The Macro Compass Founder & CEO Alfonso Peccatiello and Miller Tabak Managing Director and Equity Strategist Matt Maley join Yahoo Finance Live to discuss U.S. private payrolls data, recession expectations, and the outlook for employers.
Video Transcript
JARED BLIKRE: And Cleveland Fed President Loretta Mester said that she sees interest rates moving above 5%, and staying at those levels for some time, as the Fed fights inflation. Let's get reaction on Wall Street and check in with Miller Tabak Managing Director and Equity Strategist, Matt Maley, and the Macro Compass Founder and CEO Alfonso Peccatiello.
Guys, you've been listening to us talk about the latest labor data this morning. And Alf, let me throw this to you. We've done some, we've done multiple segments both on the live show here and also in webinars. Your view of the macro picture here is that it has deteriorated and it's put us on course for a recession. When? And what is causing you to see this?
ALFONSO PECCATIELLO: Jared, I expect the recession to start in the US in late Q2, so let's say late June mid-summer basically. And the recession happens when unemployment rate starts going up 40 to 50 basis points from its lows. And earnings start to become negative on a year on year basis.
We have already negative earnings growth. We are trending there pretty rapidly. When it comes to unemployment rate, we're still at the lowest, but labor supply is coming back. We have signs that that is happening. And at the same time, we are seeing demand for labor across various gorges actually slowing down. It's the construction sector, which is very weirdly, still holding on.
I think it's due to labor hoarding. But I guess given the frozen real estate market, it's just a matter of time before the construction sector starts with layoffs, which then feed through other sectors as well.
DAVE BRIGGS: Yeah, similar question to you Matt. I mean, as long as we've been talking about a shallow or a mild or even a kind of rough recession for all of the different types of projections that we've gotten, it's been tough to gauge exactly when we'll enter into it. And then additionally, what the severity would be in terms of the pass-through to the employment situation, even as we were laying out some of the numbers a moment ago.
MATT MALEY: Yeah, it's interesting, Alfonso's comments, and I agree wholeheartedly with those. When is it going to start? It's always hard to know. And of course, the Fed or anybody else in the government will tell us that we're officially in one long after we're already in it. And in some cases, they don't tell us until after we're already getting out of it.
So that's the one thing we have to make sure that we realize. They'll always tell us, oh, we could have a soft landing, we could have a soft landing, until we're already in the hard landing. And this whole thing with the employment, we've seen those issues with the layoffs.
It started last summer in the tech area. It started, and it became more, then suddenly companies were doubling down on that. We had tech companies who are now going through their second and even third round of layoffs. But now we're starting to see it spread to McDonald's, you know, and Pepsi, some of these other companies.
And just what Alfonso was talking about in the construction area, the ABI data, which measures what, it's a measurement of new, is basically of what the designers, what kind of new projects that are coming, that's dropped below 50 each of the last five months. That tells you the construction is going to wind down, and that construction employment that Alfonso was talking about, is also going to come down.
And so I do think we're headed for a hard landing, and at some point, the stock market has got to wake up to that, because every single recession since World War II has seen a pretty significant decline in earnings, and that's not good for stock market. It's fairly expensive right now.
JARED BLIKRE: Alfonso, Alf, what are your expectations for earnings season coming up? Have we seen the necessary revisions lower that you think might occur? And just in line with our talk about the industrial slowdown, the earnings cycle kind of slows down hand in hand with that, so your thoughts on all of that.
ALFONSO PECCATIELLO: So I think analysts are still in La La Land, Jared. They're expecting earnings to grow low single digits this year. There's a lot of dispersion across sectors, but I think that's wrong. I expect earnings to drop 15% to 20% from where we stand today.
It seems like a big number, but it's just consistent with an average recession, which we have seen in the last 50 years, as Matt was saying. It always sees earnings coming down. The median earnings decline from let's say peak to trough is about 29% during a recession. Calling for 20%, it's a big earnings decline, but it's not anything we haven't seen before already.
Adding to that, Jared, because you asked about whether the consensus is there yet, well, let me tell you something anecdotal evidence from fintwit from Twitter. I was just checking on what's trending in my feed. And the following is trending. Bullish Dogecoin, altcoin season, gold, and so on and so forth.
So that is not necessarily a sign of sentiment amongst retail investors being very negative. Bear markets have two legs. The first is a repricing of valuations. That's what we have seen in 2022. The second is a come back to reality when it comes to earnings, and pessimism about future growth. We haven't seen anything like that yet, I'm afraid.
DAVE BRIGGS: So just to follow on that, do you believe that CEOs are being overly optimistic right now, Alf?
ALFONSO PECCATIELLO: Well, if you see, if you look at what CEOs are thinking and look at insider activity, actually they're not very positive overall, right. We have seen a bit of insider selling of late. If you look at the Philly Fed survey, for instance, which is a survey that asks 125 CEOs, what do they think about future economic growth, the answer isn't great.
