Odd Lots - These Will Be The Big Markets And Economics Stories In 2018

Episode Date: January 2, 2018

On last week's episode of Odd Lots, Bloomberg's Chris Nagi and Matt Boesler gave us their takes for the biggest stories of the past year. So naturally, for this week's episode, we look ahead. Chris and Matt are back in the studio to give us their predictions for what we'll be talking about in 2018. See omnystudio.com/listener for privacy information.

The news doesn't stop on the weekends. Context changes constantly. And now Bloomberg is the place to stay on top of it all. Hi, I'm David Gurra. Join us every Saturday and Sunday for the new Bloomberg this weekend. I'm Christina Rafini. We'll bring you the latest headlines, in-depth analysis, and big interviews. All the stories that hit home on your days off.

And I'm Lisa Mateo. Watch and listen to Bloomberg this weekend for thoughtful, enlightening conversations about business, lifestyle, people, and culture. On Saturday mornings, we put the past week's events into context, examining what happened in the markets and the world. That on Sundays, we speak with journalists, columnists, and key political figures to prepare you for the week ahead. Join us as soon as you wake up and bring us with you wherever your weekend plans take you. Watch us on Bloomberg Television.

Listen on Bloomberg Radio, stream the show live on the Bloomberg business app, or listen to the podcast. That's Bloomberg this weekend. Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg Television, and wherever you get your podcasts. Oh, and welcome to another episode of the Odd Lots podcast. Once again, sadly, Tracy Alloy is not here.

So I have to do sole hosting duties. The good news is I have two fabulous guests in the studio with me. So last week we talked about 2017 themes, the big stories that we saw over the last year. And so we have the same two guests on this week. Chris Nagey and Matt Bosler of Bloomberg News. And this time, we're going to look forward and try to see what we're going to be talking about in 2018. Chris and Matt, thank you very much for joining us.

Chris, let's start with you. What's your S&P 500 forecast? So my S&P 500 forecast is the same as it would be every year, which is that the S&P will rise approximately 9.3%. My actual prediction, though... Wait, is that because 9.3% is the average volume? Actually, I'm making that. It's roughly that.

But I just feel like that's the one thing that you should predict when asked that question. I feel like there's a possibility in 2018 that even if you get the 10% roughly gain in the S&P, the sentiment towards the stock market seems to me to be on the cusp of souring in a weird way. You have Donald Trump associating himself with the run-up. And you have the tax bill that just passed. And a lot of sort of populist offense is being taken towards the tax bill. The way they're framing their objection to it is that it's essentially a gift for the 1% or to a big corporate donation. And I feel like if you see the things that the Trump critics are predicting actually happen,

particularly if you see companies take their windfall and basically shower it on their shareholders, and that causes kind of melt up in the stock market. The stock market is a kind of political whipping boy. That theme I could see take off a little bit. I really like this. So the gist being Trump tweets, about the stock market all the time. It's obviously doing phenomenally well,

but ownership and participation in the stock market is not that widespread. Exactly. And so what you then get is this contingent of people who resent the rising stock market and this feeling like all these people are getting rich are other people. I mean, and the stock market, if you think about it,

it stands for a lot of things that already annoy people a lot. It stands for like the margin impact of automation and sort of the monopolistic powers of companies like Amazon. And the outsourcing of labor, I think there's a general consensus or there's a feeling that basically pays off in the stock market. So there's already a kind of approaching critical mass for sort of vilification of equity. I mean, it's hard to imagine.

I mean, everyone always said big thermometer of U.S. well-being as the stock market. This could be completely wrong. Maybe everyone will be happy. But, yeah. I really like that. So in 2017, the theme was the stock market is boring. And in 2018, the theme is everyone's angry at the stock market. Matt, Chris mentioned the tax bill and the perception that, you know, it's largely a gift to corporations

and the wealthy. And something that I've been really struck by interviewing people mostly on TV is I have yet to hear from a single economics person or even a markets person who is not associated with the administration who thinks that this is really going to ignite a real spark in the economy. Have you talked to anyone who thinks it's actually going to move the needle on the economy? No, I mean, the only thing we've seen, you know, in that regard is the Fed's latest round of forecast, which they weren't really able to fully explain why, you know, they're expecting such a big bump to growth next year. But it's interesting because at the same time, we have these sort of cyclical forces where nine years into this expansion, it looks like we might actually

