We're Getting Whiffs of Stagflation, Sosnick Says

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Bloomberg Apr 28 04:16

Steve Sosnick, Interactive Brokers chief strategist, says the push-pull between stocks and bonds is getting a little nerve racking. He says the bond market is starting to get a little stressed. He is on "Bloomberg Markets: The Close."

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Transcript

  • 00:00 4999, I'm laughing a little bit because what does 5% mean, right, It can it go higher than that?
  • 00:06 And that would imply it seems not only
  • 00:09 prolonged delays here in rate cuts, but something else going on with inflation.
  • 00:14 Clearly, Sonali, I think that I think what we're seeing here is and and
  • 00:18 I'm starting to get whiffs of stagflation, dare I say it, I know that's like a dirty word in a lot of in a lot of circles, but necessary to talk about right now, it kind of is right.
  • 00:26 We had, we we ended up with this GDP print that was far worse than expected 1.6, we're looking for 2.5 versus 3.4, that's terrible.
  • 00:34 And you had a worse PCE number yesterday which of course is not the PCE number but a PCE number.
  • 00:41 Well, if you have a weak economy and inflation that's not coming down,
  • 00:46 you kind of have to think in those terms.
  • 00:47 And that's why it was kind of shocking to see
  • 00:50 bond yields rise on a day where GDP was a big miss.
  • 00:53 So it has to be that other that other inflation nervousness.
  • 00:56 So it's now a time for caution.
  • 00:58 I mean, how should I feel right now, Steve?
  • 01:00 I look at all this economic data, it seems to just say that basically inflation
  • 01:04 is still sticky, it's still high, stocks are rallying, yields are, you know, doing what yields are doing.
  • 01:09 How should I feel?
  • 01:11 You should feel concerned a little bit.
  • 01:13 I think you, I think it's I think the time for just closing your eyes and buying anything is is done.
  • 01:18 I think that ended sort of on March 31st or maybe maybe call it April 15th just around tax day when when people actually who made a lot of money in 2023 took some profits, which is why you saw in video and some of these other stocks pull back.
  • 01:32 But I I think right now you have to start to wonder stock, the push pull between stocks and bonds is is getting a little nerve wracking.
  • 01:38 I think we were able to ignore it for most of the year so far, partly because of just the weaponized FOMO that was in the stock market by anything.
  • 01:45 Partly also because of the reason that yields were going up, which is a stronger economy and on balance stocks do like a stronger economy
  • 01:53 up to a point
  • 01:55 the bond market starts to freak out a little bit and we we've gone from sort of the bond market just sort of rising because the economy is getting better
  • 02:02 to now the bond market's starting to get a little a little stressed.
  • 02:05 How do you feel about some of the complacency in other parts of the bond market?
  • 02:09 You think about where people have really placed their money
  • 02:11 earlier this year in pretty risky wagers frankly assuming that there's really almost no rollover in maturities here.
  • 02:19 It it's actually quite astounding how
  • 02:21 how many of the strategies that work really well in the you know let's say that the 2020 to 2021.
  • 02:27 That that you know that just
  • 02:29 the money flowing everywhere strategies
  • 02:31 are still being employed now
  • 02:33 and yet they're still working.
  • 02:35 That's one of those things, you
  • 02:37 know, that's the problem.
  • 02:38 That's my point to Katie is maybe we maybe we need to start getting a little more concerned
  • 02:43 about some of these things that are underlying it because
  • 02:45 the the spigot is not on full blast anymore.
  • 02:48 It's not turned off.
  • 02:50 But I think some of these
  • 02:51 we're we're we're still hunting yields incrementally.
  • 02:54 We're still hunting
  • 02:55 excess returns and they should be getting harder to come by.
  • 02:58 Fortunately so far they're not.
  • 03:00 But that gets the nervousness in.
  • 03:02 Isn't it funny
