Expect a mild commodity bounce between now and the election, says 3Fourteen's Warren Pies

Joining us now, Warren Pives from 314 Research, and Bob Elliott from Unlimited Funds. Bob, you say no. Well, I think when you look at the overall picture of the economy, we have seen a little bit of slowing, particularly in the employment area, but the types of cuts that are being priced in, particularly through the end of the year, are relatively aggressive. You just compare today's dots, you know, the dots in June, the last time the Fed did it, to what the current market pricing is. What you see is that the current market pricing is 100 basis points below the dots that exist in June. Compare that to the incremental data that we've gotten. Unemployment has risen by about 0.2 percent, and we've seen the core PCE number come down about 0.2 percent. Those are big moves in short rates and expectations relative to relatively modest moves that we're seeing in the macroeconomic data. OK. Warren, you disagree? Yeah, I don't know if I necessarily disagree. I try to stay away from normative policy prescriptions for the Fed. I don't think it really matters if they go 25 or 50 in September. I'm looking more for kind of a nuanced communication from them in the form of the dot plot. And so what I do expect is for this meeting plus the rest of the meetings this year, there's two more following the September meeting, that the Fed will signal probably 100 basis points of total cuts. And so, you know, I don't know necessarily if that's the right thing or the wrong thing for the economy. I just try to get in the right wavelength of the Fed and then adjust portfolios accordingly. And so that's how I see them communicating. I think it's going to be a bit of a nuanced thing. I think they want to split the baby, so to speak. OK. Well, going from the macro to a little bit more micro, Bob, lost potentially in all of this is the fact that after September, we've got Q4 and the consumer is very important during Q4 and not just the high end consumer. We've seen some credit stress, inflation stress on the middle class, working class consumer. What kind of signal do you think the market, which is still expensive, is going to need to see during the fourth quarter to feel like everything's OK? Well, I think the key challenge on the equity side of things is just how strong the expectations are for earnings growth over the course of the next 15 to 18 months. They're really expecting something like, you know, low to mid double digit earnings growth. And the only way you're going to get there is either through pretty good top line or, you know, pretty significant margin expansion up back to highs. And so the question for I think a lot of folks that are looking at the stock market is how do we get those sorts of relatively elevated expectations to get realized? You're going to see a lot of strong demand in the economy. And so far, when we look at what's going on, demand is OK. It's not meaningfully slowing or creating anything that's close to a recession. But we're a long way away from the type of boom that's being priced into stocks right now. I can't help but wonder if we end up seeing a lot of buying this holiday season without a lot of discounting and then you don't end up with with those things that you talked about. Let's get to commodities, Warren. Yeah, you can give us an update maybe on your energy views. Yeah, just to give everybody have like where we come from, what do we see happening in the year entering the year, you know, we we thought oil would top out around 90 bucks a barrel towards the end of Q1. And then we thought it would kind of get into a steady slide down in bottom out towards the very end of the year. And that has really played out exactly how we would have expected a few little pickups along the way from geopolitics. And so I do think the lows are in front of us for oil. And so that's kind of a negative view, I'd say. But right now, at this moment, before the election, positioning is so pessimistic. We've gone from optimism off the charts in the spring to nobody wants to touch this the commodity or even the equities at this point in time. And so I do expect a mild bounce between here and the election. But post-election, you have a bunch of stuff that starts to happen and work against you from a long oil position. So you have Mexico starts hedging all their production. This creates a seasonal tendency for oil to sell off already. And then you have OPEC. They're bringing these barrels back, 200,000 barrels a day increase every month through the rest of next year. And I know that all the bulls are going to say they can call that off. Once we get beyond the election, their motivation to keep prices high goes away and they'll switch to a market share strategy. That's what I think. And underneath all of this is really lackluster demand out of China. You look at China, the economy is weak in China. You've seen bond yields, long bond yields in China now below Japanese long bond yields. And you're seeing EV adoption really increase rapidly over there. So more than 50 percent of new car sales in the month of August for EVs in China. And so this is just going to weigh on demand. At the same time, OPEC is reintroducing a huge wave of supply. And so I think you get a short term balance, but you don't get married to it here. With all these demand questions and uncertainty, that's been pretty good for gold. Well, you know, gold's the best performing asset this year, a major asset this year. And particularly as we've been through this period where a lot of easing has been priced in, you'd think, you know, that would really favor bonds and it has to some extent. But the biggest winner from this shift to easing expectations has been the gold market. I think what it suggests is that maybe not U.S. investors who are bidding those bonds, but global investors are starting to raise questions about whether an aggressive Fed easing strategy is really appropriate monetary policy, given the overall set of economic conditions that they're seeing.