MARK RIEPE:  Good morning, everyone, and welcome to Schwab Market Talk, and thanks for your time. Today is June 13^th, 2023. The information provided here is for general information purposes only, and all expressions of opinion are subject to change without notice in reaction to shifting market conditions. My name is Mark Riepe and I head up the Schwab Center for Financial Research, and I’ll be your moderator today.

For those who are new to these webcasts, we do them once a month. The format today will be a little bit different. Instead of just doing all Q&A throughout the entire webcast, we’ll, today, instead, we’ll have four speakers. Each will do a presentation for about 12 minutes, and then we’ll start taking questions. For those of you who submitted questions during the registration process, we’ve got all those questions. Fortunately, many of those will be answered during the presentations themselves. But for those that we don’t get to, we’ll get to those at the at the end. For those who want to submit a live question, there’s a Q&A box on the screen. You can just at any time submit your question and just enter that in, and we’ll try to answer as many of those as we can, as well as the registration questions at the at the end.

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Our speakers today are Liz Ann Sonders, our Chief Investment Strategist; Jeffrey Kleintop, our Chief Global Strategist; Kathy Jones, our Chief Fixed Income Strategist; and Mike Townsend, he’s a managing director in our Office of Legislative and Regulatory Affairs. That’s also the order in which they’ll be speaking.

So without further ado, Liz Ann, I’ll throw it over to you, and take it away.

LIZ ANN SONDERS:  Awesome. Thanks, Mark. So let’s start with the economy. I’ll take kind of a broad angle lens, and then we will, ultimately, talk toward the end about the stock market and how these dots are connected.

As probably most people who have read our work and have watched videos like this, you know that leading indicators are particularly important when you’re trying to gauge whether we’re at some sort of inflection point in the economy. And, clearly, what we are seeing here with the decline in leading indicators… and the reason why I have a 16-month change here is not an arbitrary choice of 16 months, but it was 16 months ago that we hit the peak and we started to see the decline in leading indicators. And you can see that the fall that we’ve had in the past 16 months, we’ve never seen weakness like this other than in recessions, which are those gray bars.

Now, there aren’t really disconnects, but some of the explanation associated with why we haven’t yet had a formerly declared recession is probably tied to the fact that the financial indicators within this index… and there’s 10 overall components, four of which are financial-type indicators like the yield curve, like the S&P… clearly, are pointing in a negative direction. The remaining economic variables are more manufacturing-biased than non-manufacturing-biased. That’s not inappropriate because trends there do tend to lead, but the offsetting strength that we’ve seen in services helps to explain why this has at least not yet been a tell. We continue to think we’re in some form of a rolling recession where weakness is rolled through. It started in manufacturing, things like housing, and only recently are we starting to see a little bit of weakness in services.

The same thing has happened within inflation data, as well. This takes a look at ISM, manufacturing prices and services prices. We put the report together in advance of today’s CPI Report, but there is some data within that that confirms to some degree what we’re seeing here, where you saw the surge on the manufacturing prices side initially coming out of the lockdown phase of the pandemic, but then you saw a pretty quick move into not just disinflation, but deflation territory. And it was subsequent to that that we saw the surge on the services side, and now we’re starting to see some relief on the services side. Still some sticky components as we saw within CPI today, but generally we think we will continue on this sort of disinflationary path.

Now, that’s the inflation side of things. That’s half of the Fed’s dual mandate. Obviously, the labor market is the other half, and there’s lots of ways to slice and dice the labor market.  I think, ultimately, what the Fed is trying to do is sort of crush job openings without crushing jobs. And they look at JOLTs relative to unemployed people. Payrolls we know continue to be strong, but there’s been disconnects with the Household Survey. So, really, these payroll numbers, these Friday Jobs Report, the last few months, we’ve sort of had a little bit for everybody within them. You can sort of find that the economic bulls have supports that they can point to. The economic bears have supports they can point to. This is maybe a more unique statistic that I think is probably going to start to get some traction. And it’s, basically, the number of people that were unemployed the prior month that are now employed. And you can see that that is starting to roll over. And that’s one way to gauge whether jobs are becoming more difficult to find. So this is something that I think, again, will probably start to gain some traction as a way to think about the labor market in this environment.

Now, back to payrolls. I mentioned the ongoing strength in payrolls. Not to be a Debbie Downer here, but even though payrolls is a coincident indicator, it’s not really a lagging indicator, other than knowing that you tend to see significant revisions. This idea that there’s no way recession risk is high because payrolls are still growing, well, if you look back at history, and this go looks at every recession back to the early 1950s, you can see in only two cases were payrolls weakening when the recession began. In every other case they were strong, and quite a few cases, triple-digit constraints, similar to what we’re seeing, where the weakness tends to really pick up during the recession, not necessarily as a tell in advance of recession. So just keep that in mind when you hear the refrain that the labor market is too strong to suggest that there’s any risk of recession.

Now, the Fed has been doing their part to tighten financial conditions, but there’s also lending standards that have been tightening. And this is based on the Fed’s SLOOS, Senior Loan Officer Opinion Survey. It’s only done quarterly. But what’s interesting is even before the most recent release, which came out in May, the prior release, which came out in February, obviously, didn’t have any information in it associated with what became the banking crisis, starting with the failure of Silicon Valley Bank. But even then, conditions had tightened down into recession-type territory, and then when you got the May release, you saw it even worse.

Now, the tie in here is that with about a three-quarter lag, you see that there’s a tight relationship between lending standards and corporate earnings, S&P earnings in this case. And that suggests that what has already been some downward pressure on earnings probably still has a bit more to go in terms of forward estimates unless we see sort of a miraculous improvement in lending standards, which doesn’t seem likely given banking woes.

Now, transitioning to the stock market, obviously, the market has been quite resilient in this environment, and maybe that’s consistent with what you are seeing on the left-hand side. This is the average in terms of S&P performance around the final rate hike. We don’t know whether the last meeting was the final rate hike. Obviously, we’ll get more information this week when we hear from the Fed, but I can’t tell you how often I hear people say, ‘Well, the typical action by the stock market around the final rate hike is…’ and then they might even show a chart like this. But, man, the real problem with that is that’s an average associated with a fairly small sample size of only 14 historical tightening cycles that then have that final hike. And as you can see on the right-hand side, not only is it a small sample side, but the range is unbelievably wide. In fact, you can see the blue line, which is the average, almost ends up looking like a flat line when you put that range in there. So we’ve had outcomes where a year later the market was up 30%, a year later the market was down 30%. And it really just… first of all, it brings up the phrase I love, which is analysis of an average can lead to average analysis, but also points out that there are so many other factors that influence market behavior, not just simply a pause. And by definition, given the large sample size and the wide range, none of the individual experiences have actually looked like the average. So don’t look at that as some path that the market is likely to take.

