Key Wealth Matters Podcasts

S1: 00:01

Welcome to the Key Wealth Matters weekly podcast, where we casually ramble on about important topics, including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to open doors in the world of investing. Today is Friday, April 11th, 2025. I'm Brian Pietrangelo, and welcome to the podcast. We certainly have had a very volatile week and newsworthy week in terms of the markets and the news on tariffs. And we will get to that, certainly, with our panel today. A lot to talk about. But first, it's been a great week in terms of other things like sports. So, congratulations to the women's UConn basketball team for winning the national championship. And the same to the Florida men's basketball team for winning their national championship. It caps off a great March Madness in 2025, and now we roll into the next part of this week, which is my favorite time of the year as well, which is the Masters Golf Tournament in Augusta, Georgia. For those of us in the north of the United States, it is a nice reprieve to see beautiful blue skies, sun shining, the green grass, and certainly the wonderful Azalea flowers. It also reminds me of the calming voice of the famous Jim Nantz as he continues to provide outstanding commentary for the Masters year in and year out. What a great story from Jim in terms of his history. We talked about it last year in the podcast. With that, I would like to introduce our panel of investing experts. Some might say they could wear green jackets as well. Here to share their insights on this week's market activity and more, Steve Haight, head of equities, and Rajeev Sharma, head of fixed income. As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our Wealth Institute on many different subjects, and especially our Key Questions article series addressing a relevant topic for investors. In addition, if you have any questions or need more information, please reach out to your financial advisor. At this time, before we go into the market update for the week, I would like to pause and talk about some exciting news. And that news is tomorrow, KeyBank turns 200 years old. Our roots trace back to April 12th, 1825, when the Commercial Bank of Albany was chartered, and our origin began decades before electricity lit the night in 1882, before the automobile ruled the roadways in 1885, and before the telephone carried our voices across the continent in 1876. On behalf of our Chief Executive Officer, CEO, Chris Gorman, as well as all of our KeyBank colleagues, we consider it a great honor to be part of this special chapter in our company's long and storied history. Just as generations of KeyBank's teammates have done before us, we will continue to serve our clients and our communities through good markets and challenging markets today and for the next 200 years. And to all of our clients over many of these years, investment banking, commercial banking, business banking, consumer banking, and certainly here in the wealth business, thank you for all of your business, your trust, and your relationship with us. Well, in terms of challenging markets over 200 years, we certainly had one this week, which might have capped off one of the biggest in terms of challenges and in volatility. So we will certainly talk to our panel today about what's happening with tariffs, what's happening with the up and down markets starting last week and, certainly, continuing into this week. So the front page news was the tariff information and the stock market. But the back page news was some of the underlying economic data, so we've got three updates for you this morning, starting with the overall inflation read from the Consumer Price Index as it was released yesterday on Thursday. The report was actually favorable where the month-over-month read on Consumer Price Index was down 0.1 percent, which was actually the first time there was a month-over-month decline in inflation, going all the way back to May of 2020. Now, the core, excluding food and energy, was up 0.1%, which was still fairly mild, and a good read compared to some of the previous 3 to 5 months that we've had where that month continued to go up. So seeing it come down in terms of overall inflation by 0.1% and the core just go up 0.1% was somewhat of a relief. Now, all of this is before any tariff implementation, but nonetheless, we'll take good news when we can get it. Also, just this morning, PPI or the producer price index seemed to be favorable on the decline on a month-over-month basis as well, so we'll take those two together again for the week being good. And second, earlier in the week, the unemployment claims for the initial read came out at 223,000 for the week ending April 5th, which is good from the standpoint that it has remained stable in spite of uncertainty, and we have not seen a tick up yet in terms of unemployment. So that will take an opportunity to be stability in the job market as one of the good reads as well. And third, the meeting minutes from the Federal Open Market Committee meeting back on March 19th were released, so we'll get Rajeev's take on some of that to see if there's any new information there or whether it's consistent with what we saw back last month. So Steve, let's start with you giving us a recap on what the tariff news was this week, what the market reaction to that was, and what your outlook is in terms of where you see the markets going in terms of choppiness and/or stability and/or opportunity. Steve?

S2: 05:42

Well, Brian, it was one of those weeks where it feels like we've had years of price action and market news in the span of five days. Quite the week. Let's talk a little bit about the tariff news first. So we came into the week with the market coming in and adjusting to this idea of not only a baseline 10% tariff on all imports in the United States, essentially a tax in order to access the US market for foreign firms, and adjusting to this idea of reciprocal tariffs, which were much more-- Wednesday afternoon, we got a situation where things went, quote-unquote, to "less bad from bad" in terms of the-- the reciprocal tariffs were paused for 90 days on countries that didn't retaliate, so namely everybody but China, and the 10% tariff to access US markets universal across the board was left in place. So the market had a really huge reaction to the removal or the 90-day pause on the reciprocal tariffs. And largely, if you go kind of under the hood, it was really a-- the market was super negative on the economic impacts of the tariffs post, quote-unquote, "Liberation Day" on April 2nd, and the market got really short. So when this news hit the tape, you had one of the most violent reversals I've ever seen in the markets, with the market going up about 7% in the span of less than 20 minutes. The buying was concentrated largely in tech stocks and in the names that had been the most heavily shorted. So it wasn't really surprising to us to see that kind of come off the boil yesterday because we did have a fairly significant reversal. The volatility that we've seen this week, it's not unprecedented. The precedents are the global financial crisis and the COVID-19 onset. So it's like we've had these kind of volatility explosions before. What I would tell you is we're starting to get to the point where investors should be thinking about what can go right from here instead of what can go wrong from a market's perspective. Obviously, there's been a massive amount of damage done to trend, okay? And that's really important. It's going to take a while to repair. But when you look out 12 months into the future, when you get these volatility explosions and you get things like [Brett?] being super one-sided to the downside, where you've got over 80% of stocks trading at one month lows, all kinds of other indicators like that. What you end up with is, if you put capital to work in that kind of a market maelstrom, historically you've been rewarded on a longer-term basis. You've not necessarily been rewarded on a three-month or six-month basis. It's that 12 month number, right? Because literally, when you get into these situations, the volatility can persist for a month or two. We've seen it historically that way.

S2: 09:31

And anything can happen on a daily, weekly, monthly basis as this kind of storm unfolds in the market. So I kind of think our message to our clients has been stick to your plans-- stick to your financial plan and try to be optimistic here and look 12 months down the road when you're thinking about what's going on in the markets. And I know it's really hard when there's this chaos going on to do that. But I tell my team all the time that oftentimes the hardest thing to do is the right thing to do, and that's kind of where we're at right now.

S1: 10:18

Steve, so let's put some things into perspective. About, I don't know, a month ago in March, we had a 10% decline from the peak to the present at that time. Then we had the Liberation Day, April 2nd announcements, and two consecutive, almost three consecutive days of significant declines. Then we had the 90-day pause on Wednesday of this week, and the market shot up like 12%. Like you said, Steve, it was up like 7% in 20 minutes, but up 12% for the end of the day. And then we had the reversal again, somewhat of a sell off yesterday. So you add all that up mathematically, and at the end of yesterday's close, I think the S&P 500 was down 10% for the year. So we talk about this concept in behavioral finance, which the really the gurus of this study of human behavior go back to Amos Tversky, go back to Danny Kahneman and Richard Thaler. And they talk about this thing called prospect theory and loss aversion, which is the human brain and the human dynamic are more concerned about downside losses on a two to one ratio than they are concerned about upside potential. But Steve, when you talked about the VIX and the volatility getting roughly three standard deviations in terms of that, the future outlook has been actually favorable. Could you remind our investors and our listeners of that concept?

S2: 11:39

Yeah, so when you take a look at the volatility index that we watch, and that's published by the Cboe, the Chicago Board Options Exchange. Essentially, the long run average for the volatility index is 19 and a half. When you look historically, anytime you've gotten two standard deviations away from 19 and a half, which right now is in the mid-30s. When you put capital to work in those volatility explosions, the 12-month returns are very [inaudible] possibly. Now, the thing is, the VIX doesn't jump typically when the market goes up, it jumps when the market goes down through these kind of crisis periods. So it's a very clear sign the market's in crisis, and it is a very clear sign of large amounts of fear in the market. And so what we do is-- it's a quantitative way to kind of try to take the emotion out of understanding that this is a good time to be putting money to work. And when we see that extend above two standard deviations-- and quite honestly, last week, Brian, we got above four standard deviations. [inaudible] it got above 50 a couple different days and actually closed there for the first time in multiple years.

S2: 13:10

That is one of those signals that we look at that says that we should be thinking here about what can go right and how do you put capital to work in this situation. And again, it's very hard to do. We acknowledge that. And I know that there's a lot of emotion involved, but this is why we look at these kind of indicators to try to take the emotion out of the process. And it makes you say, "Look, historically, this works." And I think that's part of the reason why I like to come back to have the technical hat on, because these are the kind of things that you study, you look at, you understand. You've got an asymmetrically skewed positive return scenario set up from these volatility levels, and it's a good time to step in, even though it's hard to do.

S1: 14:07

Great way to summarize it, Steve. Thank you. In terms of volatility, we often see it but in this case, we're seeing both volatility in the stock market and in the bond market. Rajiv, why don't you give us some thoughts on what you're seeing and what the reaction should be from investors?

S3: 14:20

Well, Brian, the bond market's been focused on several different aspects during all of this, and credit spread and treasury movements are two big ones, both of which have been outsized moved over the past week or so. I mean, credit spreads have not been spared from the risk-off sentiment that we're seeing in the markets. There's been somewhat of a recalibration of credit risk in the market, and we've moved past the widest levels of the year. And these moves have been particularly pronounced for the high-yield market. So credit spreads are the difference in yield between two securities at similar maturities. So if we look at it that way, the spreads between triple-B and double-B-rated bonds, we can get an indication of both investment grade and high yield. And that spread differential has reached about 150 basis points, levels that we haven't seen since 2023.

S3: 15:05

So if I look at my bond screens, I wouldn't say that this is market panic for investment grade. It's been more of a market repricing from levels that were at their 20-year tights. For instance, when we were at credit spreads of 92 basis points over US Treasuries right before the tariff announcements on Liberation Day, we are now at 114 basis points over US Treasuries. So still, we're well inside crisis levels that we saw during the pandemic or during the GFC but still, I mean, these kind of moves-- I guess everybody a little bit on edge considering we've been creating really range bound investment grade for quite some time. Spreads have been so well-behaved that there was a level, I think, in my opinion of complacency that set in. So some kind of movement that we saw actually got the attention of many investors.

