Tariffs, Fed Policy, and Finding Value in a Volatile Market | Lindsey Bell and Shannon Saccocia

[00:00:00] Tariffs don't necessarily have to be this end-all of economic growth. I think the consumer, when you look at the consumer, they have been really very resilient. Our view has been that the market is going to broaden out, but that has to come along with and in parallel with earnings growth, right?

[00:00:18] If you look at part-time work versus full-time work, obviously full-time workers are going to be the vast majority of our workforce, but part-time growth has grown significantly over the last couple years. There's all of these things that go into the historical assumptions around the labor market that I think are a lot different now. Most people fail into investing, so they don't read the book and they don't learn to do it the right way.

[00:00:46] I believe that we spend far too much time as historians and not nearly enough time as futurists, as investors. You're watching Excess Returns. We're talking macro. We're talking volatility. We're talking, we're talking, we're talking because there's just so much going on here in the world that there's nothing not to talk about. Why does each hour of March 2025 feel like it's aging me six years at a clip? I don't even know if I'm going to survive to the end of this podcast.

[00:01:16] Actually, I do. These people are going to keep me going. Matt Ziegler joined today. Two brilliant guests. Lindsay Bell, Chief Market Strategist of Clearonomics. Lindsay, welcome to Excess Returns. Thank you for having me. Our pleasure. And Shannon Sakosha, Chief Investment Officer of Wealth at Neuberger Berman. Welcome to the show, Shannon. I'm so excited to be here.

[00:01:38] So holy intraday price swings and everything else, it's literally has just been madness out there. That's how I'm feeling. How's an individual supposed to be long term anymore when everything's so short term? I want to jump straight into the deep end. Talk tariffs to me. Lindsay, you go first. Like what's going on? Tariffs, are they terrifying? Are they terrible? Are they terrific? Where do you come down on this? I mean, I think the uncertainty and the back and forth about tariffs is terrifying because nobody knows where we're going, right?

[00:02:08] Every day, every hour, it almost feels like there's a new announcement of what is happening with tariffs. And I think investors are at the point where they're just kind of throwing their hands in the air and giving up. And, you know, the question is, is when is the market going to find the bottom? And I do think that for the market to stabilize, to even turn around, what we really need is a change in narrative, a change in rhetoric on tariffs or at least more clarity and certainty.

[00:02:37] You know, businesses can't handle tariffs. We handled tariffs in 2017, 2018. We have a long history of tariffs in this country, actually. But the fact that we don't know what they're going to be, how long they're going to last, it makes it very difficult for businesses to run, to operate on a daily basis, which then makes it very difficult for investors to understand what are earnings for these businesses going to be in the near term.

[00:03:03] So I think it's just like we're in this place of uncertainty and it's, you know, a lot of us are wait and see, but a lot of us don't have the fortune to be in wait and see, right? What do you think about that, Shannon? The fortune to be in wait and see. That's a very real, so very real feeling right there. Right. And it's not just investors, right? It's U.S. businesses.

[00:03:25] So, I mean, if you look at the enthusiasm, the optimism about this constructive business environment that we were entering into in 2025, deregulation, easier permitting, animal spirits. I mean, there were so many things that were driving that. And yet when you looked at and you actually see that you see it in CEO confidence. You see it in small business confidence, the NFIB. But interestingly, weighing that confidence, even in the same survey, is this increase in uncertainty.

[00:03:53] And I think that the challenging thing about tariffs is that if it really is this short term negotiation for concessions type environment where we anticipate there's going to be exemptions or perhaps we are looking ahead to say, OK, these aren't going to be protracted or sustained. Well, that's sort of a point in time disruption. Right. And you get, you know, you get companies coming out and giving uncertain outlooks or just saying we're going to be conservative.

[00:04:20] I think the real question, you know, if you think about economic growth and, you know, this this theory of American exceptionalism, if you will, is is this a true shift in how we look at trade policy? Like, are we really trying to become more insular and isolated and utilize tariffs as a revenue generating tool?