Now, the market has been resilient, but particularly this year, especially through the end of May, it is performance concentrated in a very small handful of stocks. So you’ve got the top five stocks, the darker line, the top 10 stocks. The top five stocks represent about a quarter of the S&P. The top 10 represent about a third of the S&P. You can see the names on the right. With the exception of Berkshire Hathaway, they represent the so-called, you know, Magnificent Seven, not all in tech, but techy-type names.

Now, this isn’t in and of itself a significant risk for the market. In fact, these cap-weighted indexes, whether it’s the S&P, whether it’s the NASDAQ, often have a lot of the performance bias driven up the cap spectrum. The problem occurs when the remaining stocks are significantly underperforming. And until very recently, that’s the environment that we’re in. And it gets to the point of… and often the question I get asked, which is, ‘What are you looking for to feel better that, obviously, this very strong rally in the last eight months is sustainable?’ And it would, I think, necessitate a bit of a broadening out. In fact, you can see here, this was around the end of May when we hit what I believe may be an all-time low in this metric. We only have data back to the early ‘90s. I know it’s an all-time low if you go back to the early ‘70s, but we don’t have that data to show in the chart. But we got to a point where only 15% of stocks were actually outperforming the overall S&P index, and that’s extraordinarily low. We’re starting to see a little bit of improvement. You’re seeing sort of a pickup, not on an everyday basis, but some improved performance down the capitalization spectrum into indexes like the Russell 2000. But I think that there’s still more work to be done because even though the S&P is trading at a 52-week high, only 5% of stocks are actually trading at a 52-week high. So that’s certainly one of the things that I will be looking for is better breadth, and I think that would be a positive sign for the market. That’s very much what was happening, actually, last October, where the indexes had taken out their prior June lows, but breadth under the surface was actually improving. So that would be what I’m looking for.

As a result of that, we’ve seen equal weight pretty much give back all of last year’s gains. This is another expectation that if we see breadth widening out, I would expect equal weight to start to perform a bit better again. And that’s a benefit, of course, to active managers, who in an environment like this, aren’t really operating on any kind of level playing field with passive managers. So this was a first half give back. I wouldn’t be surprised to see that start to turn back up, and that would be a positive sign overall for the market.

Now, I mentioned the tie-in to earnings, which is, obviously, a key fundamental for the market, as it relates to lending standards. What I also think is happening with earnings… and these are the four quarters for this year. So you can see first quarter ended up being better than expected in large part because the bar was set so low. Second quarter is expected to be in negative territory. And then you see third quarter is expected to move marginally into positive territory, and then a big move up in the fourth quarter. Assuming we don’t see a significant improvement in lending standards, PMIs tend to also lead earnings, I think there’s probably a bit more downward revisions to come for the second half of the year. But once we start to see stabilization in earnings, not necessarily return to strong earnings growth, that’s usually a beneficial point in the overall market cycle.

Inflation continuing to come down is also important because earnings is the denominator in the valuation equation here and inflation is the backdrop that matters. You can see on the left, these are ranges of CPI, and then what the average PE has been, the sweet spot is right around that 2% Fed target. We’re nowhere near that point. You can also see the low to high range because, again, analysis of an average can lead to average analysis. So you can see that if we continue disinflation, it will start to take some of that pressure off of valuations, which has been in place since the Fed started their policy tightening.

Finally, on sentiment. It’s been a really interesting sentiment environment, a really mixed bag. And as a result, I wanted to show this chart, which is an amalgamation of about seven different sentiment indicators that NDR tracks, called their Crowd Sentiment Poll. Part of the reason I think why the market is doing well, you can see here, is that you get an initial move toward more optimism by sentiment from very pessimistic conditions, it’s actually when the market has performed best. But this is what I’m watching in the second half of the year. If we continue to see this move into extreme optimism, I think all else equal, this becomes a risk factor for the market.

So that’s just some of the things that we’re watching as we head into the middle part of the year. Just disclosures. And I will turn it over to Jeff.

JEFF:  Thanks, Liz An. That was great. I want to talk about, of course, the global picture. And, you know, last week’s news makes it official, Europe entered a recession in Q4 and Q1, but it’s its mildest ever. Now, that isn’t too surprising, but it’s also not too much of… it’s sort of too much of a generalization, I guess I’d say. During the typical global recession, all areas of the economy, like manufacturing and services and retail, construction, trade, all tend to turn down around the same time. Yet over much of the past year, it’s really only manufacturing and trade that seem to be in a global recession, not just in Europe, but on a global basis. And we can see that in indicators like industrial production, which is down on a year-over-year basis globally. We can see that in surveys of purchasing managers at manufacturing firms. We can see it in worldwide trade volumes, job growth by industry, many other indicators, as well.

So I’m referring to this as a cardboard box recession because things that are manufactured and shipped tend to go in a box. And demand for corrugated fiberboard, which is what most cardboard boxes are made from, has fallen similar to what we see in the last few recessions. You can see here that’s what this chart is, that blue line there is demand for corrugated fiberboard, essentially cardboard boxes, which is down in line with those shaded periods in the past. Of course, those are global recessions. You might notice that this drop is also similar to what we saw in 2012. That wasn’t a global recession. The US did not slip into recession in 2012, but both Europe and Japan did suffer recessions at that time, which, of course, softened global demand for boxes. So I’m calling this a cardboard box recession because it really is tied to those cardboard box-type industries.

In contrast to the cardboard box recession, services industries have continued to grow. The Global Services PMI remains well above 50, as we know the threshold between recession and growth, and consumers have turned to shopping for experiences over goods. As an example, last week, the airline industry’s International Air Transport Association doubled its estimate for global net profit this year on the surge in flying. So we also, I think yesterday it was, we got from Carnival Cruise, a number of the cruise liners, good numbers, good outlook. So we’re definitely seeing the service industry’s doing quite well.

And that explains why this is the mildest ever recession. The recession in Europe is negative 0.2 in terms of its decline in GDP combined on that two-quarter basis. Part of the economy is in a classic downturn, while part of the economy is not.

And that divergence also extends to the mild earnings recession taking place. Historically, the Global Manufacturing PMI leads earnings growth for global companies by about a quarter, sometimes two quarters, and you can see it here in this chart. It currently continues to point to low- to mid-single-digit year-over-year declines for earnings per share. Of course, falling earnings are never great news, but the drop is barely noticeable if you compare it to those prior gray shaded recessions where they fell 20% or more.

So it’s a modest earnings downturn, again, because we’ve got, you know, cardboard box-type industries doing much worse than service industries.

If we look further ahead, the gap between earnings expectations for cardboard box-type industries and service industries is double-digit. Over the coming year, analysts forecast for earnings growth of companies in manufacturing is for a gain of 4%. In services, it’s a gain of 15%. Now, those forecasts by analysts are probably overly optimistic both ways, but the wide gap between them is what I want to highlight here. Economists and analysts are aligned on the nature of the current recession.

