Daybreak Holiday: Stock Market Records, Fed Independence, The Future of DEI

0:00Hello, I'm Stephen Carroll. I'm in Brussels where many of Europe's biggest decisions get made. And I'm Caroline Hepker in London with the hosts of the Bloomberg Daybreak Europe podcast. We're up early every weekday keeping an eye on what's happening across Europe and around the world. We do it early so the news is fresh, not recycled and so you know what actually matters as the day gets going. From Brussels, I'm following the politics, policy and the people shaping the European Union right now. And from London, I'm looking at what all that means for markets, money and the wider economy. We've got reporters across Europe and around the globe feeding in as stories break So whether it's geopolitics, energy, tech or markets you're hearing it while it happens It's smart, calm and to the point And it fits into your morning You can find new episodes of the Bloomberg Daybreak Europe podcast by 7am in Dublin or 8am in Brussels, Berlin and Paris On Apple, Spotify, YouTube or wherever you get your podcasts

1:01Thanks for joining us on this special edition of Bloomberg Daybreak. U.S. markets are closed for the Martin Luther King Day holiday. I'm Nathan Hager, and coming up this hour on this day, honoring Dr. King, we'll look at the current state of diversity, equity, and inclusion initiatives, where DEI stands in corporate America today. Plus, we'll preview the Fed's first rate policy decision of the year with the central bank and chair Jay Powell under investigation. But we begin with the markets. Stocks are coming off three straight years of double-digit gains. Could this one be the fourth? Joining us now are Cameron Dawson, Chief Investment Officer at New Edge Wealth and RBC Capital Markets Head of U.S.

1:39Equity Strategy, Lori Calvacina. It is great to have both of you with us on this holiday. And I think a lot of analysts were expecting that this year would get off to a choppy start. But Cam, were you expecting this kind of chop? Well, it certainly has been a deluge of news, especially coming out of Washington, which we do expect to continue through the year. We thought that analysts were rather rosy in thinking that Washington policy would be just a tailwind over the course of 2026. But we do see it as a source of volatility. And I think that the reason for that is that we're coming into this year with high valuations, 22 times forward.

2:18We came into this year with also high earnings expectations, 15 % growth,$310 a share. It's not that these things aren't achievable, but it's just that it creates a very high bar for returns. And lest we forget, this is a fourth year potentially of a bull market, which tends to have a 50-50 hit rate as to whether or not it can continue. And it's a midterm election year, which tends to carry more volatility and lower returns than the other years in the election cycle. So it's not to say that good things can't happen, but it could be choppy along the way. Lori, we'll bring you into this conversation now.

2:53There had been a lot of talk at the end of last year about policy affecting the market, but I think maybe we were thinking about fiscal policy and monetary policy. Now we've got geopolitical risk and pressure on the Fed as well. How does that affect your focus right now? Sure. So, you know, I would say generally we agree with Cam, right? We have a 13 % target on the S &P 500 this year, but we very much said we expected a 5 % to 10 % drawdown within the context of that. That's a garden variety tier one type pulldown. But you're dead right on the policy issue, Nathan. I mean, when I was seeing clients in December, I was getting an earful about stimulus past, present, and future.

3:33And in the past, you know, that was the one big, beautiful bill, tax refunds coming in April, and then perhaps getting some additional stimulus for the consumer because of midterm dynamics and kind of the affordability issues that had had an impact on the November results. And I don't think that anyone really had it on their bingo card to get hit over the head with geopolitical risk to start the year. We did actually flag, in terms of some of the risks, headwinds that we were monitoring this year, the impulse towards geographic diversification. And just pointed out that last year the doors did seem to open to that, where investors were more willing to look outside the U.S., were having trouble focusing on other specific geographies.

4:14And did, you know, kind of the move we saw out of the U.S. into Europe proved pretty fleeting. And, you know, when we've sort of looked at some of the issues that we've had to start the year, in terms of geopolitics, Fed independence, we have pointed out that that sort of may end up raising the risk for that geographical diversification. We'll have to wait and see, but that's kind of how it's played into our thinking so far this year. It is interesting, isn't it, that just these last few days of events or a couple of weeks of events have led to this new debate about whether the Sell America trade is back.