[00:04:40] Well, that's a whole different dynamic. Right. And I think that's where, you know, if you if you see folks that are very becoming rather bearish on economic growth and expectations around that, I think that's where you're seeing the challenge. And so we're not in that camp here at Newburger. But I do think that there's this other side of the coin that I think is weighing on businesses to say, you know what, maybe we just have to wait and see to Lindsay's point how this is going to play out.

[00:05:10] And maybe we don't want to commit to this additional capital expenditure, this hiring. It's probably not. It's probably worth it just to kick it down and kick it down, kick the can down the road for three or four more months and see how this plays out. So confidence in that frame, Shannon, just pull this out a little bit for confidence is the ability to basically see beyond the short term. And if I'm a CEO or an executive or a business planning the things that make earnings, when that confidence goes down, like, do you think our business is starting to seize up in their decision making?

[00:05:39] Are we actually seeing? Well, I think we were actually seeing them start to talk about making growth oriented decisions and, you know, as they came into the election. But no one's really put pen to paper yet. Right. So I think that's what you're seeing is like, hey, we said we were ready when we'd see this kind of policy tailwind. We'd be ready to invest and ready to hire more and ready to be more pro growth. But it doesn't seem like you're kind of delivering that that environment for us right now.

[00:06:09] So we'll just go back to the way we were before, which is kind of being conservative and focusing on margin and, you know, focusing on our core businesses. And we'll we'll we'll see how this unfolds before we really start to put pen to paper and put our money where our mouth is. Well, I would just I would just like add to that where you are seeing it to Shannon's point is companies plans for hiring started to tick up going into the election and into the end of the year.

[00:06:37] And now they're starting to tick down. So it's exactly what Shannon said. And the other the other place I feel like you're seeing it manifest is in the PPI. Prices have gone up there and, you know, there's speculation. It's hard to say for certain. You look at you look at some of the ISM surveys and you hear all that everybody's talking about is tariffs in those surveys. Right. So there is this speculation that the producers are starting to raise prices to get ahead of the potential tariffs.

[00:07:07] So, I mean, and then there's companies like Walmart that's, you know, there's headlines coming out now. They're already having conversations with suppliers in China to reduce their prices to for them to absorb the price increases rather than Walmart taking a hit to margins or having to pass it on to the consumer. And those are if if these tariffs go through, those are the decisions that are going to need to be made. Who's going to take on the pricing? And I think that's the other important point about this time around. I said we dealt with tariffs in 2018, 2017, 2018.

[00:07:37] This time is is a little bit different, though, because the consumer is much more price sensitive than they were then because of all the inflation that we've endured up until this point in time. You see it in the University of Michigan survey with plans to purchase durable goods and, you know, big purchases. Those that has plummeted. So you see it there. But on the flip side of that, organizations also have changed their sourcing.

[00:08:06] And so there's been a lot of movement around over that period of time. And so it's still it's just a little bit of uncertainty about how it all shakes out and who's going to pay the bill at the end of the day. Right. What you're saying, basically what Shannon just said, too, about it's that focus on margin. It's basically like, what can I actually control? What can I protect in either hiring or layoffs or whatever it is? So what we're watching in real time is these micro adjustments to saying, how do I just protect the core business?

[00:08:35] Correct. Correct. And I and I think what's interesting about this whole debate, too, like we don't know where tariffs go. If they if they end up being significantly reduced because we're using it as a negotiating tactic for something else, then there's going to be less of a margin worry. But when I look at 2025 operating margins and I use capital IQ numbers, I'm looking at about 17 percent operating margin for 2025, which would be an all time high.

[00:09:03] And that's higher than what we saw at the peak inflation in 2022. We're only just over 16 percent. So the question does become there is the ability probably for corporations to absorb some of these higher costs. But what's the wherewithal? You have to think about the shareholder, too, at that point in time. And so we shall see how how it plays out. But that's been something I've been keeping an eye on is the margin story. It's really interesting. Shannon, are you paying attention?