So do cardboard box-type industries rebound in the second half of the year or do service industries begin to weaken? I’m more worried about the latter happening in the second half of the year. Although by no means… I’m not confident either way. I just… I worry a bit more about the service sector weakening up rather than manufacturing rebounding sharply. And that’s in part, because of the change from shortages to gluts in the global market for goods that took place back in mid-2022. I was talking about this move from shortages to gluts as we tracked it from 2021 to 2022. Now I’m seeing that might be happening in the global market for labor this year. I’ve been tracking company communications on earnings calls and shareholder presentations, doing a big text search on all these earnings calls for thousands of companies. And what I’m seeing here is a rising trend of mentions of job cuts, phrases like ‘reduction in force,’ ‘layoffs,’ ‘headcount reduction,’ ‘furloughs,’ ‘downsizing,’ ‘personnel reductions,’ along with a falling trend in mentions of labor shortages, phrases like ‘inability to hire,’ ‘difficulty in hiring,’ ‘struggling to fill positions,’ ‘driver shortages,’ which was a big one for a while. You can see we’ve gone from an environment where we had a labor shortage where businesses were constantly talking about how hard it was to hire, to now talking about layoffs.

Lending conditions may also be contributing to this weaker jobs outlook. There is a clear and intuitive leading relationship between banks’ lending standards and job growth. Usually, is about a six- to nine-month lead when we get tighter lending conditions leading to eventual job growth. And the magnitude of the recent tightening and lending standards from banks in Europe at least... and you can look at the US, you can look at the UK where these surveys are done… they all point to a shift from job growth to job contraction in coming quarters. And so the weakness in manufacturing job growth we’re seeing right now could begin to spread into service industries in the second half of this year. Remember, they usually announce these to shareholders before they actually implement them. And so we may begin to see them shortly here, as we move from shorter just to gluts in the labor market. So we’ll have to see how that shapes up.

On inflation, which is still a major issue, the cardboard box recession may be good news. The output prices component of the PMI… remember the PMI is a bunch of different components. One of the things they ask purchasing managers about is, ‘What are you getting for this stuff? What are your output prices looking like? How do you expect that to change in the coming months?’ And what we’re seeing here is that tends to lead inflation by about six months. Now, what I’ve got here on the screen is that component for Europe, but it works pretty much everywhere around the world, and it’s signaling the trend in prices is much lower. In fact consistently, it’s done a pretty good job of predicting where prices go for the next six months. The latest PMI numbers show inflation may go from the current 6% in Europe, to year 2 over the next six months. Maybe that’s some wishful thinking, but it’s certainly… and here’s one indicator that’s pointing in that direction. If it does, the European Central Bank may be able to pause its rate hikes this summer as we get closer to that target, or appear to be on a clear path towards that 2% target. And that can mean the shift away from all the market’s attention revolving around central bank actions in the first half of the year.

Remember, we got a couple surprises. Bank of Canada, Reserve Bank of Australia last week hiked again after having previously gone on a pause. So we know this cycle isn’t over yet, certainly not for the European Central Bank, which on Thursday will likely hike by another 25 basis points, but they could be near the end highlighted by the fact that it’s now official Europe is in a recession.

So what does this mean for investors? Well, in our 2023 Outlook, we stated that international stocks were likely to outperform again in 2023 as the leaders of the last cycle tend to reverse and we see new leadership in the next new cycle, which we believe we’re in. Now, this Shark Chart, my favorite chart, shows what stock market shark attacks look like using the relative performance of US and international stock indices. I’ll quickly explain this if you haven’t seen it from me before. The lines are just a ratio of one index divided by the other. When the blue line is rising, international stocks are outperforming US stocks, and when the orange line is rising, US stocks are outperforming international stocks. They’re mirror images of each other, and they reverse with each of those blue shaded recessions. Now, there were numerous little baby shark attacks around the recessions in the ‘70s, and then again in the 2000s. But in the late 1980s, the jaws were gaping wide after about a decade of international stock market outperformance. And as US stocks began to outperform in the next cycle, the enormous jaws began to close and took a big bite out of the portfolio of investors who hadn’t rebalanced away from international stocks after a decade of outperformance, likely with some bad allocation to their portfolios.

Now the shark’s massive jaws may be closing once again, having been extended for more than 10 years. This time, the markets appear to be prepared to take a bite out of the relative performance of the US stock market as international stocks take their turn to outperform. Outside the US, the bull market has been broad, and equal weight… Liz Ann just talked about equal-weighted indexes, how narrow the advance has been in the S&P 500. We’d like to see better performance in the equal-weighted index. The equal-weighted index represents, of course, the average stock, with each stock getting the same weight. Last summer, global stocks had entered a bear market. The equal-weighted MSCI World Index fell over 20% from its peak in late 2021 to the end of October of 2022. But since then, it looks like we’re in a new bull market for international stocks.

The equal weighted EAFE Index is up well over 20% measured in US dollars since the end of October of 2022, meeting the technical definition of a new bull market. But the equal-weighted S&P 500 is only up 4- or 5% since then, showing relatively little progress for the average US stock outside those AI high flyers. In general, the greater the number of stocks that are helping push the overall market higher, the more support the market has. And while US and international stocks are up a similar amount measured in capitalization-weighted indexes this year, the average international stock continues to outpace the average US stock, offering a broader base of support for the bull market in developed international stocks.

Let me quickly turn to emerging market stocks for a second here. We’re still neutral on the performance of EM stocks this year. We like DM, just talked about that.  EM is a little bit of a different story. It seems dependent upon US-China tensions as much as China’s continued economic recovery. Chinese stocks are the largest weight in the EM Index, over 30%. And geopolitical tensions I think have weighed on China’s stock market. You see this incredible 60% rally in China stocks from the end of October until the end of January. And then what happened? The balloons happen, right? Tensions begin to really heat up between the US and China, concerns about legislation in the US, and then retaliatory gestures by China coming into play. Really saw quite a slump there in Chinese stocks since. They haven’t totally closed the gap, of course, but it hasn’t looked good. Leaders on both sides, however, has signaled that US-China relations may soon thaw, as policymakers schedule meetings with their counterparts in China. In fact, CIA Director Burns made a previously undisclosed trip to China last month. Secretary Blinken is headed to China on Sunday to meet with his counterparts. But tensions have the potential to remain strained in the near term. The Biden Administration may release an executive order to restrict US outbound investment into China in the coming weeks. So that transition to thawing tensions may not be smooth. And we know momentum in China’s economy slowed after the initial post zero […audio dropout…] stimulus might be coming here. They did cut rates today.