S3: 15:51

Now, with the announcement of reciprocal tariffs, the immediate reaction was felt on the yield curve as well, and rates started plunging 21 to 28 basis points across the Treasury curve because the tariffs were higher than were expected at that time. Now we're starting to see them. We thought there'd be some kind of relief when we got the 90 day pause this week, but yields have still remained elevated for the last few days and treasuries are selling off. Yields continue to move higher, more likely higher in the longer end. We did have some treasury auctions this week. So sort of new supply came to market. Many investors did not take part in the treasury auctions. So we have seen a lot of investors decide that they want to sell their longer treasury exposures and go to shorter exposures, especially with the volatility. I mean, if you look at the 10 year and the 30 year, you're looking at two parts of the yield curve that really point towards the economy. So any type of slowdown in the economy is going to cause some of this fear in the market and you're going to really want to stay in the front end. So that's a big factor. So we've seen a lot of things about treasury supply. We've seen investors start to move out of the long end, go into the front end. This is going to be a very interesting situation for the Fed as well. The Fed is looking at these numbers as well. They're not oblivious to what's happening in the market. If you saw the recent Fed minutes that came out in March, these minutes may seem obsolete to many of us right now because that was all the way back in March. But if the narrative continues at that time, the Fed was saying we're going to have a wait and see approach. The narrative continues that way this time as well. The Fed is continuing to stick with that narrative that we're not going to be pushed into cutting rates aggressively right now. And the market is anticipating for rate cuts by the end of the year. So that dislocation between the Fed and the market expectations is going to continue to cause volatility in the market. Every piece of data, obviously, will be scrutinized by the Fed. But until the Fed starts to really start coming out there with a narrative that they want to, they want to really start to look at what the impact of these tariffs will be on inflation. And if they feel that they're going to be an impact that's going to be more sustained, that's going to put the Fed in a corner. So the Fed, the last thing the Fed really wants to have is stagflation. And I think they will not be able to deal with that very effectively or very easily. So we have all these different considerations in the market right now. Everybody's talked about the Fed put. Is that still alive and well? If liquidity starts to really crunch up in the market, everybody feels that the Fed would step to the occasion and provide tools even beyond rate cuts. Maybe credit facilities, maybe keep the market moving that way. They have things at their disposal, different facilities they can use. We're not at that situation yet. I don't feel liquidity has dried up yet in the markets, but it's something we're going to keep an eye on.

S1: 18:36

So Rajeev, that's great. Let's do a timestamp here. So we're on the earlier part this week, April 9th, was the tariff 90-day pause announcement. So if you go 90 days from there, you've got April 9th, May 9th, June 9th, July 9th. In between that period, we've got two Fed meetings scheduled, one for May 7th, I believe, and one for June. So the Fed's kind of got to be on pause too, to some degree. No pun intended, but pun intended relative to their pause on interest rates, plus the pause on the tariffs. What are your thoughts in recognizing?

S3: 19:08

It's a very good point. I think right before we got the 90 day pause, many investors were feeling that the June FOMC meeting would be the first rate cut that we would see of 25 basis points. By October, we'd have three. And by the end of the year, we'd have four. So a total of one percentage points of rate cuts for the rest of the year. Now we have the 90 day pause. So I don't see the Fed getting in front of that. I think the odds of June rate cut slim quite a bit, considering we won't have any idea, most likely at that point of where this is going. If we just blankly accept that this is going to be a 90 day pause and we'll revisit this in 90 days, that takes the Fed out of contention for June to do any rate cuts there.

S1: 19:48

Great, Rajeev, thanks so much. And let's close with Steve. Just one final comment in figuring this out from an announcement that we hear sort of hitting the news tape is that we're getting into the earnings season, not only for Q1 reporting, but as companies begin to think about Q2 guidance, they're pulling their guidance because of that uncertainty. You want to talk about that for our listeners?

S2: 20:10

Yeah, I think that it's one of those-- we're in one of those situations where markets and price are going to move much quicker than fundamentals are going to move. So what we've seen is the market move to discount the knowledge that earnings estimates are going to have to come down to incorporate the economic impacts that we're going to see from the tariff announcements. So now as we get into earnings reporting season, we're starting to see the companies actually pull guidance because they don't know what the next six to nine months looks like.

S2: 20:52

In my view, I don't know that there's going to be a huge amount of market impact from that because the market price has already moved to discount the idea that these numbers are going to come down. The question that we're going to have to answer over the intervening three to six-month period is, has the market discounted too much negative impact or not enough negative impact? And that will be to be determined. But I'll tell you, as we go through earning season, I think you're going to find that more companies are going to pull guidance than not. We did have one large bank this morning come out and report and leave guidance intact.

S2: 21:32

I think that surprised some people when Mr. Dimon's firm and JPMorgan did not pull guidance. He said he didn't see any need to and that weakness on the consumer side at this point was, quote-unquote, "anecdotal." So we'll have to wait and see again how other companies choose to play this. I think the more touch you have with the consumer, the more likely you're going to be to pull guidance. And then the same thing on industrials kind of supply chain, anything with supply chain that goes global, I think the more likely you are to pull guidance. Things that are more domestic-focused, I think you're going to see maybe guidance remain in place or very modest guide down. But I think the ones that are going to pull it are going to be the big ones with global supply chains are focused on the consumer.

S1: 22:25

Great, Steve. And one final comment, kudos to you back in November when you wrote your 2025 Outlook. You said the first half was going to be challenging and choppy, but we're going to look to the second half. You want to give a recap of that in 10 seconds? [laughter]

S2: 22:39

I tell you, I wish I'd been more prescient in actually positioning portfolios more aggressively based on that market call. But to your point, I think that we still do see that playbook playing out where we see a down a down first half, up second half. I think that as we go through the next three to four months, we're going to have much more clarity on where things are going to end up. And I don't know where we'll be from in terms of price over that three to six-month window. But as we head into the back end of the year, we still believe that you're going to be through the worst of this and that the market's going to start to look into and see things on the bright side as we head into the back end of the year.

S1: 23:26

Well, certainly thanks for the conversation today. Stephen Rajiv, we appreciate your perspectives as always, and especially in this time of volatility in the market. In addition, thanks to our listeners for joining us today. Be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app. As always, past performance is no guarantee of future results, and we know your financial situation is personal to you. So reach out to your relationship manager, portfolio strategist, or financial advisor for more information, and we'll catch up with you next week to see how the world and the markets have changed. [music] provide those keys to help you navigate your financial journey.

S4: 24:05

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[00:00:02] Brian Pietrangelo: Welcome to the Key Wealth Matters Weekly podcast, where we casually ramble on about important topics, including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to open doors in the world of investing.

Today is Friday, April 4th, 2025. I'm Brian Pietrangelo, and welcome to the podcast. We certainly have a lot to discuss today, so I'll get right into the introduction of our panel of investing experts here to share their insights on this week's market activity and more. George Mateyo, Chief Investment Officer, Steve Hoedt, Head of Equities, and Rajeev Sharma, Head of Fixed Income.

As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our Wealth Institute on many different subjects and especially our Key Questions articles series addressing a relevant topic for investors. In addition, if you have any questions or need more information, please reach out to your financial advisor.

Taking a look at this week's market and economic news, we've got two economic releases for you among multiple, but we're going to focus on only those two so we can get to the bigger topic which was the market volatility of the week.

The ISM Services Report and the ISM manufacturing report were released earlier in the week with manufacturing coming in for March in a contractionary phase, and this has been a continuation for roughly the past two years and almost the past four years that manufacturing has been in a contractionary phase relative to that part of the economy. On the other side of the coin, the services sector continued expansion in March and that marks almost five years or 58 consecutive months of expansion in the services side of the economy. So, good news there balancing out the two areas of the report.

The second major news release from an economic perspective was just this morning at 8:30 from the Bureau of Labor Statistics, which showed the new non-farm payroll report indicated 228,000 new nonfarm pay rolls, which - good news - was above estimates and above expectations. However, the downside was that the numbers for January and February combined were revised downward by 48,000 jobs. So again, a little bit of good news, a bit of bad news, they kind of equal out. But nonetheless, they're forward-looking somewhat. They're also backward-looking, somewhat. So, we'll continue to watch this number in terms of the strength of the overall labor market. But again, for now, given all the other news this week, somewhat positive, or at least neutral.

Now let's turn to the big news of the week was certainly the market decline on Thursday and the significant market volatility in reaction to President Trump's imposition of tariffs on Wednesday evening in his press conference. And the market did not take that well relative to not only the U.S. markets, but the global markets in tandem. So, we will have a significant discussion around that today.

Now, let's turn to George and the team to spark the conversation in terms of understanding the tariffs, what they mean, what are they, and what are the implications going forward to not only the economy, but to the markets.

[00:03:07] George Mateyo: So let's start, Brian, by unpacking a lot of things that happened in the last few days or so. I think we probably need to go back just to Wednesday, which is also known as “Liberation Day.” And on that day, it was announced that some new tariffs were being put forth. And frankly, this really surprised everybody. And I think everybody was just shocked by the magnitude, the extent to which these tariffs were applied, and also the drama that's involved.

So, to kind of unpack that a little bit furthermore, I think to some extent we have to acknowledge that there really were two types of tariffs that were announced over the last few days. One of which is called a baseline or universal tariff of 10%. So, all important goods essentially will be levied to a 10% tax, basically. And those tariffs go into effect tomorrow, Saturday, April 5th.

The other notion or the other component of the tariff policy has to do with these things called individualized reciprocal tariffs. And that's kind of a little nebulous term, but it was kind of born out of the idea that I think the administration wanted to focus on tit for tat or reciprocal tariffs, meaning if we get taxed or tariffed by a certain amount, call it 20%, then we would have the right to essentially tariff another country at 20%. So that's kind of a reciprocal tariff.

And I think what really shocked people is that it really wasn't really reciprocal in the sense that what happened is that the administration took a slightly different approach and they didn't base the reciprocal tariffs on tariffs themselves, but rather they based the tariffs on the overall trade deficit between one country and the next, typically our country and another country. And so there's some issues about the validity of that and the methodology that was used, but I think that was one thing that really kind of caused people some panic and some kind of concern in the sense of these numbers got to be really large pretty quickly.

So, what essentially it means, I guess, overall, is that the overall tariff rate, if these are fully implemented, and that's a big, big caveat if they're fully implemented, you know, I think the overall tariff probably moves up to something above or close to 20 percent, which would be kind of close to a hundred year high. So, we haven't seen tariffs this high in over a century. And that really marks a major historic shift. So, people are now scrambling to try and figure out what this means for the economy. Again, the question is whether these things will be implemented alongside the notion of these reciprocal tariffs and this formula that was applied.