[00:09:33] Do you focus much on this just operating margins? Well, I think it's important to us in terms of our thesis about earnings growth driving more of the market performance this year. Right. Rather than multiple expansion. And our view has been that the market is going to broaden out. But, you know, you know, if that has to come along with and in parallel with earnings growth. Right. Because we're not anticipating that all of these kind of broader companies down cap across,

[00:10:02] you know, small mid cap and then the large caps that haven't participated to the same extent over the last two years. We're not anticipating that that all of their multiples are just going to expand due to enthusiasm around a new thematic. Right. So we're really looking for earnings to be delivered. And margins are a big part of that. I mean, you can you know, you can we can talk about whether we think, you know, GDP growth is going to be two percent or two and a half percent.

[00:10:28] But it's probably not going to be negative three percent or whatever the Atlanta Fed is coming out with now for first quarter. It seems a bit a bit grim. But I think what we're really looking at is like, OK, we there's, you know, going to be modest top line growth. But really, that earnings growth is going to have to come through for the market to appreciate in our view. And so, yeah, obviously, margin kind of across the board is going to be really important. All right. So let's talk about that on the economic level for a second. Let's let's flip this and think from the government standpoint.

[00:10:58] Talk about what you're seeing in those GDP numbers and that GDP projection, because, yeah, it's grim. And I understand there's a little data discrepancy inside of that chart that all of a sudden feels like the, you know, don't dive into the shallow into the pool. That's ugly. Do you think that's is this our future? Is this what we're doing? I'll just give my two two cents on that. I think it's a little bit more grim than than really is what's going to be realized.

[00:11:25] And, you know, you just think about, first of all, you know, we've seen a lot of seasonality over the last couple of years. I'd say that's consistent with what we're seeing in the underlying data. It's just this overhang of seasonality, whether it's weather or pull ahead from a consumer spending perspective. Net exports. I mean, wow. You know, this is when you talk about, you know, business reaction in some ways.

[00:11:46] You know, I'm sure that a lot of companies would love to have had the foresight to be able to build up their inventories ahead of the COVID, you know, kind of meltdown in March, April, May of 2020. So in some ways, it's like, wow, this businesses are, you know, looking ahead and really trying to execute again to protect that margin and protect the ability to to and protect their input costs.

[00:12:12] So I think, you know, there's this net export consumer spending, obviously expected to slow modestly. But I think the other big piece is government spend. Right. And do we you know, do you really anticipate that that's going to come down dramatically, you know, in this sort of first quarter? And how is all of what's happening from a from an austerity perspective as it relates to the size of the government?

[00:12:38] How does that translate? But I do think that, you know, GDP now is it's not a great predictor of what of what you end up seeing at the end of the quarter. But I think at least from a trend perspective, it's putting that doubt in people's minds in terms of, you know, are we going to actually deliver this trend growth this year? Or, you know, is the first half just going to be just a little bit too challenging to do that? That's not our view, but I think that's out there in the market.

[00:13:04] That's interesting, especially just you see something like that and then you can't unsee it. And there is an effect introducing new information to a story. That's how this stuff works. Lindsay, what are you seeing in terms of GDP? Has has any of the noise of the last month changed the way that you guys are thinking about economic growth for the U.S. this year? No, I think that, again, I think Shannon described it perfectly. I'm kind of in the same camp as her, so I'm not going to rehash what she just said.

[00:13:31] But what I do think is that, you know, GDP growth, just because we have tariffs, it doesn't need to fall off a cliff. The difference, though, is this time around, I do think organizations, companies are reacting much more quickly than what we saw, even in like the pre-pandemic world. I think that that's like a scar for operators right now, right? You know, they waited to pass through prices or raise prices when inflation was taking off.