So let me sum it all up here. In the second half of 2023, we may see the potential for fewer obvious risks than in the first half with a debt ceiling deal in place, global central banks moving towards a pause on rates, bank stress stabilizing, and signs of US-China tensions potentially cooling. Yet the global stock market’s double-digit returns in the first half of the year may already reflect expectations of an end to this cardboard box recession. So stocks might have trouble matching those gains in the second half if weakness spreads in service industries in both… out of the sort of cardboard box industries it’s in now. I still expect international stock market leadership may continue, though, in the second half of the year.

And so, with that, I will now turn it over to Kathy.

KATHY JONES:  Okay, thank you, Jeff. Hi, everybody. So I’m just going to run through our outlook for the fixed income markets in 2020 in the second half of the year.

And I just want to put it into context. So this year has been extremely volatile in the fixed income markets. And as we came into the year, we’re just in the throes of the Fed tightening cycle. We’ve had series of rapid rate hikes, we’ve had quantitative tightening. And then we had the big explosion in volatility, the liquidity shortage in March due to the banking problems. We’ve had the debt ceiling, you know, we’ve had just a huge number of events that have affected the fixed income market. And things seem to be settling down now, but if you can see here from the Move Index… this is an index of bond volatility based on options market… you could see we had some extraordinary moves, really not… moves that we haven’t seen in standard deviation terms since the financial crisis.

Now, we all lived through this, so we all know that’s happened. But what’s very interesting to me is what didn’t change that much. And so here are yields relative to the start of the year for treasuries for different maturities, and what you can see is, of course, short-term yields are up relative to the start of the year because the Fed continues to hike rates, but long-term yields, or even intermediate-term yields are pretty flat relative to the start of the year. So through all that noise and all that volatility, we actually haven’t really gone anywhere in terms of yield. The good news about that is that that means the coupon income is working for investors. So (a) it means that, you know, if you’re in coupons rather than just short-term you’re earning that coupon, and although price volatility has been high, returns have been positive. But also that we still have this inverted yield curve. So what we’ve seen is all the pressure is really coming at the short end in anticipation of further rate hikes, perhaps, by the Fed. But the market is telling you from the inverted yield curve, it’s still expecting inflation to come down and growth to slow, and eventually the Fed to ease. So through all the noise not as much has happened as perhaps you might imagine.

And here’s the asset class returns. And returns in fixed income include price change plus the income. And you can see the higher the coupon, the higher the returns so far in the first half of the year. Now, that’s not too surprising. We’ve seen high yield come in at a pretty positive return. That’s largely due to the fact that the coupon yield is high. But we’ve also seen the same thing with bank loans, which are basically junk quality paper, as well, and preferreds, which is among the most volatile asset classes. So we’ve seen kind of high returns where the coupons are high, but we’ve also seen pretty steady returns in every other asset class. So as long as the coupon income is working and we don’t get a massive move up in rates, which we think is highly unlikely at this part of the cycle, we expect second half returns to be pretty good.

So we think… you know, we came into this year talking about bonds are back, and meaning that bonds are delivering income again. They have potential for capital returns. Individual bonds typically provide you with capital preservation and some diversification from stock. So they’re doing their job, doing it steadily despite all the noise and all the commotion that we’ve seen in the markets.

So when we look, also, at, you know, valuations in fixed income, one of the things we look at is where are real yields. And because we’ve seen inflation and inflation expectations coming down, real yields are actually at the highest level since 2009. And we think that makes fixed income look pretty attractive, as well. So if you see these are 5- and 10-year real yields based on the implied inflation in the Treasury Inflation-Protected Securities market. And those break-even rates are back down around 2%. So the market is discounting inflation getting back to 2%. We actually think that that is a likelihood not maybe this year, maybe it takes another year or so, but the market is clearly onboard with the Fed’s forecast of getting down to 2%. In that case, we think TIPS look pretty attractive. So if you have an allocation to nominal treasuries, you may want to consider moving some of that into the TIPS market because you’re locking in a real yield and the highest real yield, we haven’t seen in quite some time. You still get that inflation adjustment based on CPI, but you’ll get that real yield, as well. And that’s the best thing we’ve seen in a long time in terms of inflation protection in the fixed income markets.

So speaking of inflation… I know Liz Ann talked about it, Jeff talked about it globally… you know, our view is that inflation is coming down. We have the CPI Report today. The one we know the Fed focuses on is the personal consumption expenditures core number, and particularly the super core number that excludes certain elements like rent that the Fed expects to come down. I just wanted to point this out. A recent study from the New York Federal Reserve has talked about or studied the persistence of inflation. And this is what the whole talk of stickiness of inflation has been about. And what we see here is that expectation for persistent inflation is really coming down. So overall headline inflation has fallen. The CPI number was… you know, was very good today. The core number is coming down, although it’s been a little bit more stubborn. We think that that will shift in the second half of the year as you get used car prices to come down and that owner’s equivalent rent component in CPI to come down. We should see that translate into lower inflation. Also, in the PCE, the core PCE coming down. And the Fed’s own studies are saying that persistent inflation is giving way to less inflation. So we’re pretty encouraged on the inflation outlook, and that’s going to be, I think, a tailwind for the bond market as we get into the second half of the year.

So what do we do with this? We think the Fed will skip the meeting tomorrow, or today and tomorrow, will deliver a skip in terms of a rate hike, that they will sit tight and look at how things are developing, assess the lagged impact of policy tightening to-date. We’ve seen that now kind of communicated very, very clearly over the last couple of weeks. And there’s been nothing to suggest that that isn’t a reasonable approach, given that inflation is coming down, the labor market is starting to show some signs of softening, and we’ve seen a huge decline in commodity prices, again, particularly oil prices, which was unexpected, and that’s a tailwind also for inflation. So the Fed wants to sit tight. And also wants to assess financial conditions. You know, we’ve had some problems in the banking sector. I think they’re a little bit nervous about what might happen in the banking sector as they raise rates some more, and that I think will keep them on hold for a little while.

Could be one more rate hike later this year? You know, hard to say. I think it’s data-dependent. My vote would be maybe not if the inflation numbers continue to show improvement but remains to be seen. If there’s one more rate hike, we think that that’s it.

At the meeting tomorrow in the dot-plot, we expect a big dispersion among the various members who provide their forecast. You’ll see some that are probably 6% for peak Fed Funds. That’s probably Bullard, who doesn’t vote this year. And you’ll see some lower, as well. But the median may edge up a little bit. But the long-term trend is we’re cresting, I think, and yields are starting to… the Fed is starting to get very near the end of its hiking cycle.

So what do you do with that? Well, you know, we like it up in quality, we like extending duration, we like staying up in credit quality because of the risk to the economy. That could be a negative for, say, well, high-yield bank loans, etc. But, you know, if you’re looking at, say, treasuries versus corporates, they’re like investment-grade, corporate bonds. So what we’re seeing here is these are the yields if you compare investment-grade corporates versus treasuries of comparable maturity. So there’s significant pickup. You can build a portfolio that has 5% investment-grade yield in the investment-grade corporate bond area. Yeah, we’ve seen some deterioration in earnings, but balance sheets are pretty strong this time around. And in the investment-grade universe, we’re not looking for a big jump in defaults or some sort of a credit crunch that would severely affect this part of the market. So we would be looking at investment-grade corporate bonds as an adjunct to, say, a base of treasuries.