4:46How are you thinking about that right now, Cameron? Well, certainly Buy America was such a consensus trade at the beginning of 2025. And you could see that in dollar positioning, people were max long the dollar. And so now there's this notion of sell America and expecting a weaker dollar in 2026. That's actually one of the most consensus trades that we can see. But what's fascinating is that dollar positioning is starting the year already negative. It's not quite at extreme negative levels. But just to say that consensus is already reflected in the positioning. So as we learned in 2025 to be surprised when everybody's on the same side of the boat.

5:23We should probably have that same notion in 2026. And I'd say that that sell America has also come with this notion of a global reacceleration. People are pointing to really strong performance out of some of the commodities, out of some of the more cyclical sectors of the global equity market, expecting a reacceleration. The challenge is you're not quite seeing it in the data yet, but always do remember that price does lead data. It's an interesting dynamic when you think about the potential for further dollar weakness. That could possibly be a tailwind for stocks. It's kind of been that way in the past, hasn't it, Lori?

6:01You know, it's interesting. Whenever these issues come up on currency in particular, we always sort of use the phrase complex dynamics for equities. And I think that's exactly right. I mean, sometimes these issues that can push the dollar down seem risk off, you know, and our risk off, you know, and kind of U.S. negative. But at the same time, what we see from an earnings perspective is that the rate of upward revisions tends to rise when you see the dollar weaken year over year. And you see it, you know, the impact hits different sectors differently. So you don't see as much of an impact on, say, financials and utilities.

6:33But you do on things, say, like industrials, materials, consumer staples. Even the tech companies have a fair amount of international revenue exposure, though they don't usually call it out quite as much. So it's always tricky when these issues come up that, yes, there are negatives, but there are also some positives as well. We're speaking with Lori Calvacina, head of U.S. equity strategy at RBC Capital Markets, along with Cameron Dawson, chief investment officer at New Edge Wealth. Cameron, given all these dynamics, how are you thinking about sector plays right now and the debate around the artificial intelligence trade as well.

7:11It's been such a dominant theme over the last couple of years in the market. How are you thinking about that right now? I think it's really interesting and maybe even peculiar that some of those weaker parts of the market are the parts that you would expect to be the strongest in a period when we are seeing a secular change in technology. If you look at the overall technology sector, it has been trading heavier, despite the fact that its earnings estimates are still going up. And a lot of that weakness is coming down into the software line of things. Meaning if you look at the big software weights like a Microsoft and a Palantir, they both have been trading heavy.

7:48And what's fascinating is that it's all multiple compression. Earnings estimates, in fact, are still going up. So the fact that we are still in this technology renaissance and yet the names that are supposed to be benefiting from it most are not participating to the same degree in this rally does cause us to raise a bit of an eyebrow. But what we would say is that if you see enough multiple compression, enough derating in these areas, they start to look a lot more attractive given the resilient earnings picture. What kind of opportunities are you looking at, Lori, in terms of the rotation trade and whether any of these risks that we've been talking about affect the idea of investors looking past tech into some of the less loved sectors in the market?

8:31So the one thing we saw in our December meetings, Nathan, that I think has really carried over into January is that when it comes to sectors, people's eyes absolutely light up when I get to the page in my deck that shows what's cheap or at least what's reasonably valued. And if you look at that page right now, what you're going to see is industrials, utilities and technology are three of the four expensive sectors in the market right now. And they were sort of on the first wave of the AI trade, right? The build out, the foundation of that trade. And when you look at sectors like financials, health care materials, those are three of our overweights.

9:04You've got very reasonable valuations there. Not cheap, you know, on certain metrics, but looking very, very reasonable. And investors also have really, you know, wanted to explore things like consumer staples, which look a bit cheaper. Com services we just upgraded, which has looked much cheaper on our metrics. And I would say as we talk about some of those sectors, you know, health care is probably a good example where earnings revisions have been strong. Revenue revisions have been strong. Again, the valuations look good. Flows look good. But often the conversation will turn to AI. And, you know, clients will bring up the idea, is this a sector that can see benefits from AI in the coming year?