[00:13:58] And they don't want to they don't want to miss that opportunity now. Again, it's probably why you're seeing the PPI start to rise, too, as folks get ahead of that. That being said, you know, tariffs don't necessarily have to be this end all of economic growth. I think the consumer, when you look at the consumer, they they have been really very resilient. There is the question about what is going to happen to the job market, given the government cuts that, you know, Doge is leading the way on.

[00:14:27] You know, you look at the federal if you look at the federal workforce, it's only under two. It's under two percent of the total workforce. Granted, if you include state and local government members, too, then it increases. But this is should be focused on the federal government. Right. Right. So it might not be as negative an impact. And I know there's the, you know, the contractor situation that like it'll filter out into that, too. So I think on that, we're kind of in a wait and see mode.

[00:14:55] I'm going to be keeping a closer or much closer eye, as I think the rest of the market will be doing on initial claims, because I think that's going to be a good indicator. We're probably not going to get in the February jobs report. We're taping this before then. We're not probably not going to see much in the way of government reductions. But I think the initial jobless claims over the next several months are probably going to be a market mover. Right. Depending on what they look like. The good thing about the initial jobless claims is it excludes federal workers.

[00:15:24] So you're really going to be able to see what other industries are looking like and shaping up. Are they getting nervous? Are they starting to lay off in anticipation of a significant slowdown in economic growth? We know the corporations over the last several years have become much more proactive in their layoff strategy rather than being reactive and slow down, then cut. Cut before a potential slowdown is the new the new way.

[00:15:50] So I do think that there's things to watch and I do think the environment is changing. But that doesn't mean I think I don't think that doesn't mean you change your investing strategy, I guess, at this point in time. Unless you do think like Shannon made the great point of are we becoming more insular? Is this a whole new shift in the way we are we are working as a country? Because then that does impact how how you should be invested.

[00:16:16] All right. Stick on a state of the consumer, because I think this nuance gets lost in this conversation a lot. And this is the great part about formats like this because we could talk about it. The state of the consumer coming into it right now is not terrible. The state of employment right now is not terrible. The information is a lot of uncertainty in the conversation. But if you were to just snapshot characterize the state of employment and the consumer in the U.S.

[00:16:42] as of March 6th, 2025, like how would you survey the land, Lindsay? And just thinking about the state of that consumer and where employment is. I think we still have a resilient consumer. The savings rate went up. Of course, spending went down, which is why we've got this GDP now that's looking pretty horrific. But they still have jobs. The most important thing for the consumer is to have a job and have an income.

[00:17:06] And we've seen wage growth continue at around 4 percent for for quite a while now and real wage growth being positive for well over a year. So to me, that's a consumer that is that is still healthy. They're nervous. You look in the sentiment surveys. But so are corporations. Right. So and so are messers really nervous. So but I don't know. Shannon, what do you think?

[00:17:33] I think the consumer is is is resilient, but it's just going to it's really going to depend on what the job what happens in the job market. No, I couldn't agree more. I mean, it's been it is always the driver of it's always the driver of everything having to do with the consumer is not only the job they have today, but the potential for them to also find another job should they need to do so. Right.

[00:17:55] And so I think the challenge here is that we continue to see this wide disparity between certain cohorts of the consumer that are doing well and those that are not doing as well. And I also think that, you know, we did see a pretty and I would say one of the things like 20 years from now, I'm sure people will do great work on this in business schools. But, you know, this increase in aggregate consumer spend by this influx of immigration into the United States. Right.

[00:18:22] It wasn't just, you know, helping to put a put a put a ceiling on wages and sap up some of that additional supply. It was creating, you know, a bump up in consumer spending. And so I wonder, you know, what the long term ramifications are of that. But overall, I think what you what what you're seeing is that consumers are reacting to the news that they hear. They're reacting to the potential for higher costs. They're fatigued. Lindsay, you made the point earlier.

