00:00 Speaker A
How many cuts, Emily, would you pencil in going forward? What do you think the pace looks like? And does the market, um, does it depend on cuts, Emily, to move higher?
00:16 Emily
I mean, it's just amazing to see. The market pretty much has selective hearing right now and all it's hearing is Fed cuts, uh, which are great news for risk assets. It almost feels like bad news is good news and good news is good news because all of it means that the Fed here is going to continue cutting and we do think that the the dot plot makes sense for the Fed to cut twice more, 25 basis point increments at the next two meetings, um, because there is some pretty significant uh weakening in the labor market. It's weak enough that the Fed should cut here, but inflation hasn't come come uh is is still stuck at elevated levels, which means the Fed needs to be careful about being too aggressive in cutting. The markets are looking at this like we're in a sort of a honeymoon period where the labor market's deteriorating enough that the Fed can loosen monetary policy or uh financial conditions, but it's not so weak uh that the Fed can't get us out of it uh with those uh rate cuts. It's certainly a risk-on response and we're seeing that in new all-time highs, small cap surging. Uh again, this is very bullish for risk assets.
01:51 Speaker A
Let me ask you Emily. uh the Fed cuts, but what do you make of the response in the benchmark 10 year with yields moving higher? What's that telling us?
02:01 Emily
Yeah, you know, today that was really a a good news uh I think response to the economic data. The Philly Fed Index came out and handily beat expectations. The new order component, which is something that we watch across all of these business surveys uh surged. Uh we saw initial claims coming down. Everybody was a bit spooked last week when we saw that jump in initial claims. Of course, it was a sign to the floods in Texas and and fraud around that. But both initial claims and continuing claims uh came down today. So I think, you know, yields certainly responded to that, but markets brushed it off due to that selective hearing. Typically higher yields would put a bit of pressure on risk assets, but all the markets need to know right now uh is that the Fed is is loosening financial conditions and that's enough.
03:00 Speaker A
Let me ask you in terms of how you characterize the equity market, Emily, I like this. You say, it is on the most epic honeymoon ever. Walk me through that. I guess I'm also curious Emily, how do you think, how and when that honeymoon might end?
03:22 Emily
Yeah, it's it's really back to the the honeymoon phase with with these Fed cuts coming through, uh, but not being more sinister to reflect a really uh deteriorating labor market. and it's reflected in valuations. The S&P 500 right now is trading at 22 and a half times forward earnings. The most expensive they've ever been in the late 90s was was 24 times. So we're certainly getting up there. and we've got, you know, double digit earnings estimates for 2020 uh six baked in to those uh PE ratio. So that's going to be tricky. We also have high yield bond spreads at a remarkable 268 basis points. That is a sign that credit markets are saying there is nothing to see here. Um so I think, you know, it's just a difficult starting point uh for equity markets at these valuations. It doesn't mean we're not finding opportunities. We certainly are. We like the earnings growth in the United States into next year, but we do have a bit of a valuation issue here. Bonds on the other hand are are really not sniffing out the disinflation and lower growth that we see uh coming into next year and we think that's an area that investors should consider adding to positions.