We also like muni bonds. Munis… this is the MOB spread, the munis over bonds spread, comparing the yields on the two. We’ve had, actually, a fair amount of up and down in the muni market over the last six months or so. Some of that is seasonal. Early in the year, you typically see less issuance from municipalities, and so the supply goes down, the price goes up. And then we saw a rush of money into short-term munis in the first quarter of the year. Some of that was tax-related. Some of that was just safe haven buying as the yields went up. So valuations in in the short-term munis, they’ve improved a bit since those lows earlier in the year, but they’re still… you know, still below average. We prefer, say, 5- to 10-year. They’re getting back to the long-term average now, after dipping below that. We think the fundamentals in the municipal bond market is still good. You know, most municipalities still have ample amounts of cash. Their revenues are still coming in pretty strong from sales taxes, property taxes, which are paid in arrears. And some still have some, you know, COVID funding money left over as a rainy-day cushion. So, you know, our view is that we’re favorable towards the investment-grade muni market.

So the bottom line is we do look for inflation to continue to trend down. We think that we’re near the peak in the Fed Funds Rate. We’ll see the yield curve remain inverted, most likely, and that will… you know, we want to stay up in credit quality.

And, with that, I’m going to turn it over to Mike Townsend.

MIKE TOWNSEND:  Well, thank you, Kathy. Thank you, Kathy, and hi from sunny Washington, DC It’s great to be with you today. I’m going to talk a little bit about what’s going on here in the Capitol, some of the issues that are affecting advisors that we see playing out over the over the next few months.

But where I wanted to start is by looking back at the debt ceiling drama that just ended this week, as I have a firetruck going by my window as I speak here. But I thought I’d just reflect on five kind of key takeaways from the debt ceiling drama.

Number one, you know, the debt ceiling is off the table until mid 2025. So the deal that was reached and signed by the President just about 10 days ago, what it does is suspend the debt ceiling until January 1^st of 2025. And at that point, the debt ceiling sort of comes back and we’re immediately at it. But also at that point, the Treasury Department can take what it calls its extraordinary measures where it moves paper around and basically makes sure that we don’t default. And as we saw here in 2023, that can last for several months. So that would then push the true default date, or the next true default date off to probably late spring or early summer of 2025. You know, the markets like having that knowledge, knowing that that’s off the table, it’s not going to come back. That’s going to be well after the 2024 presidential election. It’s going to be well after a new Congress is seated in January of 2025, so sort off the table and on the back burner for the for the time gaining.

Second big takeaway is, you know, despite all the concerns about how the debt ceiling would play out and whether there would be enough votes to get it done, it actually passed with overwhelming bipartisan majorities. So the final vote in the House was 314 to 117 almost equally split between Democrats and Republicans supporting it. A few more Democrats supported it than Republicans, but it was pretty close. And then it was 63 to 36 in the Senate, again, with a lot of Democrats supporting it, but a good solid number of Republicans also supporting it. And what I think that says, the important takeaway there is that, you know, I think default remains a red line that a significant majority of Congress just isn’t willing to cross. Like no one knows… as we’ve said for a long time, no one knows exactly what would happen, and, you know, when push comes to shove nobody really wants to test that out. So I think that continues to be an important thing for the markets to remember, is that default, you know, even though it gets scary at the end, still isn’t really something that Congress is willing to do.

I think the third takeaway is that if you want Congress to get something done, you got to give them a real deadline. So the interesting thing about how the default scenario played out is that for weeks and weeks, Treasury Secretary Janet Yellen kept saying that we could default as soon as June 1^st, that was her language. And then she would have this caveat after that, that said, ‘But due to the inherent, you know, uncertainties of revenues and outlays for the federal government, it could be weeks or days later than that.’ And as a result, Congress just never bought that June 1^st deadline. So on May 26^th, when Treasury Secretary Janet Yellen, for the first time said, ‘The default date is June 5^th,’ and no caveats, no other thing, it’s just June 5^th, what happened? Within 24 hours, the negotiations that had been kind of dragging along for weeks had a deal, and within six days, both the House and the Senate had passed it before the default line. So once again, if you need Congress to do something, you got to give them a hard deadline.

Number four, the markets clearly did not overreact to this stalemate. We didn’t even see the kind of volatility that we saw back in 2011, which is the last time that we came to the very precipice of defaulting. So I think that is partly because from the get-go, President Joe Biden and House Speaker Kevin McCarthy, the Republican leader, they never wavered from saying that the country will not default. And I think the markets bought that and didn’t get overly concerned. Even as we got within days of getting there, the markets just didn’t have that kind of volatility that we had back in in 2011.

I would say one note is that the rating agencies particularly Fitch and Moody’s still, even though we have solved the debt ceiling, you know, still have language out there that says that they’re very concerned about this pattern and how difficult this has become, and it’s just going to become a repeating thing every year or two, where we get, again, to the very knife edge of, of default, and that that’s just not a good way to run things. And so there continue to be warnings out there that the rating agencies could downgrade. And, of course, back in 2011, Standard & Poor’s downgraded the US credit rating for the first time in the wake of the debt ceiling fight then, and that was really a big trigger for the market volatility. Even though the immediate debt ceiling situation had been solved, that downgrade is something that really spooked the markets. So I think the other rating agencies, keeping that option on the table is certainly notable.

And then, finally, the last takeaway is that resolution of the debt ceiling doesn’t mean we don’t have big budget and spending fights to come. We do. What the debt ceiling did, what the agreement did is it said that Congress has to pass the 12 appropriations bills that fund every government agency and every federal program, and they need to do that by the end of the year. And if they haven’t done that, if Congress hasn’t done that by the end of the year, then that we would have an across the board 1% spending cut, and that’s cuts to both defense and non-defense spending. That’s something that is out there as a kind of motivator for Congress to actually get the appropriations done process done. But Congress’s historical record is terrible. It has been since… 2005 was the last time that all 12 appropriations bills were passed. And what typically happens is that Congress ends up with a big agreement at the end of the year to just keep funding going at the old levels. And this is something that’s going to play out in the late summer and into the fall, and I think there’s a real possibility still on the table that we could have a government shutdown in the fall as a result. You know, a government shutdown could kick in as early as October 1^st, when the federal government’s fiscal year begins. So I think that’s the next big fight to watch.