[00:18:51] They're fatigued with price increases. Right. Right. And so, you know, you're coming off of a period where people have, you know, I think that whole post covid, post pandemic surge in services spending that's come down a little bit. People have done their trips. They've you know, they've gone to Italy like they've done their their their foreign things that they wanted to do. And now I think we're really at this point where it's going to be about the job market. It's going to be about overarching messaging from companies.

[00:19:19] And, you know, are you expecting to see this huge this huge increase in unemployment from government workers? How much of that gets gets gets picked up by the, you know, the private sector? There's just a lot of questions. But I think overall coming into this, you really couldn't ask for a much, you know, for you couldn't ask for an environment where the consumer should remain resilient.

[00:19:45] However, with that fatigue, I just wonder how much tariffs and an increase in costs would weigh on that. So we're maybe a little bit becoming a little bit more cautious just given that overhang of sentiment. But on paper, you know, there there's no reason that, you know, consumer spending can't sort of grow at trend for for 2025. Do you feel like stick on the Shannon?

[00:20:09] The how long does that normally take to change behavior if you don't have a pandemic or some colossal system shock event? This isn't something that happens overnight either. This is gradual, right? No. And I mean, let's be honest. If you look at consumer confidence, I mean, it is not that predictive of actual consumer spending. So, you know, you can you can survey people one week and then you can survey them three weeks later and you can get very different numbers.

[00:20:36] And so I think the translation of, you know, am I going to continue to spend and where am I going to continue to spend? We're also at this point in the year. I talked about seasonality earlier where people are getting their like their car insurance renewals and, you know, the sticker shock from that and whether, you know, I don't really want to go out and, you know, go through an ice storm in Texas to go shopping. Right. So I do think there is some seasonality in this.

[00:21:02] I think longer term, though, to really change the direction of consumer spending. You're right. It does take, you know, you know, unemployment ticking up. It takes, you know, a real sense of concern for the consumer. And so we'd have to see broader deterioration in the labor market, broader deterioration in in hiring messaging for there to be a pronounced change in consumer spend. And Lindsay, follow that through.

[00:21:30] That's a pretty big anchor, a stable workforce and a relatively stable consumer until you unhinge that. Does that show back up in that stock market margin comment from before? Yeah, no, I think so. I think that the the consumer, you know, inflation can only be passed really actually occur if the consumer is willing to pay the higher prices to. If they're not willing to pay the higher prices, then it's going to be come through from a margin perspective.

[00:21:58] And then corporations will have to kind of look at their expenses from a whole different angle. But I also think like when when it comes to the consumer. And I've done some like deeper work on wage growth and it's really been occurring at the low end, which that is still the primarily strained consumer. And it's the middle that hasn't really seen real wage growth over the last four or five years. They've seen a little bit, but not as significant as the low end.

[00:22:27] And then the very high end has has seen higher wages as well. So what I do think is happening, though, looking like just tying some things together and maybe this is just me theorizing. So hang on here and work with me. But but there's I look at some of the labor data that comes out monthly. And if you look at part time work versus full time work, obviously, full time workers are going to be the vast majority of our workforce.

[00:22:54] But part time growth has has grown significantly over the last couple of years, especially since after the 2022 hiring spree. We've seen a massive tick up in part time work and we're we're nearing almost mid 90s levels. We're still far from as a percent of the workforce. We've still got about a percentage point to go. But there was a sharp uptick post pandemic. And then it and it continued after 2022.

[00:23:21] And so I there's part of me that if you look at those trends, you look at the change in like the gig economy. And I'm not just talking like Uber. I'm talking a tick up and becoming self-employed contract work, a tick up in small business growth. I feel like there's this consumer that is being very resourceful to find other sources of income. OK, and I know I'm like I'm kind of like trying to tie the dots.

[00:23:50] Like I said, it might be theorizing a little bit here. But when you look at what the job market data has been and you look at what spending has been, we're out of the stimulus period. Right. Post pandemic. To me, I'm like, how are these two tying together? Like the job market's been good and resilient, but has it been as strong and wage growth has been decent for the low end, but not the middle? How is spending been so strong?