There's a lot of subjectivity in terms of how the administration could kind of walk these tariffs back. They could be renegotiated down. They could be actually escalated even further. So again, there's a whole lot more ambiguity and again, I think the market was coming into this thinking there would be some type of clearing event. I heard this phrase “clearing event” used all the time last week and that really didn’t happen, meaning that we saw... some people think there would be some relief of uncertainty, and I think unfortunately we've got more uncertainty in the sense that these reciprocal tariffs now essentially could be moved back and forth and negotiated and added and subtracted pretty easily, which just fuels more uncertainty.

If we think about brass tacks in terms of what it means for the overall economy, as I said a few minutes ago, people are starting to think about what this means for their models around inflation, their thoughts about GDP growth, and the overall headline numbers, again, are pretty wide. So again, I think there's a wide range of outcomes that could certainly ensue going forward. But what it seems to suggest is that on most economic models, the price level of most goods, and again, there's lot of caveats there, but most goods will probably rise about 1% to 2%.

At the same time, most of these economic models that I've seen in some of the forecasts I've read suggest that growth could contract by one to two percent. So if you add that up, and again, kind of coming into this, we've had inflation hovering around two and a half percent. So if we mark inflation up by 150 basis points, one point five percent, you're staring at inflation closer to four percent. And that's, of course, well above the Fed's comfort level and well above their two percent target.

Conversely, if you mark the growth estimates down by 1% or 2%, coming into this, the economy was in decent shape, I would argue. So the economy was growing 2%, 2.5%. But if you have to subtract another percent and a half or two away from that, then you're staring at something close to 1% or less growth for 2025. And that's where I think now we have to start thinking about this, this actually introduced the notion of stagflation or maybe an outright recession. And the market is trying to grapple with that because the market doesn't know, again, how much uncertainty, how long these tariffs will be implemented. I think that's a really key variable. How long do these tariffs go into effect and will they stay in effect? That's just, again, brought with it a lot of uncertainty. And the markets are really kind of struggling to kind of digest that.

So, I think there's also some broad implications around kind of what the administration's trying to accomplish by these things. I think, there is a broader realignment of trade policy that we haven't seen probably in many, many decades, and I think that's also causing some concern. But at the same time, we are starting to see some of the market anticipate this, maybe try to clear some of uncertainty out. It's going to take some time, but I think what we've seen so far right now is we kind of focused on risk assets and particularly those companies and those stocks that have been probably more economically sensitive, companies that actually have more exposure to the overall global supply chains. And at some point, I do think that this is going to be kind of a moment where there could be some quick reversals. So, there may be some policy forcing mechanisms. Maybe we'll talk about that a little bit. But I think there could some clarity at some point, and that could provide some relief rally when we least expect it. So, I think the idea is to try and stay focused, try and say disciplined, try and keep your head on as much as you can amidst this chaotic moment in time. But let's talk about for a second, Steve, kind of what we've seen so far in the equity market and the reaction there, and what you’re thinking about as relates to earnings and the outlook going forward.

[00:08:39] Stephen Hoedt: Well, George, this morning on Friday, you got total panic finally getting into the market, right? I mean, when you look at what's been going on over the last few days, even yesterday, the selling was mostly orderly. But this morning, we've seen the Cboe Volatility Index spike to over 45 intraday. That's the highest level since the Japanese yen situation last August.

We've got put call ratio spiking to over two this morning, and we've got ten to one breadth negative and 95% volume negative this morning. So we're finally getting to a place where the market might be so bad that it's good in terms of, you know, finally getting the move that we needed to see or the flush that we needed to see out of the market to get capitulation and to get a tradable low put in.

That said, you know when you look at those fundamentals: the fundamentals are going to take quite a while to catch up to where the market is. It's very similar to the COVID situation or, I hate to draw the comparison between this and the global financial crisis, but some of the numbers that we've seen in terms of the moves, the speed of the moves, it is a bit reminiscent of the sea change that we saw back then. So, I think that what we're going to see is we're going to see earnings numbers come down to reflect the reality of that change in growth trajectory that you mentioned earlier. That's a big change to go from 2.5% to 3% growth to go into 0% growth simply because of the tariff situation.

And the fact that you've got the Fed potentially sidelined because of the inflationary impact, I mean, the market is rapidly pricing in the idea that recession probabilities have jumped to maybe 50% or 60% from sub 20%, 10% to 20%, maybe when we came into the year. So, it's been a total sea change in the span of less than three months. And we've seen the market really kind of go to pieces in the last three days.

Again, hard to say that we should be committing money to risk assets today, but we probably are getting close to a place where you're probably going to feel good 12 months down the road from committing capital to the markets, but it's really hard on a day like today to step in on it. But 12 months hence, if you look at the data, when you get these spikes in the VIX above 36, which is two standard deviations on a closing basis, on a 12-month forward basis, you've been very well rewarded from committing capital to markets in these kinds of situations. So it's something to think about. Sometimes the hardest thing to do is the right thing to do and that's kind of where we're at right now.

[00:11:42] George: That's really, uh, important advice, Steve, that I think we just need to underscore that sometimes, as you said, the hard thing to do is the right thing to do, and we'll have to revisit that time and time again, I think probably in the next few weeks, because this is going to be a process. This is not an event, even though it feels like the initial moment was an event, and we've talked before that these things take time. And usually why the event kind of signals this or maybe kind of kicks this off, this does take time for resolution to actually occur.

You also mentioned though a little bit about the Fed being somewhat constrained and we talked briefly I think at the onset about today's payroll report and the job market actually looks pretty solid, at least at this moment, but it's probably the most irrelevant job report we're ever going to see in the sense that the market doesn't really seem to care about it and we're kind of focused probably not on last month's numbers but more focused on what happens next.

And with that being said, I think, Rajeev it's important to kind of get your perspectives on what the Fed might be thinking. They often are focused on inflation, and as I mentioned a few minutes ago, it seems like inflation is poised to move potentially meaningfully higher if these tariffs are sustained again. But how will the Fed process this? What's the market thinking the Fed's going to do? And more importantly, perhaps, what's your outlook also for the overall growth trajectory and how we think about rates going forward?

[00:12:59] Rajeev Sharma: Well, you know, George, I mean, the Fed and Fed Chair Powell have come out and said that, you know, whatever impact from these tariffs will be, quote unquote, transitory, I don't think the market is buying it.

The first thing we've seen is a continued flight to safety post this tariff announcement. The bond market is pricing for multiple rate cuts, along with the rise in inflation. So it's almost like the market is not really thinking about inflation, they're thinking about the growth of the economy, and they're really looking at the Fed to step in and start doing multiple rate cuts. And that's very bad for anyone who's on the sidelines here when they think about what the Fed's going to do. There are many people just about a month ago that thought the Fed is not going to anything this year, and now all of a sudden, you're talking about multiple rate cuts.

The markets are reacting to the U.S. talking itself into a recessionary scenario. Thursday's weak ISM services data did not help. We now have a healthy jobs report, although that was before the impact of tariffs. We now have a 10-year that has now fallen below 4%. And I think literally a few weeks ago, I don't think anybody would have thought that we would have a 10-year that's below 4%. Now if we hit 3.8%, that would be the lowest since we've seen since last October. We have a yield curve that's steepening. We've got 2s, 10s curve around 40 basis points. That's the steepest level we've seen since October 2021.

And other market expectations for Fed rate cuts by the end of the year have jumped to about four rate cuts. We were leaning to three rate cuts by market expectations before the tariff announcement. And traders pretty much expect that the first 25 basis point rate cut will happen at the June FOMC meeting. In fact, the market is now leaning towards four rate cuts by October. So that's a very aggressive move. Many people think that if the Fed steps in, maybe things will get better. But if the market's already anticipating four rate cuts by October, it's being priced in already.

And I think the resiliency of the market has come into question when you look at credit spreads. I've spoken about this over the past several months, that how resilient credit spreads have been in the face of all the noise that we've seen in the market. But investment grade spreads are wider by seven basis points this week. We're on 101 basis points over U.S. Treasuries for investor-grade spreads. High yield looks worse. The risk-off environment is not helping high yield. High yield is wider by 40 basis points on the week.

Spreads on the lowest quality corporate bonds, they spiked the most since the pandemic. And investors right now are thinking default outlooks and the rising risk of an economic slowdown are really starting to weigh on the market right now as far as credit spreads go. But if you look at where we have been in the past, similar situations where growth was coming into question, growth scares were coming into the question, we actually have a lot more room to widen to match some of the equity sell-off that we've seen.

And if you're thinking recession, then we have a lots more room to widen CCC-rated bonds have led the sell-offs, but still nowhere near recessionary levels. Spreads on double B and single B rated debt are the highest since 2023, but there is more widening for the riskiest segments of the market that we could anticipate. So in that environment, we have continued to advocate for high quality liquid exposures in our portfolios.

I also want to point out that credit default swaps, credit default swap indices are blowing up. We've got high grade and junk indices, both showing levels that we haven't seen since August, 2024. And it's a key measure of a perceived US credit risk. They've hit their worst levels since the past eight months. So the CDS index rises as fear climbs. And so U.S. bond investors are concerned that tariffs may lead to a global slowdown. And I think this is really weighing on the market. I think you're going to see a lot of corporate issuers step back in this environment and wait to decide whether to come with new deals or not. But a 10-year below 4% is something that was not anticipated just about a week ago.

[00:17:11] Brian: Great conversation today. I think it's important for our audience, given all the fast-moving information around tariffs of the economy and the markets, to get George your thoughts, closing remarks, and what are good reminders for investors and our audience these days in terms of times of turmoil like this from a portfolio perspective.

[00:17:28] George: Well, Brian, again, I would reiterate what Steve said earlier, which again is doing the hard thing is usually the right thing. And that sometimes being able to put capital to work when things really feel the worst. And I don't think we're quite at that point yet. Again, as Steve mentioned, some of the indicated for watching suggests that maybe it's getting close to doing that. And I think it's hard to do this in this environment. But I think the idea of really thinking about the purpose of your portfolio is a gear towards a long term investment objective. And if so, really kind of keep that long term horizon in mind.