9:41And I think, you know, that is something that is a question, you know, that people have on their minds as they're looking maybe not to abandon the AI trade, right, but maybe just to take it to its next iteration. And Cameron, how are you looking at some of those sectors outside of big tech, given the economic backdrop and the idea of something of a K-shaped economic growth picture? Yeah, one of the key ratios that we watch is the ratio between equal weight consumer discretionary versus consumer staples. We see this as the equity market's determination as to whether or not the consumer should deserve the benefit of the doubt to the upside.

10:18And despite all of the things that we have thrown at the consumer, what we've seen is that ratio has continue to remain in an uptrend, which has coincided with an uptrend in expectations for household consumptions or upward revisions for GDP and household consumption. That's important because when we think about the K-shaped economy, it's very much like a market-weighted index, meaning that the largest weights in the index or in the economy are also the strongest. So they make the aggregate data look a lot better. It's the lower weights, smaller weights in the index that are much weaker, same with being in the overall consumer, that is not affecting the aggregate data.

10:56But it's also why sentiment surveys are so weak, because they effectively equal weight every vote. So it's a fascinating kind of complex where we're seeing this still consumer data remain resilient, but consumers on the equal weight basis are still feeling very poor about the economy. And Laura, you mentioned that a lot of the clients that you've been speaking to are looking for more fairly valued pockets of the market. Are you finding any opportunities in mid-cap to small-cap stocks? So it's a great question, and small caps are taking up a fair amount of the conversation. I think every strategist in the world is out there making a bullish case on small cap right now.

11:34And I'm a former small-cap strategist, so I'd say my sort of criticism of the discussion that's going on is not that I necessarily think people are completely wrong on their bottom line, but maybe getting a little bit over their skis, you know, and maybe oversimplifying what's going on. So if you look at small cap, one of the things we actually called out in our latest weekly on valuations is that we're trading at an 18 and a half times next 12 months PE. Now, that's not a terrible PE by any stretch. It is a bit above average, not as much above average as, say, the large cap indices or the mega cap names.

12:05But the last peak we had in this index was late in 2024 at about 19.1. So there's some room, but not a lot of room, right, before we go back and test those past peaks. Similarly, if you look at CFTC positioning on small caps in terms of just futures exposure, it's a good gauge of kind of positioning and sentiment. That's no longer net short the way it was, you know, several months back. So we think things are getting a bit harder to justify in here on small caps. And of course, we've sort of seen a series of rate cut catalysts propel this space upward, you know, outperforming large, but those trades fizzle out very fast.

12:39And our team at least is not looking for any more cuts this year. So we think that's largely behind us. So what does that leave you with? It leaves you with the economy. And there's a lot of cyclical excitement that's building, but consensus GDP forecasts for 4Q are still only at around 2.1%. And that's really not even back to average. We also generally need to see ISM manufacturing rising, NFP data on a monthly betas, the jobs number accelerating. We're not getting either of those things right now. I do like the earnings dynamics in small caps. We've got some cool things going on in the rate of upward revisions, you know, inching to new highs, forecasted growth rates are better.

13:15But at the end of the day, we need the cyclical excitement to really come through in a much bigger way than what we're seeing in either kind of the GDP numbers or some of those more tactical indicators right now. So we're definitely more interested in this space, but we do think people need to calm down a little bit and take it, you know, a little bit more day by day. Our thanks to Lori Calvacina, head of U.S. equity strategy at RBC Capital Markets, and Cameron Dawson, chief investment officer at New Edge Wealth. Up next, we'll look ahead to the first Fed rate decision of the year and the controversy swirling around Fed independence.

13:46It's 20 minutes past the hour. I'm Nathan Hager, and this is Bloomberg.

