Wall Street Week 07/26/2024

Summary

This episode of Bloomberg's Wall Street Week discusses market trends, the potential impact of a September rate cut, and Vice President Harris's economic policies. It also covers the state of commercial real estate, the importance of corporate earnings, and the growing interest in premium office spaces.

Takeaways

• 📉 Markets are experiencing a rotation from big tech to small caps, with the S&P 500 ending the week in the red while small and mid-cap stocks outperform.
• 🏦 The belief that interest rates might be coming down soon is driving the outperformance of small cap stocks, as they benefit significantly in a lower or more stable interest rate environment.
• 📈 The Russell 2000 has outperformed the Nasdaq for four straight weeks, indicating a shift in investor sentiment towards smaller companies.
• 🌐 Geopolitical risks are currently the top concern for institutional investors, affecting their portfolio construction more than Fed actions or interest rate cycles.
• 💼 Vice President Harris's potential economic policies are seen as more future-oriented, focusing on investing in America's future, fiscal responsibility, and global cooperation, contrasting with Trump's pro-inflation strategies.
• 🏙️ Commercial real estate, particularly office space, is recovering, driven by interest rates and corporate earnings growth, with leasing activity increasing as companies expand and hire more staff.
• 🌐 The U.S. is attracting significant foreign direct investment in real estate, with European and Asian lenders participating in major financing deals due to a lack of domestic interest.
• 💼 Corporate earnings growth is a key driver for office leasing, with companies more likely to take on more space when they are profitable and growing.
• 🏢 The distinction between premier workplaces and other office buildings is growing, with top-tier buildings seeing higher rents, lower vacancy rates, and positive net absorption.
• 🌐 The global economy is seeing a shift in investment flows, with money moving out of Europe and China and into the U.S., Japan, and select emerging markets, driven by changes in supply chains and geopolitical tensions.

Q & A

What is the current market trend that the script discusses regarding the rotation out of big tech and into small caps?

The script discusses a market trend where there is a rotation out of big tech stocks and into small-cap stocks. This is evidenced by the S&P 500 ending the week in the red, while the Russell 2000 has outperformed for four straight weeks, suggesting a belief that interest rates might be coming down soon.

What does Peter Borish suggest as a possible reason for the market rotation to small cap stocks?

Peter Borish suggests that the market rotation to small cap stocks could be due to a natural tendency to 'buy low, sell high.' He mentions that the market has been one where everyone has been buying high, leading to a natural rotation into oversold stocks and out of overbought ones.

How does the script relate the performance of commodities to the likelihood of the Fed easing interest rates?

The script indicates that a weaker market for commodities, such as grains, crude oil, cotton, and copper, might be an indication that the Federal Reserve is more likely to ease interest rates, which would benefit small cap stocks in a more stable or declining interest rate environment.

What economic indicators does the script mention that could suggest a slowing economy?

The script mentions several economic indicators that suggest a slowing economy, including underperformance of Visa and MasterCard stocks relative to American Express, higher unemployment claims, stabilized wage growth, and a GDP report showing softening consumer spending.

What is the significance of Vice President Harris's performance in the polls as discussed in the script?

The script suggests that Vice President Harris's better performance in the polls could imply the expiration of the Trump tax cuts, potentially leading to higher capital gains rates. This might cause investors to sell winners and harvest losses in small cap stocks.

How does the script describe the potential impact of a Kamala Harris administration on the economy compared to Donald Trump's?

The script presents a comparison where a Kamala Harris administration is expected to focus on investing in America's future, emphasizing child care credits, fiscal responsibility, and international cooperation, in contrast to Donald Trump's approach, which is criticized for potentially causing inflation and high interest rates.

What is the stance of the script's contributors on the Fed's decision to cut rates in the near future?

The script includes differing opinions on the Fed's decision to cut rates. While Bill Dudley is suggested to be in favor of an imminent rate cut, Larry Summers advises caution and patience before making such a move, considering the unsettled environment and problematic deficit figures.

What investment advice does Sharmin Mossavar-Rahmani of Goldman Sachs provide regarding U.S. equities?

Sharmin Mossavar-Rahmani advises clients to remain overweight in U.S. equities and to stay invested. She argues that despite the market rally, the upside in U.S. equities is substantially greater, and the market is already anticipating earnings for 2025.

How does the script address the concerns about the U.S. fiscal deficit and debt trajectory?

The script acknowledges concerns about the U.S. fiscal deficit and debt trajectory, especially from clients worried about the impact of the upcoming election. However, it suggests that even at 100% debt-to-GDP, investor confidence remains, and the tipping point for unsustainability is not clearly defined.

What is the current state of the commercial real estate market according to Owen Thomas, and what are the factors driving its recovery?

Owen Thomas describes the commercial real estate market as bouncing back, driven by interest rates and corporate earnings growth. He notes that leasing activity is improving as companies are growing and hiring more people, and the cost of capital is lower due to recent favorable inflation reports and the prospect of more rate cuts.

How does the script discuss the return-to-office trends in the context of the commercial real estate market?

The script discusses that while work from home has impacted office demand, there is a trend of companies wanting their employees to work in person more, especially in premium sector buildings. It mentions that Tuesday to Thursday visitation in New York and Boston is back to pre-pandemic levels, with Monday and Friday lagging but slowly improving.