And so we're not recommending any major changes. We've been really trying to advocate for the notion that being diversified in this year made a lot of sense. We've argued, I think, that since the beginning of this year, if not before, that being diversified with respect to country exposure, with respect a sector exposure, and certainly certain styles of the market and also certain securities makes the utmost sense. And that's really kind of one key takeaway that we should remind ourselves of what's happening this year. So I think it's important to really stay balanced, stay diversified, and at some point, it makes sense to be opportunistic. We have a lot of things we just don't know and the uncertainty is always the hardest part, but with uncertainty comes opportunity. And I think we should be able to look up to that as well.

[00:18:37] Brian: Well, thank you for the extended conversation today, George, Steve, and Rajeev. We appreciate your insights. And thanks to our listeners for joining us today. Be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app. As always, past performance is no guarantee of future results and we know your financial situation is personal to you, so reach out to your relationship manager, portfolio strategist, or financial advisor for more information and we'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you navigate your financial journey.

[00:19:11] Disclosures: We gather data and information from specialized sources and financial databases, including, but not limited to, Bloomberg Finance LP, Bureau of Economic Analysis, Bureau of Labor Statistics, Chicago Board of Exchange Volatility Index, Dow Jones and Dow Jones NewsPlus, FactSet, Federal Reserve and corresponding 12 district banks, Federal Open Market Committee, ICE Bank of America Move Index, Morningstar and Morningstar.com, Standard & Poor's, and Wall Street Journal and wsj.com. Key Wealth, KeyPrivateBank, Key Family Wealth, KeyBank Institutional Advisors, and Key Private Client are marketing names for KeyBank National Association, or KeyBank, and certain affiliates, such as Key Investment Services LLC, or KIS, and KeyCorp Insurance Agency USA, Inc., or KIA.

The Key Wealth Institute is comprised of financial professionals representing KeyBank and certain affiliates, such as KIS and KIA. Any opinions, projections, or recommendations contained herein are subject to change without notice, are those of the individual authors, and may not necessarily represent the views of KeyBank or any of its subsidiaries or affiliates.

This material presented is for informational purposes only and is not intended to be an offer, recommendation, or solicitation to purchase or sell any security or product or to employ a specific investment or tax planning strategy. KeyBank nor its subsidiaries or affiliates represent, warrant, or guarantee that this material is accurate, complete, or suitable for any purpose or any investor. It should not be used as a basis for investment or tax planning decision.

It is not to be relied upon or used in substitution for the exercise of independent judgment. It should not be construed as individual tax, legal, or financial advice. Investment products, brokerage, and investment advisory services are offered through KIS, member of FINRA, SIPC, and SEC-registered investment advisor. Insurance products are offered through KIA. Insurance products offered through KIA are underwritten by and the obligation of insurance companies that are not affiliated with KeyBank. Non-deposit products are not FDIC-insured, not bank-guaranteed, may lose value, not a deposit, not insured by any federal or state government agency.

[00:00:00] Brian Pietrangelo: Welcome to the Key Wealth Matters Weekly Podcast, where we casually ramble on about important topics including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to open doors in the world of investing. Today is Friday, March 28th, 2025. I'm Brian Pietrangelo and welcome to the podcast.

There's a ton of fun things going on this week, beginning actually with last week as March 20th marked the first day of spring. We're in the second week of the March Madness Basketball Tournament. Yesterday, on Thursday, it was opening day for the Major League Baseball season. Tuesday was International Waffle Day, and Thursday was International Whiskey Day. A lot of fun things, and we hope that you're enjoying the week.

On a more serious note, we'd like to celebrate a few things that are really important. The first is as we end the month of March, we celebrate International Women's History Month, which is a time to celebrate the achievements of women and raise awareness about women's rights, with International Women's Day falling back on March 8th.

Second, even though it doesn't get a lot of press, I would like to bring attention to everybody around National Vietnam War Veterans Day. That is celebrated on March 29th, which is tomorrow, where National Vietnam War Veterans Day as Americans unite to thank and honor Vietnam veterans and their families for their service and their sacrifice.

The Vietnam War Veterans Recognition Act of 2017 was signed into law by President Trump back in 2017, designating every March 29th as National Vietnam War Veterans Day. Multiple sources quote that the US involvement in Vietnam started slowly in the late 1950s, then incrementally grew through the early '60s and reached its height in the late '60s, but continued on into the '70s and basically ended around 1975, where many are quoting why this is the 50th anniversary of the celebration of the end of the Vietnam War in 1975 as we're now in 2025.

If you know any vets and you have an opportunity to see them and thank them for their service, I'm sure that they would truly appreciate it, as do we. With that, I would like to introduce our panel of investing experts here to share their insights on this week's market activity and more. Steve Haight, head of equities, Rajeev Sharma, head of fixed income, and Tim McDonough, director of fixed income portfolio management.

As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our Wealth Institute on many different subjects, and especially our key questions article series addressing a relevant topic for investors. In addition, if you have any questions or need more information, please reach out to your financial advisor.

Taking a look at this week's market and economic news, we've got three key economic releases for you this week. First, beginning with the conference board's report on overall consumer confidence. The monthly confidence index declined in the month of March due to a variety of factors including some of the sentiment on the overall stock market, the overall implication of tariffs across the economy, and the general conditions and outlook for employees.

That comes on the heels of two other reports that came out last week on consumer sentiment, both from the University of Michigan and Apollo, that showed consumer sentiment was deteriorating across all income levels. Second, just yesterday on Thursday, the final estimate for real gross domestic product or real GDP came in from the Bureau of Economic Analysis at an annual rate for the fourth quarter of 2024 at 2.4%.

Now, this was the final revision and final estimate, which was slightly better than the previous two estimates at one-tenth of 1% above the 2.3% that was previously reported. Now, we continue to watch this. That is good news. However, we will be looking to the estimates for the first quarter of 2025 to see if the economy is slowing or will continue to maintain its pace.

Third for this week, we get the update just this morning from also the Bureau of Economic Analysis, giving us information on overall consumer spending and inflation. Consumer spending is defined as personal consumption expenditures, and then we get a look at the consumption expenditures, and then the equivalent inflation read on PCE. The importance there is, again, PCE, core inflation, excluding food and energy, is the Fed's preferred measure of inflation.

On the spending side, on a month-over-month basis for February, there was an increase of 0.1%, which was not a lot, but it was positive considering that the January read was negative at 0.6%. Again, consumer spending somewhat slowing. We'll continue to watch it. On the inflation side, specifically for PCE core inflation, the report today was not favorable. As we look at month-over-month increases, there's been three consecutive months of increases, going all the way back to November at 0.1%, December 0.2%, January 0.3%, and February 0.4% on a month-over-month basis. That's not heading in the right direction.

As that translates into year-over-year PCE core inflation, February came in at 2.8% year-over-year, which was an increase over January's 2.7%. Again, presents somewhat of a challenge that we continue to see inflation remain. sticky, and persistent.

Now let's turn to Steve to get his read on what's been happening in the stock market this week and some of his observations for our investors. Steve?

[00:06:13] Steve Haight: Brian, it was one of those weeks for the market where it feels like we've been marking time and it does start to look to us like the market wants to put in a bottom here. Probably I would say the most bullish chart that we've seen that puts an exclamation point on that is it gets a little bit esoteric, so I'll explain. It has to do with the VIX, which is the CBOE Volatility Index in Chicago. There are also futures that trade on that index.

Essentially, if you can take and plot differences between some of these different futures contracts, it can provide you with information about what the market is thinking. Historically, when we've seen the three-month futures trade at a-- The three-month futures typically trade at a premium to the one-month futures. They do that simply because there's more time. When you talk about volatility indices, the more time that you have to expiration on a futures contract, the more chance there is that something's going to go wrong during that time window and make that futures contract pay off to the upside.

The normal state of affairs is that three months trade at a premium. Now, what happened over the last month is the three-month contract traded at a significant discount to the spot market contract. That happens when the market gets into a period of panic. Clearly, we got into a period where over the last month or so, the market was selling off really sharply to the downside. Now, it's not so much that curve inverts and has the one-month trade at a premium. It's when that curve un-inverts. Rajeev, that's very important, right? Un-inversion of curves.

When you have this spread between the one-month and the three-month VIX futures contracts un-invert, it signals to you that the storm has passed. In the last week, we saw that condition resolve itself. We went from trading at almost a three-point premium for the one-month versus the three-month, to now back to the point where the three-month futures is trading back at its normal premium to the S&P versus where the one-month futures is.

Again, we think the storm has passed. This coincides with what we've seen in terms of some of the market breadth information. We got to a good oversold condition within the last week or so. When you combine that with this un-inversion of the VIX curve, it does feel to us like we're trying to bottom here. Now, that said, price rules all. We've had a little bit of a weak week this week where we've backed and filled, that's part of the process. Bottoms are a process. They don't happen in one day, typically.

What we see here is, typical backing and filling and trying to put in a higher low. I think that we're going to get the news event that should hopefully set that higher low next week when we get "liberation day" on Wednesday for the tariff announcement and we get some clarity on that. Once we get past that, my guess is that we'll start to work our way back to the upside. It does seem to us that, long-term the earnings line continues to make new highs. It did again this week. That's the direction of least resistance on a long-term basis.

[00:09:45] Brian: Steve, I like the way you phrased that. I've been on the road again this week working with multiple client events. It seems like the sentiment when you talk to people face-to-face is they still have a lot of jitters reacting to the 10% market decline that we experienced. In reality, the S&P is only down roughly 2.9% year-to-date. That's not that big of a number, but people are following the 10% downside rather than the 2.9% downside. Any additional thoughts on that?

[00:10:11] Steve: Yes, you're right. It feels like the pain is worse than what it actually has been because I think a lot of clients, a lot of investors have been maybe a bit overconcentrated in some of the Mag 7 names. It's been very clear that those are the names that have been under the most pressure. As we've seen rotation in the market under the hood, whether it's into defensives over the last few weeks or prior to that, it was into cyclicals like financials and industrials.

To us, look, if you look at a chart of NVIDIA, it hasn't gone anywhere for a year almost. I can understand why there's some consternation there. When you look at the headline numbers for the S&P, it's not a disaster here right now. I think that people need to maybe recalibrate their expectations in terms of what they expect, in terms of returns from some of these tech stocks going forward.

[00:11:11] Brian: Great, thanks, Steve. Now let's turn to Rajeev and talk about fixed income. Rajeev, we had the PCE inflation report that came out this morning at 8.30. It was not favorable. It shows that inflation continues to remain sticky and or persistent going in the wrong direction. How do you think that gets incorporated into the Fed's thinking and the overall yields that we're seeing in the treasury market?