13:59Hello, I'm Michelle Hussain. And for more than 20 years, I was at the BBC. But all the time I was delivering the headlines, I wanted to go further than the news of the day, to spend more time with the people shaping our world. And that's what I'm doing here on this podcast. Speaking to people from Nigel Farage, Russia needs to be taught a lesson, to tech journalist Kara Swisher. And the tech industry is running wild. You know, they've gotten what they wanted and they've seen a huge run up in their stock prices. This will be a place where every weekend you can count on one essential conversation to help make sense of the world.

14:43So please join me, listen and subscribe to The Michelle Hussain Show from Bloomberg Weekend, wherever you get your podcasts. You certainly ask interesting questions.

14:58Welcome back to this special edition of Bloomberg Daybreak. U.S. markets are closed for the Martin Luther King holiday. I'm Nathan Hager, and we want to turn now to the Fed. Lost in the recent controversy over the investigation into the central bank and Chair Jay Powell is monetary policy. We've got the first Fed rate decision of the year coming up next week. Ahead of that, we're joined by the man who will be in the room for the first Powell news conference of the year. Michael McKee is with us, Bloomberg's international economics and policy correspondent, along with Anna Wong, chief U.S. economist for Bloomberg Economics.

15:31Thanks to both of you for being with us. Of course, we've heard from Chairman Powell in just the last few days talking about the probe. Here's what he had to say. I have served at the Federal Reserve under four administrations, Republicans and Democrats alike. In every case, I have carried out my duties without political fear or favor, focused solely on our mandate of price stability and maximum employment. Public service sometimes requires standing firm in the face of threats. I will continue to do the job the Senate confirmed me to do with integrity and a commitment to serving the American people.

16:08Certainly not mincing words there, of course. Dr. Wang, what are the implications of this investigation for the decision coming up next week? So, you know, Powell has always been the center in the committee or even last year a little bit more dovish than the center and always been the one who, you know, pushed back against the hawkish faction that we have seen in the last year. And now we have seen in this video response a version of the Powell that is a bit different from what we have seen. He is not as cool as a cucumber. I think he has finally had enough of all these antics from the White House.

16:54And I think he would be less of a champion of rate cuts than otherwise, even if, you know, marginally. So if the data, even if the data suggests that they should be cut, just because I think he's now more worried about the optics of co-opting to the administration. It's an interesting way to frame it that we could see a Fed that may be swayed a little bit more by the politics than the data itself. Mike, would you go that far? I don't know if I would go quite that far. It's impossible to separate yourself from the headlines, of course. But for Fed officials, this is a worrying situation because of the criminal investigation.

17:38Last week, John Williams of the New York Fed was telling us that he thinks this is a kind of order of magnitude more threat from the administration. And he, of course, had praise for Powell as a man of impeccable integrity. I do think that in this case, we're reasonably free from suspicion on January 28th because the numbers are saying don't cut with the PPI inflation that we got last week up high and retail sales still strong. So there's a reason why you wouldn't cut that people wouldn't say, oh, this is political. If they were to cut, then you might think there was somebody trying to bow in their direction.

18:22But I think the market's got it priced about right. Now, it's not just John Williams who's been talking about this investigation. We've heard it from a number of head speakers who are going so far as to say they see this probe from the Justice Department as coercion on them. Given that, Anna, what is the balancing act for the Fed to show that its policy decisions are still driven by the data and not any other outside influences? Well, I think it will be a tough one because, first, the inflation data that we have seen in the last two months, well, the data has been very soft. Nonetheless, there are a lot of controversy over those inflation figures.

19:04In November, many people thought, well, it's just a shutdown. It's a fluke. In the CPI figures we got a couple weeks ago for December, it was, again, soft to the surprise of many longtime inflation watchers who really crunched numbers. And we did it as well in our team, and that surprised us as well. So I think there's a real signal in the data about softness in CPI. And then we have upcoming jobs data where we are expecting to see pretty weak non-farm payrolls as well. So I think the difficulty for the Fed is when you have the two key data points, CPI and also jobs, coming very soft while all the other data are moving other way.