be on the cusp of a pickup in productivity growth in 2018 and the types of things that would lead businesses to spend more and invest more. And so just thinking about that in terms of the likely Trump tweets that we're going to see, it's kind of interesting because, again, that might turn out to be a red herring. But it's going to be. I'm just, I'm already imagining how furious his critics and detractors are going to be when the economy starts taking off because of we hit a certain point in the cycle that would cause greater capital investment. And Trump and all his fans are reciting the tax cuts. Yeah, exactly. You know, like the reality is wage growth has been muted in this expansion, but it's been rising for several years. And we're getting to the point where just

naturally, businesses are starting to invest more in labor-saving technology, that sort of thing. That's kind of exactly what you would expect. Chris, on the matter of the tax cuts, you know, it's funny, we're recording this, just so everyone knows before they've technically passed it, we're assuming they're going to pass it because it doesn't look like there's any ambiguity. we've had this discussion a lot about what is so-called like priced in and, you know, we've had this incredible rally in the stock market this year. What is your best view on how much can be attributed to the presumption of tax relief? Well, we ran a story this morning that runs down all of the strategies.

These Wall Street pundits were basically paid to advertise for stocks and they, a lot of them break out a separate impact for if and when the tax cuts are passed. And generally it's in the 10 to 15 bucks per share for the S&P realm. So if S&P earnings are about 130 bucks a share, so it could add 7 or 8 percent to the S&P's earnings, which that sounds, if you look at that relative to the gains this year, that's not implausible. That basically maybe a quarter or third of the gains

that came through this year were related to the tax break. That strikes me as, I mean, all of it, the imprecise science. One thing that really strikes me, though, in this discussion is all the idea that Trump has unleashed something and investors really want tax cuts is that from basically 2010 through end of 2016, we had this extraordinary market rally without DC being able to deliver anything because we've been in total gridlock. And so the idea that suddenly investors need to see tax cuts to continue this extraordinary rally always seemed a little option. It is.

But by the same token, I think that if you look at the people designing the tax cut, they were aiming at pretty square way. at the stock market. It seems like it's part of their trickle-down philosophy. They wanted something that would be easily identifiable and appreciated by stock investors at least. And I feel like for better or worse, they've done something that basically is going to achieve that. It's hard to argue that the last couple weeks haven't been a slightly higher velocity rally than we'd seen previously. You can get the news whenever you want it with Bloomberg News Now. I'm Amy Morris. And I'm Karen Moscow here to tell you about our new on-demand news report, delivered right to your podcast feed. Bloomberg News Now is a short five-minute audio report on the day's top stories.

Episodes are published throughout the day with the latest information and data to keep you informed. Yes, there are other products like this from a variety of news organizations, but they usually rerun their radio newscasts throughout the day. That's not what we do. We create customized episodes that can only be heard on Bloomberg News Now. And we don't wait an hour to publish breaking news. When news breaks, We'll have an episode up in your podcast feed within minutes. So you're always getting the latest stories and developments. Get the reporting and the context from Bloomberg's 3,000 journalists and analysts we're all over the world.

Listen to the latest from Bloomberg News Now on Apple, Spotify, or anywhere you listen. Matt, Boisler, I want to turn to you. What is, in your view, going to be the big economic story of 2018? I think the big economic story of 2018 is going to be how little changes in terms of, of the trends that we're seeing in the economy in 2018. And specifically, I think we're going to continue to see a solid decline in the unemployment rate without much inflation. And I think the way that those two are going to fit together is we're going to finally see that pickup and productivity growth that has been missing for a long time. And I think we're finally starting to

get to that point. Well, this has been one of the funny questions to me. So, you know, like unemployment has been plunging all year. And people are like, okay, we're really get close to full employment now. We must be because it's going down so fast and so wages are going to pick up. But it always struck me is that you could take the same data and make the opposite argument, which is that if unemployment is falling faster than people expect without a pickup in wage growth or inflation, then maybe it could just fall a lot further because it sort of gets to what we were talking about on the last episode. Maybe just the whole premise of there being some point where inflation and wage growth kicks in is just flawed. Yeah, that's what policymakers are

kind of starting to entertain, right? So this idea of full employment as this level of employment that would trigger runaway inflation was born in the 1980s, right? And that was coming right off the heels of a high inflation environment in the 1970s that was fairly unique. And then as you go forward into the 1990s, we had a very strong labor market at the end of the 1990s, a very low unemployment rate, but it didn't really manifest itself in higher inflation. It manifested itself in higher productivity growth. And so if anything, you know, you're kind of weighing, does the experience of 40 years ago seem more likely to reoccur? Or does the experience of 20 years ago seem more likely to reoccur? And given, you know, all the big global changes that we've talked about, you know,

over the last several decades, it seems like maybe the first one to reach for would be the most recent experience. Chris, if Matt is right and we sort of continue to see this economy that hums along, but none of the inflation pressures that pick up, that again, it just sounds like a great recipe for stocks. Yeah, it's hard to imagine that being a problem for your typical investor. How dominant is fears of the Fed as the entity that could kill this rally? If you ask people what could end this incredible market run, we've seen. How many people would put that as their first thing?