[00:11:31] Rajeev Sharma: Yes, Brian. The PCE print this morning is going the wrong way for the Fed. The rise in the savings rate points to a consumer that's being more defensive, but still not at a level where it would be that defensive posture when you have during a recession. Yields remain lower as opposed to PCE print. Now the treasury market seems to remain focused on growth. Treasuries are proving to be that safety haven asset in case there is a slowdown in the economy.

I feel that the bond market is getting ready for tariff day and implementing a defensive strategy right now. The expected rise in inflation that is due to tariffs are keeping the yields steeper, the curve steeper. We've got long-term rates that are rising at a faster clip than short-term rates. Investors are buying the two-year in response to data pointing to lower growth revisions. Inflation warnings are weighing on longer-term rates.

Right now, the difference between a two-year Treasury note yield and a 10-year Treasury note yield is hovering around 33 basis points. Traders are looking at this and trying to figure out what the next resistance point would be. How much steeper could the curve get? Right now, that resistance point is around 41 basis points.

How the curve is going to react is going to come down to the near-term catalyst, which is April 2nd, as Steve pointed out, "liberation day." They're going to look for a better entry point. Right now, I think investors in the bond market are just waiting for that April 2nd date, with month-end approaching. Generally see a lot of rebalancing happening at the end of the month. I think a lot of that rebalancing is not going to happen until April 2nd, or right after April 2nd.

Then if you look at credit spreads, they've remained pretty much range-bound and not showing any signs of growth slowdowns. It's providing some comfort to bond investors. High-yield spreads, however, have shown some widening. We're almost about 20 basis points wider on the week for high-yield. Again, that comes down to some renewed fears of how CCC-rated bonds are going to handle a growth slowdown and the possibility of increased defaults.

If we look at credit default swaps for some guidance, we do see that IG, investment-grade credit default swaps are higher and approaching a level that we haven't seen since August of last year. That may be some indication that inflation fears are still there and consumer sentiment is waning right now. The same thing with high-yield CDS spreads. They are also wider. That might be an indication for us of what we can expect from credit spreads going forward. So far, we have not seen any level of distress in the credit markets. Credit spreads have been well-behaved and not showing a sign of upcoming recessions.

[00:14:10] Brian: We hearing anything on Fedspeak these days, Rajeev?

[00:14:13] Rajeev: Well, the Fed narrative since the FOMC meeting that we had about a week ago, it's been sticking with the theme that the wait-and-see approach. Every single Fed member that's hit the newswire has pretty much come in line with that approach. The Fed has the luxury right now of waiting for data, waiting for some kind of tariff substance, really, in fiscal policy.

We're not hearing them waiting away from two rate cuts for this year. If you look at the market, the market's ahead of the Fed and thinking we should get about three rate cuts by January of next year. I think that's a little optimistic. What's going to have to happen is the Fed narrative and the market expectations, they need to resolve themselves. Otherwise, we're going to have more volatility. until we get there.

[00:15:02] Brian: Great, makes sense, Rajeev. Thanks so much. Now we've got Tim on our team to talk about the municipal bond market. It's an important component to a lot of our investors out there. From time to time, we have Tim and other team members come on to give an update on the municipal bond market. Tim, take it away. What are your thoughts you're seeing overall? Then we'll dive into a couple of details.

[00:15:22] Tim McDonough: Thanks, Brian. Well, for the muni market, I'd have to say beware the Ides of March. After the broad muni index enjoyed gains for February and January of this year, broad index is down 2% a month to date. It's been a function of supply and demand and some changing dynamics of where muni investors are interested in this market.

For the year, we've had issuance actually up 24% year over year. We've seen fund flows change. After seven weeks of inflows, we've had our third consecutive week of outflows. When you look at where muni investors are interested on the curve, with the increasing prevalence of ETF usage and individual separately managed accounts, we've seen a lot more demand on the front end of the muni curve. Traditionally, a retail investor was going to get a 20-year or a 30-year muni.

These changing dynamics have changed ratios. We would say, what's a ratio? We take the ratio of a AAA muni to the current treasury of the same tenor. Simple math is if a muni is yielding 60% or more of the treasury, it's a easy buy for investors in the top tax bracket. The pandemic changed the normal relative valuation of muni ratios. We've been in this new normal for the last five years or so, where we've seen ratios pretty much hug right around 60%, even dip lower than 60% into the 50s.

What we've seen for the month of March is that ratios for munis have gone up across the curve. Ratios right now are in the 70s in the 5 to 10-year portion of the curve. Then even on the long end, the 20-year and 30-year ratios are currently at 87% and 92%. Part of that is because when these new deals are hitting market, there's less demand. The typical investor in long-dated munis has changed.

There's not as many buyers for that portion of the curve, but with these ratios going higher, it's going to make some people, some crossover buyers consider the merits of buying longer-dated munis, but when you look at the performance, for the month, so much of that underperformance compared to the aggregate index is purely contained in the long end of the curve.

From a valuation standpoint right now, for most of our clients, we want to be in the first 10 years of the curve. These are ratios that are cheaper and more attractive that we've seen, really since, the pandemic. From our perspective, the valuations are very compelling. For sure, if you're in the top tax bracket, and even if you go into the second, the third tax brackets, the pickup that you're going to see in munis right now cannot be ignored.

[00:19:05] Brian: Oh, great summary, Tim. Have you seen anything in the new Trump administration that's of merit for you, of interest for you, or concern for you in terms of what's happening in the municipal bond market? Anything on your mind?

[00:19:17] Tim: Yes. We always want to keep an eye on Washington and the Tax Cut and Jobs Act of 2017, there's key provisions of that that will expire at the end of this year. Again, with munis, the big question is the income earned on municipal bonds still going to be exempt from federal income tax? That's the big question.

Sometimes it's floated around for any change in a tax regime. We keep an eye on Washington for sure. We would expect that a lot of these key provisions will be extended at the end of this year. Yes, we always need to keep an eye on Washington and, even more so with this current administration.

[00:20:07] Brian: Well, thanks for the conversation today, Steve, Rajeev, and Tim. We appreciate your perspectives and thanks to our listeners for joining us today. Be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app. As always, past performance is no guarantee of future results, and we know your financial situation is personal to you. Reach out to your relationship manager, portfolio strategist, or financial advisor for more information. We'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you navigate your financial journey.

[00:20:43] Voiceover: We gather data and information from specialized sources and financial databases, including, but not limited to, Bloomberg Finance LP, Bureau of Economic Analysis, Bureau of Labor Statistics, Chicago Board of Exchange Volatility Index, Dow Jones and Dow Jones NewsPlus, FactSet, Federal Reserve and corresponding 12 district banks, Federal Open Market Committee, ICE Bank of America Move Index, Morningstar and Morningstar.com, Standard & Poor's, and Wall Street Journal and wsj.com. Key Wealth, KeyPrivateBank, Key Family Wealth, KeyBank Institutional Advisors, and Key Private Client are marketing names for KeyBank National Association, or KeyBank, and certain affiliates, such as Key Investment Services LLC, or KIS, and KeyCorp Insurance Agency USA, Inc., or KIA.

The Key Wealth Institute is comprised of financial professionals representing KeyBank and certain affiliates, such as KIS and KIA. Any opinions, projections, or recommendations contained herein are subject to change without notice, are those of the individual authors, and may not necessarily represent the views of KeyBank or any of its subsidiaries or affiliates.

This material presented is for informational purposes only and is not intended to be an offer, recommendation, or solicitation to purchase or sell any security or product or to employ a specific investment or tax planning strategy. KeyBank nor its subsidiaries or affiliates represent, warrant, or guarantee that this material is accurate, complete, or suitable for any purpose or any investor. It should not be used as a basis for investment or tax planning decision.

It is not to be relied upon or used in substitution for the exercise of independent judgment. It should not be construed as individual tax, legal, or financial advice. Investment products, brokerage, and investment advisory services are offered through KIS, member of FINRA, SIPC, and SEC-registered investment advisor. Insurance products are offered through KIA. Insurance products offered through KIA are underwritten by and the obligation of insurance companies that are not affiliated with KeyBank. Non-deposit products are not FDIC-insured, not bank-guaranteed, may lose value, not a deposit, not insured by any federal or state government agency.

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[00:23:53] [END OF AUDIO]

[00:00:00] Speaker 1: Welcome to the Key Wealth Matters Weekly Podcast, where we casually ramble on about important topics including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to open doors in the world of investing. Today is Friday, March 21st, 2025. I'm Brian Pietrangelo, and welcome to the podcast. For those of you that are serious basketball fans or maybe just seasonal, it comes to March Madness was tipped off this week as the annual NCAA men's and women's basketball tournament. There's lots of activity, lots of thrills, and it is known as March Madness. And just like the stock market, there are ups and downs, thrilling days, days of disappointment. And we sure have had some market madness in March earlier with a sharp decline at the beginning of the month. With that, I would like to introduce our team of investing experts here to share their insights on this week's market activity and more. George Mateyo, Chief Investment Officer, Rajeev Sharma, Head of Fixed Income, and Cindy Honcharenko, Director of Fixed Income Portfolio Management. As a reminder, a lot of great content is available on key.com slash wealth insights, including updates from our Wealth Institute on many different subjects, and especially our Key Questions article series addressing a relevant topic for investors. In addition, if you have any questions or need more information, please reach out to your financial advisor. Taking a look at this week's market and economic activity, we've got three economic updates that are worth sharing with you this week. First, beginning with the overall retail sales for February of 2025 that were coming in at roughly up 0.2% from the previous month. Now this is important because back in January, the month-over-month increase was actually a negative 1.2% from the previous month, so it was a down month and we were looking for whether or not that was a trend. So seeing a pop back up to a positive 0.2% for February was headed in the right direction, but we will continue to monitor whether overall retail sales and consumer spending is slowing or not. Second, on the manufacturing side of the economy, industrial production came in at 0.7% positive in February, which was good news because it is the third consecutive month that we had positive increases in overall industrial production, which prior to that had followed three consecutive months of negative growth in industrial production going back to September, October, and November. But now we've got three months going in the positive direction for February, January, and December. And third, overall existing home sales advanced 4.2% in February, up to a seasonally adjusted annual rate of 4.26 million homes. Now on the surface, that is good news because it's headed in the right direction, meaning existing home sales are increasing, which is unlocking the freeze in supply that has been existing for a couple years now due to higher interest rates. However, underneath the surface, it's still okay news because if you actually look at a chart from the National Association of Realtors for the total existing home sales that happens on a month-over-month basis, there always seems to be a spike or has been a spike in February of each of the last consecutive three years, 2025, 2024, and 2023. So in general, we don't want to overreact to one very good month of increased existing home sales, and we'll have to continue to read that on a month-over-month basis going forward throughout 2025. In addition to the economic releases, the big update for the week was the Federal Reserve's Federal Open Market Committee meeting that ended with its press conference on Wednesday of this week. The policy decision was pretty much expected, but there was a lot of conversation during the press conference about what the Fed thinks going forward, so we'll bring Cindy into the conversation to give us a recap on the Federal Open Market Committee meeting. So just like basketball fans that have to wait and be patient to see who will cut down the nets this year, it seems like the Fed's going to be patient to see when they cut rates this year. Cindy, what do you think?