Now that the dead ceiling is behind us, what else are we keeping an eye on? Well, in the immediate-term next week, Chair Jerome Powell of the Fed will give his semi-annual testimony before the House Financial Services Committee and the Senate Banking Committee on back-to-back days. I think that’s going to be really interesting for a lot of reasons. Obviously, members of Congress will have an opportunity to probe him on whatever the result is of this week’s deliberations at the FOMC. But I expect you’ll see a host of other issues, particularly around the banking sector and other things that members of Congress will take the opportunity to ask some pretty tough questions, probably, of the Fed Chairman.  So I think that’s worth keeping an eye on.

There’s another Fed development next week, which is that there will be a confirmation hearing in the Senate Banking Committee for Adriana Kugler, who is the World Bank economist who has been nominated to fill the vacancy at the Fed Board of Governors. And she will have her opportunity, first opportunity to testify as she seeks that confirmation. At the same hearing, Philip Jefferson, who is a current Fed governor and has been nominated to move up to the vice-chair slot, that will also be on the table. And then Lisa Cook, who is a current Fed governor whose term expires in January, she’s been nominated for a full term of her own. So the three of them will all testify as part of the confirmation. And then if that goes through, then I would expect confirmation votes in the full Senate as soon as late July for all three of those.

The other, you know, thing that I think I’m watching right now on Capitol Hill and with the regulators is the response to the banking turmoil of the last a few months. There’s been a lot of hearings, there’s been a lot of discussion in Washington about what to do in response to the big mid-sized bank failures, Silicon Valley Bank, Signature Bank, and First Republic. And I think it’s kind of narrowed down to three tracks at this point.

Number one, I think we’ve got tougher regulations coming for these mid-sized banks. There’s no question that the Fed is going to propose rules that, you know, toughen stress testing, increase capital and liquidity requirements, and take other steps to strengthen the oversight of mid-sized banks. So that’s almost assuredly coming.

Second, there’s been a lot of talk about the deposit insurance system and whether changes need to be made. Some of the extreme ideas around maybe we should just get rid of deposit insurance, those seem to have cooled off. And where I think the consensus is emerging is keep the individual cap of $250,000 per account at the same level but maybe create a higher cap for business accounts that use those deposits for payroll and other payments. So would not be at all surprised to see Congress move in that direction in the second half of this year.

And then, finally, and this happens whenever there’s some kind of scandal, that there is effort underway in Congress to toughen penalties for executives of failed banks. This really goes at particularly Silicon Valley Bank, where they happen to pay their bonuses the week that the bank failed. Executives had made stock moves, you know, in the weeks before. So this is something that Congress wants to crack down on, try to claw back some of those bonuses and make it more difficult for them to keep that stock compensation. So that’s the third track that I think we’re going to see.

Also, a lot of intrigue in the cryptocurrency space. There is an effort that has been ongoing for a while in Congress to try to find a better… create a better regulatory apparatus for the crypto space and put better investor protections in place. And that’s continuing to move forward. This week in the House, there is a discussion going on about a Republican bill that would give more of the oversight to the CFTC on the commodities side, maybe less oversight to the SEC, but I’ll tell you, there is not yet consensus on how to do this. And consensus has been really elusive on this. There is genuine bipartisan interest in regulating this space. But the actual mechanics of doing that have been very challenging.

What has stepped in to fill that void, of course, is the SEC, with its high-profile suits last week of the two largest crypto exchanges, Coinbase and Binance. And so you’re really seeing an aggressive SEC make a move to really fill that regulatory gap and assert its jurisdiction there.

And then, finally, one other legislative issue to watch is the retirement savings law that went into effect at the beginning of the year, Secure 2.0. You may have read about a funny little glitch, which is that funny in terms of its complexity, but there was an error in drafting the bill that inadvertently dropped provisions that the effect of which would prohibit catchup contributions in 2024. Now, ironically, this came about because Secure 2.0 actually expands catch up contributions for people in their sixties. That’s the intention. Inadvertently dropped some language that’s created this problem. Both parties’ leadership know about this issue and have already written the IRS to say that that was not the intention, that there is, of course, a plan to keep catch up contributions going forward. But there is going to have to be a technical fix to correct this drafting error. And so that’s something we’re going to keep our eye on. We don’t expect this to be a big problem, but it probably won’t get solved until late this year. So we do think catch-up contributions will be permitted next year even though you have this little glitch in the in the current law.

And high-profile, I wanted to talk just a for a minute about the overwhelming agenda at the SEC on the regulatory front, a whole bunch of very high profile rules that are in the queue, and several of which I think are going to be candidates to be finalized in the second half of this year.

So in particular, I’m watching the four-rule package that would overhaul equity market structure. Very controversial, big, big changes potentially coming to the way the markets work. In particular, for individual investors, there is a proposal to require retail trades to go to an auction system at the exchanges, an auction system that is yet to be developed but would have to be developed if this rule went through.

There’s also going to be several changes to best execution standards to make sure that individual investors are getting the best execution that they’re supposed to get, and that they get information about where and how that happened.

Another one that we’re really keeping our eye on is this mutual fund liquidity risk management rule. The one feature of which is that it would have the so-called hard 4:00 PM close that would require all trades to be at the mutual fund by 4:00 PM which is not how mutual fund trading currently works. Currently, mutual fund trades are bundled together and then sent by brokers after hours to the mutual fund to be executed. If you have to have a 4:00 PM deadline to get it to the mutual fund, it probably means an earlier cutoff time for mutual funds. For retirement plan participants, it would probably be a late morning cutoff time.  Basically, what our concern is, is that this ends up really disadvantaging mutual funds as compared to other types of products. So another one that we’re keeping an eye on and hoping that maybe there are some changes in the works.

The climate risk disclosure proposal that the SEC… a very, very controversial proposal that would require public companies to disclose more to investors about their impact on climate change and the risks that they face from climate change. That is also likely to be finalized later this year. And that’s one I can almost guarantee will be challenged in the courts, and probably the courts are going to have to decide whether that’s in the SEC’s jurisdiction or not. So that’s also coming.

And then, finally, for advisors, in particular, I think most advisors are aware that the SEC has a number of rules in the queue that really go at sort of how advisors do their business. So there’s a cybersecurity rule, there’s a rule that would require more due diligence on the outsourcing of certain tasks to third-party vendors. And then the latest changes to the Custody Rule, which would require new contracts between advisors and custodians, and a much broader definition of the types of assets that would be under custody

So a number of rules particularly affecting advisors that are also in the queue here.

So all that to say that I think the second half of 2023 is going to be a real focus on the SEC in terms of getting some of these rules across the finish line.

So with that I think I’ll bring Mark back in to facilitate some Q&A here. And thank you very much.

MARK:  Great. Thank you, Mike, very much. So we got a lot of questions here.

Kathy, I’m going to send the first one to you. ‘There is a lot of talk about the Treasury needing to step up selling of bonds to fund the deficit related to the debt ceiling. What is the effect on fixed income?’

