Introduces David Zervos, Chief Market Strategist at Jefferies, and asks for his market outlook given high starting valuations.
Sarah
David Zervos
Rates have come down substantially. If you believe rates continue down, P/E multiples can rise. The neutral rate is being debated and will continue to lower toward pre-COVID levels (closer to 2% than 3%), which is great news for stocks.
Asks if rates will continue down more than the market expects, noting current pricing of two cuts.
Sarah
David Zervos
Yes. The market and Fed overestimated neutral since COVID. Their calculation was incorrect due to the balance sheet. Now the balance sheet is back to neutral, rates will return to pre-COVID neutral levels.
David Zervos
The iteration process of rates coming down is still ongoing. We will have a more dovish Fed, new Fed Chair, and new Governors who will be more inclined to focus on supply side and lower neutral rate structures.
Clarifies that the key thesis is lower Fed rates and lower market rates, questioning what happens at the long end of the curve even if the Fed cuts.
Sarah
David Zervos
The long end is under control by the Treasury, which has tools (issuance, buybacks) to manage it. Inflation expectations and data are coming down. Monetary policy is still restrictive, keeping a lid on inflation and interest-rate sensitive sectors.