[00:04:19] Speaker 2: Yes, Brian. Not only will the Fed need to be patient to gather more data on inflation and employment before they cut rates, but they're also dealing with their own version of madness as they try to interpret the tariff environment being transitory or longer lasting. At their meeting this past Wednesday, their policy decision was to be patient again for the second meeting in a row, leaving the federal funds rate unchanged at 4.25% to 4.5%. The Federal Reserve has forecasted two interest rate cuts for 2025. This is unchanged from the December 2024 forecast. The committee anticipates reducing the federal funds rate by a quarter percentage point twice during 2025, bringing the target range from the current 4.25% to 4.5% down to 3.75% to 4% by year end. However, these forecasts are subject to change due to several factors, including the impact of tariffs on inflation and economic growth. The Fed has expressed that the effects of these tariffs introduce a higher degree of uncertainty into their forecasts. The Federal Reserve released its Summary of Economic Projections, also known as the SEP, outlining forecasts for key economic indicators for the year 2025, and these projections were as follows. Real GDP growth, the Fed anticipated a growth rate of 1.7% for 2025. That's a slight decrease from the 2.1% projected in December 2024. Poor PCE inflation rate was forecasted at 2.8% for 2025, and that's higher than the 2.5% projected in December of 2024, and that reflects concerns about rising price levels. Finally, the unemployment rate was projected to rise to 4.4% in 2025, and that's up from 4.3% in December 2024, suggesting a potential softening in the labor market. So the two most notable comments from the press conference, in my opinion, the first one is on elevated economic uncertainty. Powell remarked uncertainty around policy changes and their effect on the economy is high, and this is according to the Fed chair who says we do not need to be in a hurry to adjust our policy stance. I think the significance of this statement highlights the Fed's cautious approach amid significant policy shifts under the new administration, emphasizing a wait-and-see strategy before making monetary policy adjustments. And the other is on the impact of tariffs on inflation, where Powell stated President Donald Trump's tariff increases are expected to delay progress in reducing inflation this year. However, the price impacts from these tariffs are likely to be temporary and will quickly pass through the economy. This comment underscores the Fed's assessment that while tariffs may pose short-term inflationary pressures, their effects are anticipated to be transient, influencing timing and pace of future monetary policy decisions. George Rajeev, I'd love to get your take on the Fed meeting this past week.

[00:07:35] Speaker 3: Madness, huh? Madness, Cindy. I think that's right. I think it's interesting that you used the word transitory and transient a couple times, and same with Powell. I mean, I think it was pretty bold for him to actually go out there and use that word again knowing full well that the word transitory was something he talked about two years ago, which turned out to be wrong in the sense that inflation was a lot stickier. But I think this time he might be proven right on that front in the sense that when you think about tariffs, there's typically a one-time event, and it's not really always necessarily an easy one to digest, but it usually is somewhat of a shock to the system, like a tax increase, for example. That's what tariffs really are. So I think you might be right on that. But I think the bigger message for me, Cindy, was the fact that if I went back, and I think we had somebody count for us, we counted the number of times that the word uncertainty or uncertain appeared in his press release, I'm sorry, press conference, rather. And that number was 16 times. So in the span of about 30 minutes or so, that word uncertainty or uncertain was used. So that's roughly once every two minutes. And I think that's probably the apt description of what we're all navigating through right now. I think it's also fair to say that he was probably a bit more concerned about the growth outlook. He was more concerned about the moderation of expectations for growth this year. And to me, that was a pretty significant signal in the sense that it suggests the Fed is getting more concerned about growth at the same time that we have these tariffs and other things that might come through later this spring and summer. But nonetheless, I think that the growth outlook is also somewhat tempered, which maybe at the margin would kind of keep the Fed engaged. So in other words, that if inflation does stay a bit stickier and growth does weaken, the Fed probably would likely be at the cut rate sometime, perhaps later this year, given that outlook. I think it's, again, kind of fraught with a lot of uncertainty. I think the market's still going to price it in a decent amount of uncertainty, but we still have a lot of things to kind of get through between now and really the next few months or so, particularly April 1st and April 2nd are going to be key dates to watch as relates to tariffs. That's the big date that the administration has talked about with respect to reciprocal tariffs being implemented and some of the sectoral tariffs that are also on the table as well. So I suggest the markets are probably going to be a bit range bound and probably a bit skittish until we get some more clarity around those fronts. But maybe, Rajeev, I can turn it over to you to get your thoughts on what's happened in the credit markets this week to try and suss out what's happened around the political sphere as we often talk about.

[00:09:52] Speaker 4: Well, you make very good points there, George, and Cindy, you as well. I mean, you come out of that meeting, the FOMC meeting, and it's kind of, for some, it kind of feels a little mind boggling, the fact that you're pointing to slower growth, higher inflation. But again, we're sticking with two rate cuts in our projections for the FOMC projections for the year. And that was enough, really, for the markets to really get excited, not just the equity markets, but the credit markets got really excited as well. And you saw credit spreads rally right after the meeting. If you look at credit spreads, all macro investors should ultimately care about is the direction of credit spreads, because if they widen, you're going to start feeling some real economic stresses in the market. What's impressive to me is that there's been a resilience of credit spreads over time over the last several months, even with all the headline news, all the tariff information, growth scares, credit spreads have been very resilient. We did see some widening in credit spreads before the FOMC meeting. But since then, we've kind of worked our way back to the tight ranges that we've been in. And these ranges are 20-plus-year tights on credit spreads. And so why are credit spreads continuing to tighten? Again, we've pointed to it before, the supply-demand technicals continue. There is a lot of demand for corporate credit out there, corporate bonds, and that's really supporting where credit spreads are right now. But what's going to be important to keep an eye on is the liquidity in the market. We've talked about economic stresses before, market stresses before. And when you start feeling a liquidity crunch in the market, then everything gets very, very dicey. You start seeing credit spreads really start to widen. We have not seen that at all right now. I've kept a close eye on liquidity. Markets are operating very efficiently. There's no liquidity crunch. What's the biggest issue right now for corporate bond investors is finding paper, finding enough paper out there. But if financing were to somehow shut down, then companies could start facing defaults and the economy suffers. So it's going to be important to not just see credit spreads, but also make sure that we're operating efficiently in the market, the liquidity is still there. Now, talks about recession have been in the market, but we haven't seen credit spreads reflect any of those fears. Tensions remain tight, even compared to previous periods of elevated volatility, even compared to past recessions. We are extremely tight right now on credit spreads. But if you want to look at other indicators of what might be coming down the road, I have looked at investment grade credit default swaps. They are at their widest level since August. So when credit default swaps widen, it means the cost to purchase the credit default swap has moved higher. This points to investors demanding higher compensation to ensure against an issuer's likelihood of default. However, much of this has to do with some of the recent headline volatility. There was a fear about a government shutdown. All of this translates to CDS moving wider, but that did not translate into corporate bond spreads moving. So it's always important to look at other indications out there that what could cause credit spreads to go wider, but they just don't seem to be working this time around. The demand for corporate credit paper continues to be there. We have been insulating ourselves against any of these fears of growth scares or any of these fears of recession by continuing to advocate for high quality corporate bonds. These will provide us some kind of resilience against any type of economic downturn if we expect one. So they've done really well over time. I think investors have also kind of done this flight to safety. They've not just demanded U.S. treasuries, but they've also gone out there and demanded very high quality corporate bond paper. What could cause credit spreads to widen in the future? Yes, if we start talking about trade wars, the possibility of stagflation, we could start to see that credit spreads could start to widen if those fears become reality. But right now, I think high quality sectors have really shown resilience and corporate fundamentals are strong enough, right enough to withstand any type of downturn of the broader economy. Now, if we go back to the Fed meeting, the immediate reaction that we saw on the yield curve right after the Fed meeting was a bull steepening of the curve. And what that means is the front end yield started moving lower at a faster pace than longer term yields. This is even after we saw some movement in the dot plots and some movement about some Fed members thinking about whether we'll have rate cuts or not this year. I think the whole resilience of the fact, the whole important fact was that the Fed stuck with their two rate cuts for 2025. And that provided a sigh of relief for risk assets in general, but also provided a very strong surge for yields to go lower in the front end of the curve. If you look at the 10 year Treasury note yield, it's hovering around 4.22 percent. That is right at the 200 day moving average. And I think we're going to stay at these levels for at least the near term until the date that you mentioned, April 2nd, George, where we get some clarity on tariffs and that clarity could result in some volatility. And we could see that right on the yield curve.

[00:14:43] Speaker 3: Yeah, I think it's worth mentioning, Rajeev, and I'm really, you know, I think it's very important to get your insights around the things you talked about, the liquidity, credit stability, the flowing of credit and money is going to be really important to monitor, I think, in the next few weeks or so. But, you know, there's a difference, I think, in my view between volatility and sentiment. And if I look at some of the sentiment indicators, and I know Steve's off this week, hopefully having a good weekend somewhere, but I think the point is that if you were here, I think we would probably talk about sentiment in the sense that right now, in terms of the aggregate market sentiment, it's as bearish as it was back in 2008 and 2009. And 2009, of course, was a terrible time. The economy was really upside down. I'm not going to give all the history, but if you kind of compare today versus then, I don't think it's nearly the same level of economic disaster or uncertainty that we're facing today that we faced back then. And so when we have that kind of these big bearish readings in terms of sentiment, it's definitely it feels like some of that is getting priced in. Now, I'm not going to be so bold to say that the bottom is in because I think this is going to be kind of a bottoming process. And to be honest, we're only down about eight percent from the high. And typically when you have a real correction, it could be something down in the teens. So there could be some more pain. There could be probably to your point more volatility. But sentiment right now is still pretty bearish overall. So I think it's important that we really want to say balance for risk. As you mentioned, trying to be focused on quality makes a lot of sense. Some of our strategies in the equity portfolios that we manage are focused on dividend paying companies. And they've actually outperformed pretty neatly this year. And then we're also trying to think about maybe dialing up the exposure toward international markets, which have been diversifiers, too. And we've seen a significant sea change with their economies in the past few weeks or so that are probably worth exploring further also. So I still think it's important to be diversified. It's really important to think about the difference between volatility and sentiment and restructuring a portfolio to benefit from a wide range of outcomes

[00:16:31] Speaker 1: that we've talked about for much of this year. Great discussion today on the panel. Thanks, everybody, for it. And we'll close with having a little bit of fun with possibly getting each one of your March Madness predictions from all of you on your favorite teams or the folks that you think will win or your emotional connection. My purpose is with Florida in my bracket. How about the rest of you, Cindy, Rajeev and George?

