Analysis of the Dow's 203 Point Run-Up
Monday, November 09, 2009
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SUSIE GHARIB: So what do all these developments mean for investors and the economy? Joining us now, Drew Matus, U.S. economist at B of A Merrill Lynch Global Research and Scott Wren, senior equity strategist at Wells Fargo Advisors. Gentlemen, welcome to NIGHTLY BUSINESS REPORT.
DREW MATUS, U.S. ECONOMIST, BANK OF AMERICA: Thanks for having us.
SCOTT WREN, SR. EQUITY STRATEGIST, WELLS FARGO ADVISORS: Hi, Susie.
GHARIB: Scott, let me begin with you. What's behind the rally and will it continue?
WREN: Susie, I think overall rally has been built on number one on earnings. We've had two blowout earnings quarters in a row. I think earnings estimates are too low. I don't think it's any surprise at all that the G-20 is going to leave a lot of stimulus measures in place. I think a lot of our trading partners were starting to talk tough about interest rates and liquidity and things like that. But in the end I think it's -- one could expect that hey, these stimulus measures are going to be in place for a while. Interest rates are going to remain very low for a while. So all of those things have helped to drive the market higher.
GHARIB: Drew, I was talking to somebody today and he said that this is a liquidity bubble masquerading as a recovery. If you pull the stimulus out. there is no recovery. How do you respond to that?
MATUS: I wouldn't say there is no recovery but certainly when the Fed is deciding when they're going to raise interest rates, they're going to be looking at it through the lens of all the additional liquidity they've added and asking themselves that exact same question. What happens if we pull it out? And that is one of the reasons why Bank of America, Merrill Lynch doesn't expect them to move until 2011.
GHARIB: Scott, let me go back to something that you said about earnings are coming in better than people are expecting. Are companies really doing better or are they -- is it just a matter of them having cut costs and that's why we're seeing some growth?
WREN: Susie, we get questions about the revenue growth type situation all the time. And really if you think about it, at this point in the cycle when you are coming out of a bottom, you know companies, the way that earnings improve are always because of cost-cutting. Revenue growth is later. And I think it's going to be no different in this particular recovery. Probably we have sequentially earnings are getting better. Sequentially earnings are going up, but on a year-over-year basis we're going have to wait a little while. But cost-cutting is always how earnings improve off the bottom.
GHARIB: Drew, should we be concerned that the dollar is hitting these lows and stocks are going up? Is that a good or bad thing for companies and for the markets?
MATUS: Well, the dollar is often seen as some sort of view on the health of the U.S. economy. In some ways it might be correct, but you have to remember that the S&P 500 more closely mirrors the global economy rather than the U.S. economy. And so the dollar going down actually is somewhat helpful for those companies. And as we look ahead too we also have to remember that a weaker dollar means better U.S. exports, more exports because they are cheaper and that will be helpful as well.
GHARIB: And Drew, let me also ask you this. A lot of people are looking at the stock market rally. They are scratching their heads because they also saw that unemployment is at 10.2 percent. Is there a disconnect between what's going on in the economy and what is going on in the markets?
MATUS: No, there are lags. And the lag in the unemployment rate is a well-known thing, so about two quarters after the economy lags the unemployment rate will peak and about two quarters after that you could start worrying about inflation. But you know if you just kind of remove the lags from the equation, it just doesn't work. There are always lags. There will always be lags. And so I think what we are seeing is perfectly normal.
GHARIB: Scott what do you say to that, about this disconnect? I'm sure a lot of your clients are asking you this.
WREN: They definitely are. And I've been doing a bunch of client events here lately, Susie. And that is certainly one of the big questions on their minds. As Drew said, you know, employment is always a lagging indicator. I think that right now we're in that part of the cycle where productivity growth is high. Companies are trying to do as much as they can, produce as much as they can with fewer inputs, in other words, fewer employees. So they don't want to hire people until they absolutely have to. I think this particular cycle, employment's probably going to come back slower than it has at least for the last few cycles.
GHARIB: All right, gentlemen. Thank you very much for coming on the program and analyzing this. We really appreciate it.
MATUS: Thank you.
GHARIB: Thank you very much, my guests tonight, Drew Matus of B of A Merrill Lynch Global Research and Scott Wren of Wells Fargo Advisors.
