Lerner: Well I think it’s about timeframe. The first thing is I would say at the end of December we came out and said that the risk reward was very favorable. Short-term it’s a bit more mixed. However, I would say this, if you look out at the next 12 months we still think there’s upside, an interesting stat if historically when you’ve been up the first four months of the year that’s happened 16 times, 15 times you’ve been up the rest of the year so strength is actually typically a positive, not a negative.
Carl Quintanilla: So what keeps traders from bringing the register mid-year here Shawn, just take it and run?
Matthews: Sell in May and go away. I think you will have some of that happen this year. It’s been a great first quarter for risk assets. Certainly as we look into the second half of the year and into next year there are a lot of headwinds that are out there. You’ve got political issues that are out there. Revenue growth hasn’t been particularly great. Earnings growth has been great. The one thing you can’t change is revenue all right, so you really have to start looking at revenue growth as the key to this market because people are looking at an EPS as really the barometer. But going forward I think you really have to start concentrating on revenue growth.
Eisen: We should say, Shawn, I mean you’ve been warning, you’ve been sort of on the bearish side for a while and you’re opening this new credit fund and you are expecting some … real issues.
Matthews: Yeah, I think there’s issues in the marketplace and credit. We’re going to be a global background fund, but certainly we look at the credit as now cyclical, right. So as opposed to the business cycle that used to be out there, we now have credit cycles and bubbles that materialize. And certainly if you look in the credit space there’s a couple of trillion dollars that has to roll in the corporate space that is significant. We think high yields performed great in the first quarter of this year. We think it’s a challenge in the second half.
Quintanilla: In terms of risks, right, let’s assume inflation is really and truly not a problem and not going to surprise us. Is it disappointment on trade? Is it dollar strength, right? Is it some other policy mistake? Is it just election noise, something else?
Lerner: I think it’s a combination of all three, so we certainly expect to see some bumps along the way. Where I may differ a little bit with Shawn is that we actually think there is an inflection point in the global growth side. Now we don’t expect there is going to be a robust recovery, but we still think China’s PMI had the best move up in seven years last month and we also think the US economy is on solid footing. So if you have the two largest economies doing fine, we think that’s enough to go ahead and see some of that revenue growth to support earnings in the back half.
Eisen: I mean there’s also the Fed Shawn. The Fed has the market’s back. That’s been a powerful force for this market.
Eisen: And some of the problems that you talk about, potential blow-ups in the bond market and issues with financing, didn’t the Fed just kick that way down the road by saying they’re not going to move this year?
Matthews: I think they pushed it into next year so that’s clearly happened and most of the central banks now are getting more accommodative, but you still have the same roll risks you’re going to have so it’s out there. And look, the Fed has been behind the back of the market for a while now, but if we look at global opportunities for them to continue to be aggressive on the accommodative side there’s not that many chances to do it. The US still has the ability to actually lower rates. Germany can’t do that so they are pushing on the string a little bit. And look, I think in 2021, people may be starting talking about stagflation and other issues that are out there, because there is wage pressure that’s in the system right now that’s not moving its way through the system, because I think the numbers are actually calculated wrong and they’re looking at a portfolio of goods and services that people used to buy 30 years ago as opposed to today.
Eisen: But personal incomes today rose 0.1 percent, we’re just not getting it.
Matthews: There is wage pressure at the bottom end. There is an asset bubble at the top end. The middle class is getting squeezed but if there is wage pressure at the bottom end, it’s going to work its way through the system.
Quintanilla: I wonder do traders think all right Powell pivoted in December, smart guy, listens well, or he got pushed around, he’s weak, he’s ours?
Lerner: My perspective is he was looking at the data. The Fed pivot had a big impact on the moment because it reduced the outlier risk and that’s why you saw this reflation back up. The other thing to keep in mind from an equity perspective even though the risk reward is more balanced here rates have come down at two-and-a-half.
The equity risk premium is filling a bucket where you tend to see positive returns when you look out 12 months. So overall I think expectations should come down from this huge rally, which is natural, but all in all we still think it’s a good relative bet at this point.
Eisen: Are there any pockets in the market, sectors perhaps that are more vulnerable than others to earnings? I’m thinking, you know, 3M was such a big disappointment and led some to wonder about industrials or those with China exposure. Where would you be cautious around earnings?
Lerner: I would say right now you have to look a little bit more micro. Even with industrials where we like is the aerospace and defense. A lot of news around the Boeing put a cloud over that but underneath we’ve seen some really good earnings. The GDP report on Friday showed defense spending still improving, so whether you are positive on the economy or not, that’s a secular story that’s still intact.
Eisen: Keith and Shawn, thank you very much.
Matthews: Thank you.
Courtesy of CNBC
Keith Lerner, Investment Adviser Representative, SunTrust Advisory Services, Inc.
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