[00:16:59] Speaker 2: I'm with you, Brian. Florida.

[00:17:02] Speaker 4: Well, I will have to say living in New York City, there's a lot of excitement about St. John's. So I'm going to go out on a limb and go St. John's all the way.

[00:17:10] Speaker 3: St. John's. What are they? What are they ranked? What's their seed, Rajeev?

[00:17:13] Speaker 1: They're a two seed. I watched the game last night, George. They played well.

[00:17:17] Speaker 3: Did very well. Wow. OK, there you go. Well, I'm going to go to the Duke Blue Devils. And I've just kind of always had a biggest hand. Instead of going to Duke, I went to a small Division three school. So basketball was kind of, you know, something that you kind of take in. But it was much different level than it is today at the NCAA. So I'm going to go with the Duke.

[00:17:35] Speaker 1: Well, thanks for the conversation today, George, Rajeev and Cindy. We appreciate your perspectives. And thanks to our listeners for joining us today. Be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app. As always, past performance is no guarantee of future results. And we know your financial situation is personal to you. So reach out to your relationship manager, portfolio strategist or financial advisor for more information. And we'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you navigate your financial journey.

[00:18:10] Speaker 5: We gather data and information from specialized sources and financial databases, including but not limited to Bloomberg Finance LP, Bureau of Economic Analysis, Bureau of Labor Statistics, Chicago Board of Exchange Volatility Index, Dow Jones and Dow Jones News Plus, FactSet, Federal Reserve and Corresponding 12 District Banks, Federal Open Market Committee, ICE Bank of America Move Index, Morningstar and Morningstar.com, Standard and Poor's and Wall Street Journal and WSJ.com. Key Wealth, Key Private Bank, Key Family Wealth, Key Bank Institutional Advisors and Key Private Client are marketing names for Key Bank National Association or Key Bank and certain affiliates such as Key Investment Services LLC or KIS and Key Corp Insurance Agency USA, Inc. or KIA. The Key Wealth Institute is comprised of financial professionals representing Key Bank and certain affiliates such as KIS and KIA. Any opinions, projections or recommendations contained herein are subject to change without notice, are those of the individual authors and may not necessarily represent the views of Key Bank or any of its subsidiaries or affiliates. This material presented is for informational purposes only and is not intended to be an offer, recommendation or solicitation to purchase or sell any security or product or to employ a specific investment or tax planning strategy. Key Bank, nor its subsidiaries or affiliates, represent, warrant or guarantee that this material is accurate, complete or suitable for any purpose or any investor, and it should not be used as a basis for investment or tax planning decision. It is not to be relied upon or used in substitution for the exercise of independent judgment. It should not be construed as individual tax, legal or financial advice. Investment products, brokerage and investment advisory services are offered through KIS, member FINRA, SIPC and SEC registered investment advisor. Insurance products are offered through KIA. Insurance products offered through KIA are underwritten by and the obligation of insurance companies that are not affiliated with Key Bank. Non-deposit products are not FDIC insured, not bank guaranteed, may lose value, not a deposit, not insured by any federal or state government agency.

00;00;00;00 - 00;00;39;15

Unknown

Welcome to the Wealth Matters weekly podcast, where we casually ramble on about important topics including the markets, the economy, human ingenuity and almost anything under the sun, giving you the keys to open doors in the world of investing. Today is Friday, March 14th, 2025. I'm Brian Pietrangelo and welcome to the podcast. This past week I was on the road again and actually had some time to spend with family and I wanted to say thanks for the wonderful quiche prepared by my cousin Marilyn, especially when the Department of Justice just opened a probe on the surge in egg prices.

00;00;39;17 - 00;01;01;05

Unknown

As inflation on eggs has basically doubled over the past year. We'll talk overall inflation with our panel today as CPI for February was released this week. In addition, as we head into the weekend, Saint Patrick's Day is on Monday, so maybe a little luck of the Irish can provide a proverbial pot at the end of the rainbow relative to recent market volatility.

00;01;01;07 - 00;01;27;29

Unknown

With that, I would like to introduce our panel of investing experts here to share their insights on this week's market activity and more. Steve Hoedt, Head of Equities. Rajeev Sharma, head of fixed income. And Dan Serrano, director of Multi Strategy Research. As a reminder, a lot of great content is available on Key.com/Wealth Insights, including updates from our Wealth Institute on many different subjects and especially our key questions.

00;01;27;29 - 00;01;58;09

Unknown

Article series addressing a relevant topic for investors. In addition, if you have any questions or need more information, please reach out to your financial advisor. Taking a look at this week's market and economic activity. The economic release calendar was fairly light this week. We only have two updates for you. First, beginning with the JOLTS report, job openings came in at roughly 7.7 million for January, which was up mildly from December, which was at least somewhat good news that employers were willing to post jobs.

00;01;58;11 - 00;02;33;16

Unknown

And second, we've got both inflation reads with CPI and PPI. The consumer price index and producer Price Index reports for the week. We've got, CPI coming in a little bit better than expected. So overall, on a year over year basis for the month of February 2025, all items in the CPI report came in at 2.8%, which was down from 3% in January and core items, excluding food and energy came in at 3.1% year over year, which was also down from 3.3% in January.

00;02;33;19 - 00;02;55;26

Unknown

Outside of the economic calendar, there was a lot of market activity, as has been the case recently with the conversation around tariffs. We also have the Federal Open Market Committee meeting next week, and we've also had some significant market volatility to begin the week. So, with that, we'll turn our conversation first to Steve to get his reaction on the market volatility and his thoughts for the week.

00;02;55;27 - 00;03;31;26

Unknown

Steve or Brian you know it’s been an interesting week especially as a market technician because these are the weeks when I get lots of questions from everyone about where is support for the market. Right. So, we hit a 10% correction, this week, officially, down from the peak. And, you know, when I take a look at the chart, the chart says to me that, the August lows back during kind of the Japanese yen fluctuations last year where we got done around 5400, it looks like that's where support is.

00;03;31;26 - 00;04;02;08

Unknown

Okay. That being said, I don't know that we'll get well that, that will have to go all that way. And I say that because there, there are indications within the market that we're starting to see some stability here. In terms of the decline, there are a handful of indicators, though, that we're looking at that we have not seen, that we typically see improve when we get to what would be called a tradable low or a durable bottom for the market here.

00;04;02;08 - 00;04;32;19

Unknown

Namely, we haven't seen sentiment get overly, cooked to the downside. So, if you look at call ratios, that's one way to gauge that. Typically, when we get into a period of market stress, you see the put call ratio expand up above 1.3. Right now, that's a little over one. So, it shows that there are some, fear that is creeping into the, the buyers of, of options, but not a lot.

00;04;32;21 - 00;05;06;20

Unknown

So that's something to watch here as we, try to try to try to go through this bottoming process. The other thing is we watch market internals, internal calls are, data points that are created by aggregating the performance of the various individual securities in the market to create an aggregate indicator. So, the one that I watch for this, importantly, is the number of S&P 500 constituent issues that are making new 20-day lows.

00;05;06;23 - 00;05;36;08

Unknown

Typically, when you get to a durable, tradable low for the S&P 500, you see that number spiked to over 50%. So, in other words, 50% of the stocks in the S&P 500 are making a new one month low on the same day. That typically has gotten to the point where we're flushing out all of the, thing, and you're getting to a kind of a I don't want to say panic, but you're getting to a point where the market is capitulating to the downside.

00;05;36;10 - 00;05;57;11

Unknown

The highest that we've gotten to during this most recent move is 40%. And right now, we're sitting around 35%. So, we really have not gotten to that point where we've seen the 20-day lows flush. Now, that doesn't mean that we can't bottom without having that occur. It just means that it's going to take more time if we don't have that occur.

00;05;57;11 - 00;06;17;03

Unknown

So, you know, markets are just two ways they justify a price or they in terms of a move up or down and markets adjust by a time, they can just mark time sometimes. And, you know, it feels to me here, over the last week or so that we've gotten to a place where the market is starting to mark time.

00;06;17;03 - 00;06;51;28

Unknown

We've been going back and forth a little bit, trying to establish, a new a new trading range as we adjust to the realities that have come out of both, Washington and, and other places around the world. When I look at the earnings numbers for the S&P 500, one of the things that I think has been really interesting during this downturn is that, you know, we were concerned earlier in the year, when we saw the earnings line for the S&P 500 on a forward 12 month basis heading downward.

00;06;52;01 - 00;07;16;15

Unknown

It had been a couple. It'd been a few years, actually, since we'd had a downtrend. There. As we moved through earnings season, we actually saw the 12-month forward earnings line for the S&P 500 move higher. And it's actually at new highs as we sit here and speak today. So, all of the decline effectively has been the market taking price to earnings multiple out of the out of the valuation.

00;07;16;18 - 00;07;49;19

Unknown

So, we came in with valuations that you know not cheap levels for sure. To this situation. And what we've seen is multiples come down due to the increase in uncertainty out of out of Washington. As the market gets more comfortable with the situation and uncertainty lifts, that multiple should stabilize. And again, that's what we started to see this week after the precipitous decline where we've seen two and a half to three turns come out of the S&P 500 multiple over the last six weeks.

00;07;49;22 - 00;08;12;27

Unknown

So, our feeling is that, you know, we're getting we're getting pretty. It looks to us again like we're getting it's pretty late in this move to start making a lot of portfolio changes. We don't think that that's wise at this point. The tariff stuff, it can change on a dime. We've seen all of the stuff out of Washington.

00;08;12;27 - 00;08;38;17

Unknown

The policies can change tomorrow on this. I think that investors need to focus their horizon on their long-term stick to the plans that they have. And you don't make good decisions when you're making panicked, emotional decisions. And, and I think that when you look at the way the market sets up today, you know, it was rational for the market, to react to the level of uncertainty that we've seen.

00;08;38;19 - 00;09;02;20

Unknown

It has reacted to that. We've now come down enough where we've gotten back to what I would say is five-year average multiples. So, the markets no longer extended. And now we'll see how things go. And are uncertainty lifts. You know I think we're set up pretty well into the back end of the year. And that was really our forecast as we came into 2025.