  • 03:03 that people still have that yield seeking behavior?
  • 03:06 They're
  • 03:06 funding into, of course,
  • 03:08 risky parts of the bond market when you take a look at cash right now earning 5%, actually bill gross, he tweeted
  • 03:14 the other day.
  • 03:14 Why bother with bonds?
  • 03:16 T-bills are at 5.25%.
  • 03:19 Seems like a slam dunk there.
  • 03:21 You're speaking to someone who has too much money in money markets by a lot of people's point of view.
  • 03:25 But but yeah, it's the same basic thing,
  • 03:27 you know,
  • 03:28 think about it this way.
  • 03:29 We went up 10% in the first quarter S&P which, which was, which was fabulous.
  • 03:33 Can you annualize that?
  • 03:34 Are we going to be up 40% this year?
  • 03:35 I'm going to say no.
  • 03:36 So at some point you get the back in the fill.
  • 03:39 And when you're getting that back in fill, when you're getting some of the volatility, there's not the wrong, it's not the wrong place to be if you can actually earn a real rate of return on cash.
  • 03:48 It's something
  • 03:49 a generations of investors have just not been used to.
  • 03:52 And I think we forget about that sometimes.
  • 03:54 Bill Gross, having the perspective that he does, you know, says OK, there's nothing wrong with just, you know, parking your money if you can make some profit on it.
  • 04:02 This whole idea of where's the risk you we were talking about some of the steam coming out of some of the favorite trades.
  • 04:07 But the question is how much drawdown risk is there still, especially going into a
  • 04:13 big Fed meeting, a big payrolls print and potentially a new economic environment.
  • 04:18 I think the drawdown risk can be substantial in terms of let's we didn't complete a correction, you know, it felt like we corrected, but we really were down, call it, call it 4 to 5%, Certain stocks had big corrections,
  • 04:30 but but as a market as a whole, we didn't really complete that correction.
  • 04:33 It's possible.
  • 04:35 I'm not necessarily saying that's the base case.
  • 04:37 There still seems to be this underlying residual momentum and earnings season.
  • 04:40 We've gotten our requisite 80% of stocks beating estimates.
  • 04:43 So that seems OK
  • 04:45 but that's that you know that would sort of be my my point it's to say this is not out of the question because it's really a correct finishing the correction is really down another call 5 to 6% at this point which is not historically unusual
  • 04:58 and you know you really know it's been a crazy week.
  • 05:00 Because I actually had to check as to when Tesla reported and turns out it was
  • 05:03 3 days ago.
  • 05:04 Can we talk about some single names here?
  • 05:06 Can we talk about Tesla a little bit.
  • 05:08 You write in your notes that finally maybe we're starting to see some genuine risk aversion priced into Tesla shares.
  • 05:15 I mean what do you make of what we heard.
  • 05:17 Of course on the call the
  • 05:19 the IT just shows you what a wacko stock Tesla is and how faithful I've I've called it a faith-based stock for many time from for years
  • 05:28 and
  • 05:28 any other company if it put out numbers like Tesla did would have been shredded.
  • 05:33 I I don't, I don't even want to put a number on it but it would certainly double digit down.
  • 05:36 But Tesla investors are always looking to the future and so
  • 05:40 oh let's talk about robo taxis.
  • 05:42 Oh, let's talk about, you know, a $25,000 car that may or may not actually be coming to to market, but if you put enough
  • 05:48 futurism in front of the Tesla investors,
  • 05:51 that is what gets them going.
  • 05:53 The reason the stock rallied also was because for the first time in ages going into earnings, we actually saw the options market pricing in some real risk.
  • 06:01 And you know what we've learned this week was the contrarian.
  • 06:04 The option market was, was a good contrarian indicator.
  • 06:07 It was, it was showing a lot of risk for Tesla.
  • 06:09 Tesla went up.
  • 06:10 It was showing not too much risk for meta.
  • 06:11 Meta went down it then, because of meta, it was then pricing in a lot of risk for for Alphabet and for Microsoft, and they were fine.