KATHY:  Yeah, so the Treasury has announced some of the preliminary plans for catch up issuance. So when we hit the debt ceiling, they weren’t able to issue very much debt at all, and so now we have to play catch up. And they’re probably going to have to issue between now and the end of the year somewhere between $800 billion and a trillion dollars worth of treasuries. That would be significantly more than you normally get in a six-month timeframe. They’ve started with… the preliminary announcements of what they plan to sell have been all short-term paper. So there’s cash management bills, short-term T-bills, very short duration paper. And that’s because of two things. One is that’s where the demand is in the market, so it’s easy to get the paper out there and get it absorbed by the market because the demand has all been at the short end. And we expect that demand to be pretty strong, because you can remember there’s over $5 trillion sitting in money market funds. Over 2 trillion of that is in the overnight repo program. The yield on the overnight repo is about 5.05. Yields in the treasury market are now above that. So a lot of money got funneled into the overnight repo market because of concerns about the debt ceiling. Now that the debt ceiling’s been resolved and issuance is picking up, we’re starting to see those money market funds and other buyers, not just them, but other buyers come back into the market who had been holding off waiting to see if there’s going to be more disruption.

So we think it will go pretty smoothly. They’re not issuing a lot of coupon paper, that may come later in the year, but right now they’re focusing on the short-term paper because that’s where the demand is, and it’s the quickest way to start restoring the Treasury general account. So we think it’s manageable. That’s not a big one, I think, for the market to handle. Obviously, it’s going to be a lot of issuance, but supply rarely drives the long end of the market. Supply typically is more of a short-term factor, particularly, you know, right around auction times. But in this market, since demand at the short end is so strong, I don’t think it’s going to have a long-lasting impact.

MARK:  Thanks, Kathy. Liz Ann, this one is for you. ‘What would be the elements that would definitely turn you from Debbie Downer to enthusiastic Ellen concerning the stock market?’ I don’t think I’ve ever heard the phrase ‘enthusiastic Ellen,’ so that’s a good one.

LIZ ANN:  No, I’ve not heard ‘enthusiastic Ellen’ either. So as I mentioned when I was going through the formal part of the presentation, even though last October was an ugly moment in time because the indexes were taking out their June lows, breadth under the surface was improving. So a continuation of that broadening out of the market, not seeing a huge surge in optimism such that you get to the kind of frothy territory that I think was a contributor to the bear market.

And then, as I mentioned, not so much a pick back up in earnings growth, but a stabilization in downward estimates. Interestingly, the best performance for the stock market has actually come when earnings are, for the most part, still in negative territory, just improving from the trough.

And then lastly, I’d say, you know, continuation of disinflation that starts to maybe provide a better backdrop for the overall valuation picture, which is still on the rich end of the spectrum. But if we see a stabilization in the E, the denominator, plus disinflation representing what has been a negative macro force, I think those would be some of the ingredients to suggest the… it’s never smooth sailing, but that the worst is definitively behind us.

MARK:  Thanks, Liz Ann. Let’s see. Kathy, I’ll combine a couple of questions here. So what is the best way to phrase this? So I’ll start with you, Kathy. ‘What is the price trend in the dollar you expect?’ And then we’ve got another question here, Liz Ann and Jeff, asking you about the stock market implications of that dollar trend. So why don’t we start with Kathy, then we’ll go to Jeff, and then we’ll go to Liz Ann.

KATHY:  Yeah, so our outlook on the dollar is for some moderate weakness from here. So we had a 11-year bull market in the dollar that took it up almost, you know, fourfold from the lows in 2011. So it’s had a huge move here. A lot of that was driven by the fact that the US recovery has been stronger than most of the rest of the world, and that our interest rates were higher for most of that 10-, 11-year period. And that makes holding dollars, you know, more attractive because you earned more on those holdings.

We hit a peak late last year, I think, when the peak expectations for Fed tightening were hit, and now we’re seeing expectations for a relatively narrower gap between. So the Fed is near the end of the tightening cycle. Europe maybe not quite there, although after the recent numbers, they may be closer than people think. But still their inflation is higher, so they still have some rate hikes to go. Similarly, we’re seeing this in other areas of the world. So some of that interest rate differential, which has been a big driving force, is starting to come down, and that would allow the dollar to come down from very lofty levels that it hit last year.

Don’t look for a major bear market in the dollar, but we do think that there’s a bit more room for it to go down here and maybe sideways. The limiting factor, at least from… if you take out growth expectations and capital flows based on investment flows, which have been favorable for the dollar, but if you look at the spread between, you know, US yields and global yields ex US, the spread is still about 175 basis points. So if, you know, investors are going to go out of the US on a fixed income basis, they’re still going to pay a penalty in many markets to do that. And they have to have a pretty good expectation for a shift in terms of what’s happening with the US interest rate cycle. So I think that’s a limiting factor. That’s still a pretty wide gap historically, and something that supports the dollar. It will probably come down a bit from here and then consolidate as we go into next year.

JEFF:  Mark, I’ll just say, obviously, at a high level, we know if the dollar does continue to come down, as Kathy suggests, that’s generally a benefit to investors overseas, their gains translate into more dollars from foreign currencies. But let me say, I don’t think that’s going to be a major factor. You know, last year the dollar went up a lot, and yet you still saw international stocks outperform US stocks even on a dollar basis. And this year, one of the weakest currencies against the dollar has been the yen, yet the Japanese stock market has doubled the return of the S&P 500 this year, even measured in dollars.

So it’s sort of less of a factor, I think, that many people put emphasis on, ‘Should I hedge, should I not hedge?’ I don’t think that needs to be a major factor here. I think the wind is still to the back of the international investments. The kicker of an additional benefit of a dollar decline would be nice, but not necessary in order to see the performance gap.

LIZ ANN: Yeah, I would second what Jeff said in terms of the benefit that would accrue to international markets, and also the fact that movements in the dollar go beyond some of the traditional fundamentals. One thing to keep in mind is that there’s a lot more shorter term currency trading that is happening, and sentiment conditions, there are even sentiment indexes now for the dollar, which means you can see shorter term swings that really don’t have a lot to do with fundamentals, but are more driven by either technical overbought/oversold conditions or sentiment getting stretched in one direction or another. So keep that in mind. And that applies to both currencies and other areas like commodities.

MARK:  Thanks, Liz Ann. Let’s see, Kathy, ‘When will unfunded pensions become an issue in the muni market?’

KATHY:  No one knows. Meredith Whitney posited that, you know, it would be a big issue back in 2010, 2011, and issued a warning, and that that hasn’t developed.

I would also say that pension funding has improved significantly over… you know, writ large. Again, there’s always some gaps, but writ large, because returns in markets have been so strong, a lot of those pension funds have actually improved significantly, are getting closer to their funding levels.

So I don’t think it’s something on the horizon that we can see in the foreseeable future. It may be in certain areas, certain municipalities might face a problem, but in terms of a big national issue, it doesn’t look like something that’s on the foreseeable, you know, horizon in the next five years.