I would say a fair number. One thing that's true, though, is that you have a dwindling population of people who even remember the Fed killing a stock market rally. I feel like it probably should be the first thing that occurs to everyone because that's typically how it happens. I mean, but there may not be that many people left. I have to admit that even I have a hard time imagining the Fed actually killing a market rally. And I don't know whether that's because of my experience or because I just sort of think of the Fed is in this mode where it doesn't want to do any harm. But even even though it seems kind of obvious that that could be a risk, it's hard for me to remember. Well, right. It's hard for me to

believe. Yeah, and this has been a unique experience of Federal Reserve policy experimentation. Matt, the corollary is that for many history, like the Fed has sort of caused recessions. And so, or is sort of like Fed tightening preceded a recession. In our minds, I think probably because we're still doing with the scars of the Great Recession and the financial crisis, we think of recessions as these like cataclysmic events. But it's not, you know, it wouldn't be that weird for the Fed to tighten and you get a slowdown for a few quarters and then you sort of go back to normal. Yeah, no, that's absolutely right. And I mean, to some extent, you could argue that's what we've seen over the last two years or so, right? So before the Fed started raising rates, you saw

investors starting pricing that in coming in the global currency markets. And we had a big 20% appreciation in the dollar alongside that crash in oil prices in 2015. And that really did lead to a large slowdown, not only because the U.S. has become such a big oil exporting country, but also because of the effect it had on manufacturing. And so to some extent, we're just still kind of seeing that work through the system. I remember that growth scare. So how much at the time did people see that as sort of like fear of like, okay, the Fed is getting ready to make its move, time for some shifts? Well, yeah, absolutely. And at the same time, what you had was, you know, the European Central Bank and the Bank of Japan, notably also shifting toward

an easier monetary policy starting to launch their quantitative easing programs. They were so far behind the Fed with that, that it just came at a time when, you know, both were going in different directions for the first time and a long time. That really had a powerful impact. So that exacerbates the sort of tightening financial conditions, that surging dollar, that monetary policy gap. Exactly. So it's kind of like the tightening was extremely front-loaded, you could say, in this cycle,

and at least in terms of the economic effects. Chris, in terms of other risks to the market, besides the Fed? Like, what would be the number two thing people would say? Just to take it slightly out of the realm of economics, I feel like one of the big stories of the market this year has been boringly the rise of passive investing. And along with that, this weird thing we're covering the stock market has become this kind of weird science experiment. You sort of have to be prepared to deal with financial economics. I remember there was that day that the anomaly study came out. Oh, yeah, yeah, yeah.

saying that all of these sought market patterns and academic papers were a little off. And everyone had absolutely freaked out about it. I feel like there's so much quant underpinning of the market right now that it's not out of the realm of possibility that some kind of jam, not a meltdown, but somehow those underpinnings get jammed up somehow next year. Right. Like every little blip now, people wonder if there's some quant explanation, right? Like you go half a percent, like, oh, people are selling winners.

Which is, in another way of saying, no matter what happens, we will say, we will. say it was a quant fuel thing. You're not supposed to admit it. Not really. Yeah. Well, I think that about does it. Chris and Aegee, Matt Bosler of Bloomberg News. Thank you so much for joining us. Looking ahead, I think these are great themes for the year 2018. That does it for odd lots for 2017. We'll be back in the new year. Tracy will be back with a full suite of shows looking at the random odd lots corners of the financial markets. In the meantime, you can follow Chris on Twitter at Chris Nage.1. You can follow Matt Boasler on Twitter at Bose underscore. You can follow me on Twitter at the stalwart, and you can follow Tracy on Twitter at Tracy Alloway. Thanks for listening.

On April 4, 2023, around 2 in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, who did this to you? What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App. From Bloomberg Podcasts,

this is Foundering, the Killing of Bob Lee, beginning April 16.