19:58So you have a pretty difficult picture there already. But how do you convince the public that that's what you are really making policy based on data when you have soft data like that? I think they are in a very difficult situation. Mike, are you seeing any evidence in the markets that this pressure on the Fed is affecting pricing within the market for rate cuts? No, we really haven't seen that. We saw an immediate reaction after the Powell video that came out last week, and then it faded by the end of the day. It seems to be something of a taco trade. The old Trump always chickens out. The feeling is, I think, in the markets that whatever the president's threat level, he won't follow through with it, and that this whole event will sort of fade and there won't be any charges or anything like that, which may be the case.

20:53But there's a feeling that until there's evidence to the contrary that the administration is following through, that it probably won't happen. And so it seems like there's a tanguinity in the markets at the moment towards this, even if there's not at the Fed. We're speaking with Mike McKee, international economics and policy correspondent for Bloomberg Radio and Television, and Anna Wong, chief U.S. economist for Bloomberg Economics. Anna, what's your view on the seriousness of this investigation? As Mike puts it, it could be seen in the bond market as a taco trade. Is that how you're viewing it as well, or how do you view it?

21:39I think as the days go by, it gets more and more confusing for the market, and partly to the credit of many of the journalists covering the Fed, including a lot of great work of reporting done by Bloomberg journalists. So in the Trumponomics podcast a couple of weeks ago, Saleha Motion, our senior White House correspondent, was talking about how this DOJ probe occurred when Besant was out of town. Similarly, the Lisa Cook firing also happened, or the charge against Lisa Cook also happened while Scott Bessent was out of town. And there was just more stories are coming out that this DOJ probe seems to be started at the bottom.

22:30And then there's a lot of miscommunication. It's not, it doesn't seem as coordinated. Nonetheless, the problem is that this DOJ probe has happened. And similar to the Lisa Cook incident, once it happened, you can't really take it back and the damage is done. And make no mistake, the damage is massive. And I see very few paths for the administration to off-ramp from this mess. Interesting. To that point, we've seen reports, Mike, that Treasury Secretary Scott Besson, ostensibly when he got back into town, told President Trump that this investigation could make a mess of markets. Given where that potentially stands, what does that mean when it comes to the question of Fed independence?

23:20How much of a threat is Fed independence under from an investigation like this? Well, I think folks at the Fed believe the danger has ramped up with this because it is a potential of putting somebody in jail as opposed to just criticizing them. But the overall feeling is that there's nothing there. I don't think anybody at the Fed is particularly concerned that they would go to jail. And there's not really a feeling that there's a danger of an indictment. And if there is an indictment, I suspect that would set the markets off because then you get into the real danger of what could happen to the chairman of the Fed in court.

24:01So we'd need to see some follow through. Now, the interesting thing that happened, and if you've been around Washington for a a long time, Nathan, is we had a statement from Janine Pirro, the U.S. attorney who sent out the subpoenas, and normally they don't comment at all. And in this case, she was careful to say there was no indictment. This is just a request for documents. And so I suspect that maybe she got a call from Scott Pessant, and they may just let this lie. I don't know if the Fed is going to comply and send in any documents, but they may just back off and then we don't hear any more about it.

24:41And with all the chaos around the Trump administration, it'll probably be forgotten. We'll bring it up. It'll be in our stories about 12 paragraphs down every time there's a Fed meeting, but it won't be front and center news. I wanted to ask you whether you're going to bring it up when you're in the room for the news conference later on this month. I'm going to bet you that's going to be very close. Unless there's a surprise in the decision, it'll probably be the first question. Yeah. Anna, do you think that the Trump administration backs off this investigation, given that we have seen so many different pressure points on the Fed almost since President Trump returned to office?

25:21I still think that it will be pretty hard for them to completely say, okay, forget it, folks, we are withdrawing this DOJ inquiry. They didn't do that for the Lisa Cook case, even though clearly it set off something. I think they are watching the market right now, and that given that the market has not really reacted much to it, it sort of emboldened the president to keep on with it. So I think it depends on the market reaction going in the next few days, few weeks. So Mike, what are you going to be watching for next? Obviously, we've got a Fed decision next week, but I wonder how much pressure is going to be on the Fed and the potential next chair that President Trump still has to announce.