So rather than about CEOs themselves, I'm afraid it's investors. The other thing that matters a lot in equity markets drawdowns and in the second leg of a bear market drawdown, is that actual selling happens. Selling from real money investors, from retail investors, from long goal investors. We haven't seen a capitulation of those at all.
We have seen hedge funds de-grossing. We have seen them being stopped out and taking risk off the table. But we haven't seen the real money guys getting out of the game yet, because they're scared. We haven't seen that yet. And I'm afraid that's the part which is missing, together with dropping earnings.
JARED BLIKRE: Matt, I'll throw the earnings question to you. What are you expecting this season? You can take a macro perspective or individual names and sectors.
MATT MALEY: Yeah, I mean, obviously, as Alf said, the top down, I'm sorry, the bottoms up estimates are still way too high. A lot of the top downs players are looking for down to 200 on the S&P 500, $200, that is on the S&P 500. That's, and that's 10%.
And so if we're looking at 15% to 20% that Alf was talking about, obviously, you come in lower than that. And I'm sorry, but 18 times earnings is not something we have unless you're getting outsized zero interest rates or outsized QE programs. Without that added liquidity, the accommodation, those value, I'm sorry, those fundamental values are going to have to come down.
I mean, we got to look at 15 to 16 times earnings. I talked about what happens for every bear market since, or every recession since World War II. Well, every bear market since World War II has seen valuations drop to below 15 times earnings. And if earnings are going to have to come down, that's, you know, obviously, we've got further to fall.
You know, I don't want to say, cry fire in a crowded theater, and I'm not trying to do that. We're not repeating 2008. But you look at just about what CEOs or CFOs are doing. I mean, look at what Jamie Dimon did in 2016. We had problems with, people were concerned about banks and stuff.
And what did he do? He came in and he bought $25 million of his own stock with his own money, not a company buyback. And the stock market bottomed and took off for the next 18 months. This time around, he's warning about that the banking price is going to be more of an issue.
Again, this is not 2008 all over again. But when you got one of the most important and powerful business people in the world who's not doing what he did at a bottom, he's still giving us warnings, it's something that I think people need to be careful about. And I still think they need to be raising a little bit of cash here, so they can take advantage of when the next downturn comes.
DAVE BRIGGS: Interesting. And so within those warnings, Alfonso, just lastly while we have you, we've been trying to, and perhaps a little bit of this is PTSD coming off of the end of the second quarter or the end of the first quarter and the banking crisis that ensued, and the turmoil that really caught all of our attention because of the broad-ranging implications, and because of how that also showed up in Jamie Dimon's letter, the annual shareholder letter.
And so within all of that, what is the potential for a Q2 surprise or even an April surprise that the markets haven't yet seen, and that they're not prepared for? And to what extent could that be non US focus? What extent could that even be China, which I know that you have a lot of thoughts on as well?
ALFONSO PECCATIELLO: Well, look, that's a very valid question, because the US is getting a lot of attention when it comes to potential credit crisis, right. And I think people have mistaken a liquidity event in the banking sector, which the Fed can backstop, with the credit crisis the Fed cannot backstop.
I mean, the banking sector goes, has troubles that the Fed can solve when there is a credit event. So in 2008, house prices were falling. The banking sector is highly exposed to the housing market. The Federal Reserve cannot backstop the value of the collateral behind the loans, which is house prices, offices prices. They can't backstop that.
But they can backstop the value of treasuries as collateral, which they did. So it's important not to confuse a liquidity crisis, which the Fed can always try and backstop, with a credit crisis. But you're right, that a lot of attention is being given to the US.
And people are now expecting, if you look at the Bank of America Fund Manager Survey, that the next credit event, systemic credit event, will happen. It's high up on the list of tail risks that fund managers are looking at.
I think we have gotten a bit maybe too complacent about a couple of things. The first is, it's true that the real estate market has had quite some excesses over the last 10 years. But not only the US one has had. I mean, look at Europe as well. Look at places like Sweden or the UK.
In the UK, we are looking at millions of mortgages to be refinanced at rates, which are much, much higher than the ones that were there five years ago. And there are some countries as well, Canada, that have a much higher household debt and a much higher and better leverage than the US has.
This goes to show that if the real estate is the sector that might have a problem, it's not necessarily the US which is going to see a credit event first. But there are many other places, where in the last 10 years, zero interest rates or negative interest rates, QE, low vol, and so on and so forth, have generated quite some excessive speculative behavior.
And it's not only about the US. I mean, people need to have a global macro approach. Nothing, never like now, I think having a look at what happens around the world and not only in the US, is paramount important for portfolio allocations.
DAVE BRIGGS: Gentlemen, thank you both this morning for joining us and for some great analysis and insights, and perhaps a little bit of a vision into what we should be keeping a close eye on going forward. And Miller Tabak Managing Director and Equity Strategist, Matt Maley, and the Macro Compass Founder and CEO, Alfonso Peccatiello, thank you so much.