MARK:  Well, thanks, Kathy. Let’s see, Liz Ann, this one is for you. ‘I’d like to make sure you adjust…’ no, discuss. ‘I’d like to make sure you discuss the impact of fiscal tightening in the recent debt ceiling deal and likely upcoming budget negotiations on the outlook for the economy.

LIZ ANN:  So outlook for the economy. You know, what we’re dealing with now in the past year is just a broad change in the liquidity backdrop driven by fiscal tightening, obviously, monetary tightening. You’ve seen the biggest kind of drawdown, to use an equity term, in M2 money supply in history from what at the peak during the pandemic was about 30%, now down into negative 5%. And it’s been a big theme of everything that all of us have been writing and doing in the past year, is this liquidity drain.

Now, of course, in this higher interest rate environment, we’re dealing with the rising cost of paying interest on the debt. And a lot of times that analysis is done by looking at debt as a share of GDP and then tying in what the interest costs are. But really the ratio that matters in terms of impact on the economy is interest costs as a percent of tax revenues coming in. And historically, when that’s gotten to about 14-, 15%, that’s when you start to see what we generically can think of as austerity measures and a potential hit to the economy. The latest data shows that we’re up at about 13%. Now, we could see it turn back to lower interest rates would be, I guess, one of the benefits of getting an actual sort of formally declared recession, but in the meantime, we are about to bump up on that percentage of tax revenues in an otherwise weak tax revenue environment that in the past has led to the kind of austerity measures that can have an impact on GDP.

MARK:  Thanks, Liz Ann. Mike, this one is for you. ‘Would the 4:00 PM hard close for mutual funds also apply to ETFs?’

MIKE:  No, it would not. And that’s what I’m trying to get at, is the difference in sort of products that would result if you had sort of one set of standards for this product and a different set of standards for exchange-traded funds. So no, that’s a big area of concern.

MARK:  Thanks, Mike. Another one for you. Let me scroll down here. ‘Any final rules for RMDs from inherited IRAs after 2020?’

MIKE:  This is something that has been, you know, waiting for finalization for many, many, many months. At this point, haven’t heard about the timeline, but those are supposed to come out this year, so we should see something later this year.

MARK:  All right, one, one more question here, and then we’ll do a quick round-robin wrap up here. Liz Ann this one… or no. Kathy, a couple questions here for you related to munis. ‘How is the state of California looking relative to national muni bonds, and do you have any concerns over California munis with the tech sector pullback and office building value collapse?’

LIZ ANN:  Yeah, so California’s outlook is still stable to positive. And I think that that reflects the fact that it’s still… it’s a huge economy and a very diversified economy. Now, it is likely to take a hit as the tech sector weakens, and you start to see, you know, those capital gains drain from the tax revenues. But that being said, you know, California has the big rainy-day fund, a large and diverse economy, and came into this time period in really good shape. So, yeah, certain municipalities are obviously going to suffer from lower tax revenues, but there’s a lot of levers California can pull, and I don’t think that we’re looking at a big deterioration in the credit quality. We still feel pretty confident in most California munis. Again, there’s a wide range of them, but we still feel pretty confident about the state’s finances.

MARK:  All right. Thank you, Kathy. Let’s do a kind of quick one-minute, one minute wrap up for each of you, starting with Liz Ann. Take it away.

LIZ ANN:  Sure. So I continue to think that the debate around recession versus soft landing sort of misses the unique nuances of this cycle. And to me, best case scenario is more of a continuation of the roll through, such that if weakness starts to hit the services side of the economy more definitively that we’ve got some offsets in areas that have already gone through the recession type conditions. And to some degree, we are starting to see some improvement in housing, not yet in broader manufacturing.

I agree with what Kathy certainly talked about, that the Fed is close to being done at the terminal rate, but their inclination is to stay there for a while. And that’s certainly our view unless there is something more calamitous that happens in the economy from a market perspective. The concentration of the cap spectrum in and of itself isn’t a potential risk, particularly if we start to see a broadening out, where maybe you have a little bit of catch down by the larger cap names and some catch up by the kind of broader market that could give a benefit to equal weight. In the meantime, we continue to think you want to be more factor-focused as opposed to sector-focused. Part of the reason why many of those large caps have done well is the factors that we have been emphasizing, things like self-funding companies, strong balance sheets, strong free cash flow, positive earnings trends, revisions and surprises. We think you want to continue to focus on those factors that really have kind of a quality wrapper around them.

MARK:  Thanks, Liz Ann. Jeff, your turn.

JEFF:  Well, it’s a cardboard box recession, at least for now. But the job market may be moving from shortages to gluts, which could weigh on the rest of the economy. And all that may call for some outside the box thinking when it comes to investing to avoid the shark attack, with the average international stock, outpacing the average US stock this year. And I’ll turn it back to you, Mark.

MARK:  All right. Thanks, Jeff. Kathy, you’re up.

KATHY:  Yeah, main points are that we think the Fed, as Liz Ann reiterated, is at or near the end of the hiking cycle, but that we’ll continue to have an inverted yield curve and we’ll see long-term intermediate to long-term rates continue to drift down from here. Keep in mind, the longer the Fed stays tight… if inflation comes down and they hold current rates where they are, that’s still tightening, they’re still doing quantitative tightening. So even holding steady is still tightening. And that’s one reason that we expect slower growth, lower inflation, and lower bond yields. We’re looking for 10-year treasuries around 3- to 3-1/4% by year end, even if the Fed holds steady or even hikes one more time.

The to-dos? Extend duration. If you’ve been sitting real short, you should, we think, start to add some duration to avoid reinvestment risk. And to stay up in credit quality because tightening is a risk to credit quality, particularly lower credit quality bonds.

MARK:  Thanks, Kathy. And, Mike. wrap it up for us.

MIKE:  Well, with the debt ceiling behind us, I think we’re going to be in store for a period of a little more calm on Capitol Hill over the next couple of months. But the next big fight is looming in the fall over the government shutdown potential at the beginning of October and trying to find compromises to fund government operations for the annual year ahead. Meanwhile, I think a lot of attention should be paid to the SEC the second half of the year. We’ll see the SEC really have to make decisions on several high profile and very controversial rules, ranging from market structure, to mutual funds, to climate risk, and several issues that affect advisors directly in how you operate your business. So second half of the year is going to be big for the SEC.

MARK:  Great. Thanks, Mike. We are out of time. So Liz Ann Sonders, Jeffrey Kleintop, Kathy Jones, and Mike Townsend thanks for your time today.

If you would like to revisit this webcast, we’ll be sending a follow up email with a link that you can click on that will get you to a replay.

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The next installment of this series will be on July 11^th at 8:00 AM Pacific. Liz Ann, Jeff, and Kathy will be on that call. Until then, if you would like to learn more about Schwab’s insights or other information about Schwab, just reach out to your Schwab representative. Thanks for your time today.