00;09;02;20 - 00;09;23;16

Unknown

We thought the first half of this year would be a difficult one. It would be a period of adjustment. Granted, we've had more adjusting to do that. I think any of us thought, but I think that the, the plan that we had or for the year where down first half solid second half still remains in play.

00;09;23;18 - 00;09;45;07

Unknown

That's great Steve, appreciate the summary. And with 30 years plus of experience in this business, your words of wisdom for our audience are very appropriate. So, thanks for that, Steve. Keep in that line of thinking as to what's going on in the world. Let's move to Dance Inferno. Dan, what's your take on what's happening in the international markets that are a little bit different right now than what we're seeing on the US front?

00;09;45;09 - 00;10;07;18

Unknown

With the exception of this tariff battle? Thank you. Brian. Yeah. And just as Steve was saying, you know, in the US we're seeing compressed multiples. And we're going to talk about Germany and the European Union, where multiples are actually stable and actually rising. There's a reason for that. In Germany we're seeing the changing winds.

00;10;07;20 - 00;10;39;26

Unknown

Germany has been the largest economy in the European Union basically since inception. And they've shouldered a big burden since the EU became a single, currency area. Germany has a new chancellor now, Friedrich March and Friedrich Mertz. has actually been instrumental in reducing the debt break, that Germany has been subject to for years, basically since then, great financial crisis.

00;10;39;28 - 00;11;07;27

Unknown

The debt break puts a cap on government deficit spending. And that hard cap has probably caused a lot of European underperformances in the equity markets since the GFC. Over the past couple of weeks, we've heard scuttlebutt about Germany, maybe, reducing the actual break on their spending. And just this morning, Germany had their whatever it takes moment.

00;11;07;29 - 00;11;59;06

Unknown

They've, they have, appropriated funds for deficit spending that's going to go directly into, defense spending and also looking into, more infrastructure spend on transportation, helping the energy grid in Germany that is really reliant upon Russian energy and also in housing within the, within the country. And what this says about greater Europe, if we use Germany as the bailiwick here, we could see the rest of Europe kind of following the leader here, reducing the constraints on fiscal spending and maybe, maybe continuing the outperformance that we've seen in the equity markets so far this year because as the U.S. has struggled, struggled in the equity markets with the compressed multiples and the flurry of activity from Washington, in Europe, we've actually seen multiples expanding and the equity markets increasing. That that could be a big deal. And it's, it's interesting that this flurry of activity in the US, these new threats of tariffs and, a different view of the US compared to the rest of the world, that might actually be the catalyst for, the rest of the world's equity to, to increase relative to U.S performance.

00;12;35;06 - 00;13;05;25

Unknown

That's great. Dan, any quick thoughts on what's happening in China? Sure. And in China, we're actually seeing, the Shenzhen, the Shanghai, Shenzhen index, at Ise year to date, as of the close today. Now, granted, that's only 2% up year to date, but the index is up about 12% over the past year. And we're we are seeing, gee puts maybe, coming to fruition in the Chinese equity markets.

00;13;05;27 - 00;13;38;17

Unknown

That's a backstop, where we think equity can fall, based on what the government has come out and said and the new policies, the new stimulus policies they've put in place, in fact, Germany or, China actually has the biggest stated, budget deficit over the next year that they've had, in, in, in memory. And what this is going to do is it's going to provide stimulus for, for more consumption within China.

00;13;38;21 - 00;14;06;17

Unknown

And could be a catalyst for, continued equity performance and continued equity outperformance moving forward. And last for you, Dan, what's something that you've seen in your research that's not really hitting the radar, that's being talked about by everybody else that you're seeing that might be important for our listeners today? Sure. Brian. Mergers and acquisitions, it was a hot topic in the election cycle, and it may be a hot topic moving forward as well.

00;14;06;19 - 00;14;31;09

Unknown

Mergers and acquisitions were supposed to increase under the new regime. And in November and December of last year, we saw a big jump in the spreads were a big jump in performance of hedge funds and performance of other funds that, were involved in merger arbitrage. The big jump in performance was due to tightening spreads in deal flow.

00;14;31;12 - 00;14;58;23

Unknown

And it was expected that there was going to be less regulation, less hurdles for, acquisitions to occur, just based on the new, more conservative government coming and coming into office here in the US. That has not happened. In fact, with, increased rhetoric about tariffs and increased volatility of activity within Washington, we've actually seen the reverse.

00;14;58;27 - 00;15;38;22

Unknown

We've seen deal flow dry up and we've seen, the volatility of potential mergers increases. So, spreads have increased. And one reason for that, or one thing that could, that we could see actually, increasing in the M&A front is, foreign companies buying US companies. So, this would be a replay of what we saw during the Reagan era when there were quotas on Japanese cars coming into the U.S back then we saw, Japanese companies buying us manufacturing firms and starting to build the cars here in the US to avoid those quotas.

00;15;38;25 - 00;15;58;24

Unknown

We may see something similar here if the tariff rhetoric continues in the current marketplace. Thank you, Steve. And Don, appreciate that. On the equity and international update. Now let's move to fixed income with Rajeev. It seems to be a little bit more calm, a little bit more stable. Rajeev, what are your thoughts on the fixed income markets and the upcoming fed meeting next week?

00;15;58;26 - 00;16;17;09

Unknown

Well, you're right Brian. I mean, in the grand scheme of things, credit spreads, they've remained pretty resilient. Both investment grade and high yield spreads all the wider on the week. They're still not really showing any signs of the volatility that we've seen in the equity markets or in the news headlines. The riskiest parts of the credit market continue to show this resilience.

00;16;17;09 - 00;16;39;13

Unknown

They continue to be really well behaved. And I've spoken about it before about supply demand technical that are really supporting credit spreads. There's a lot of demand for high quality paper. There's a lot of demand for, corporate bonds. And there's just not enough supply. Even though we've been seeing amazing amounts of supply coming to the market, still not enough to satisfy that demand, but here to go a little bit beyond that.

00;16;39;13 - 00;17;02;10

Unknown

And I think something that's very important to keep an eye on is the liquidity of the markets. Liquidity has been exceptionally good. You can only have a well-functioning bond market and risk asset market if there's an abundance of liquidity. And as long as that lasts, the credit markets will remain well positioned to handle this market noise of fiscal policy or even some of the growth scares that we've been, speaking about in our calls.

00;17;02;13 - 00;17;22;11

Unknown

The most important thing right now is that investment grade funds, you're seeing this flight to quality. You're seeing a lot of inflows into these funds. You see yields on ten-year treasuries. They're hovering around four and a 3:45 .31 percent. It's a very comfortable level. Given the CPI number that we saw there pretty much came a little bit better than expected.

00;17;22;13 - 00;17;41;05

Unknown

The direction of treasuries this week has been pretty much led by equity market volatility, fears of a government shutdown. We will see more corporate supply coming to market in the upcoming weeks. And we're expecting about 35 billion of fresh, front loaded debt supply next week. This could put some pressure on yields as we move, into the week.

00;17;41;05 - 00;17;56;00

Unknown

And I'd start to see maybe some, pressure for yields to move a little higher. But the reduced likelihood of a government shutdown to take some of the steam out of this recent bond rally. We've been on this story many times before about a government shutdown. Generally, what happened is there's a flight to quality, there's flight to safety.

00;17;56;07 - 00;18;13;23

Unknown

You see yield start to go lower with all these fears of a government shutdown, and then nothing happens. And you basically in the 12th hour a deal is made, and the government keeps running. I think that that playbook is kind of getting old now. And I think the markets kind of, moved beyond it. So, you're seeing a little bit more pressure on yields to remain at these elevated levels.

00;18;13;23 - 00;18;33;07

Unknown

Around four and a 3:45 .31 percent. As I mentioned, you have other factors in the market right now as well. The fed meeting coming up next week. Nobody's expecting the fed to cut rates next week. But what's happening right now is many people are expecting, a fresh look at the summary of economic projections that will be released during this, this next fed meeting.

00;18;33;09 - 00;18;50;07

Unknown

In that summary, economic projections are to be very important to see what the fed is thinking as far as rate cuts for 2025. Last time we saw the summary of economic projections, the fed pretty much signaled two rate cuts for 2025. It'll be very interesting to see if they cut that down to one rate cut for 2025.

00;18;50;07 - 00;19;16;28

Unknown

Just a few weeks ago, that's what people were expecting. And then you had this big, fear of the R-word, recession when that started to creep into the market. If you look at what market expectations are for fed rate cuts for 2025, we are pretty firmly at three rate cuts for 2025. So, when you see the summary of economic projections and you see the fed coming out and saying what they feel as far as 2025 projections go, if that doesn't line up with the market, expect more volatility.

00;19;16;28 - 00;19;34;08

Unknown

And I think all eyes are on that. Rajeev, what do you think the read is. We got CPI and PPI inflation reads this week. And it seemed to be favorable. That may lead into a favorable PC e at the end of the month. Or it might continue to go sideways. How do you think that'll factor into the Fed's decision making?

00;19;34;10 - 00;19;54;17

Unknown

Well, the fed has been very, very clear about their dual mandate inflation and jobs. Any type of numbers that really support inflation headed, in the right direction toward their 2% target goal. I think that would be very well received by the fed. But what I thought was really interesting was, you know, we've been so fixated on inflation and inflation numbers.

00;19;54;17 - 00;20;10;25

Unknown

And if they're out of whack, the market doesn't like it. And this time we actually got numbers that were a little better than expected on CPI, PPI. And as you mentioned, it should feed well into but for some reason, I think this whole growth scare narrative has kind of taken the grip of the market right now.

00;20;10;28 - 00;20;30;06

Unknown

And I think that's what people are really focused on. So, I can imagine the fed coming out, fed Chair Powell having his, news conference, his press conference and pretty much saying, you know, inflation is going in the direction that we expect it to go. But he is going to be bombarded with questions about growth, about where we think the economy is going and what the impact of tariffs are going to be on inflation.

00;20;30;09 - 00;20;49;25

Unknown

And really does feel the tariffs are inflation stoking. So exactly how the Fed's going to handle those kinds of decisions with fiscal policy as it shapes up. It's going to be very important. Might even be more important than inflation at this point. Well thanks for the conversation today, Steve, Rajeev and Don, we appreciate your insights and thanks to our listeners for joining us today.

00;20;49;27 - 00;21;12;01

Unknown

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00;21;12;07 - 00;21;48;12

Unknown

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