[00:24:14] And to me, I think that there's something happening in the background where the consumer is really I don't know if they're just hustling or or what. But that pickup and part time work while full time work is still strong is interesting to me. I'll leave it there. Yeah, that's I think this is a really important is a really important detail because it impacts the way we calculate stuff like this. This impacts the way we report on jobs, report on unemployment.

[00:24:43] Shannon, just any thoughts on that on the on the gig worker side of data? This has been I mean, it's been it was a question when we had, you know, these huge job openings numbers that, you know, everyone was like, OK, yeah, jolts. Like, you know, that's like if a you know, if the perfect person with the perfect qualifications that wanted to work for 20 percent less than market walked in the door, you'd absolutely hire them for that job. Right. I mean, you know, there was a lot of that in those numbers.

[00:25:10] And I and I don't think you know, I think the other thing is, is that that relationship between part time and full time, you know, that was always, you know, part time workers were part time because they couldn't be full time. Right. And I think that's a great point. Like, you know, the dynamics have changed so much. And I think that you also look at there's changes in the environment.

[00:25:32] There's changes where, you know, in the absence of a return to as much health care or child care and elder care as we had prior to the pandemic, the increased costs of that, you know, people are making choices. So maybe they are working less, but it's because they would be paying more for those services than they were prior to the pandemic. So there's all of these things that go into the historical assumptions around the labor market that I think are a lot different now.

[00:25:59] And so I would agree. I mean, I love led analysis. So I was definitely going with you on that. Like I that makes a lot of sense. But I also think it makes a lot of what we look at on a month by month basis really difficult. And not to be an apologist for the Fed, they know that, too. You know, they're really I mean, they're looking at this data much more deeply than they were previously and trying to figure out how they can prognosticate based on it rather than just anchoring themselves to some of these historical constructs.

[00:26:29] I love that you took it there. So we're staying there and talk about the Fed. We're talking about the Fed not being dumb, which is, I think, something that's important to say. None of us. I mean, me aside, do either of you want a Fed chair job or they've been gunning for Powell's position? No, thank you. Yeah. No, thank you. Indeed. This is a hard job. They're in a really interesting place right now because of the focus on unemployment and the focus on inflation. Do do either of you guys have a view on Shannon? What's the what's the Neuberger view on where the Fed is coming into this year?

[00:26:58] Wow. Coming into this year or coming into last week? Because we saw we saw the shift. We went from what one cut to three in the futures part. So let's see. Where are you coming into this year? Where are you now? Coming into this year, we were probably at two interest rate cuts. Actually, we because we are we were sort of anchored to the fact that economic growth will be a little bit maybe a little bit above trend this year because of some of the kind of the pro business sentiment I talked about earlier.

[00:27:24] You know, but like when the when we were when the market was six to eight, you know, we were, you know, three to four. So, you know, we have always we have been on this path to kind of expect less from the Fed maybe than than than our than our peers. But I think now I think what the real question is, is, you know, I think the Fed would would like to be accommodative. I think they would like to bring down rates. I think that their their neutral rate is lower than it sits today and they'd like to continue on that path.

[00:27:53] And so I think their biggest challenge right now would be parsing out. You know, you you you get a potential uptick in inflation. You're seeing it again. Right. But again, I think they're discounting, you know, this first couple of months of the year because, you know, we've seen that the last two years. And I still think there's some residual services effects there. So the Fed is really in a tough spot because, you know, some of this unemployment that's going to show up in the numbers is going to be government unemployment.

[00:28:21] And actually, government has been additive to, you know, nonfarm payrolls over the last few years. So I think they're in a difficult place. I think they would like to cut. I think, you know, we're still more in that. You know, if it's two, maybe it's, you know, more on the one and a half to two versus the one to one and a half that I would have been, you know, a week ago.

[00:28:40] But if they start to see significant deterioration in terms of consumer spending and if they start to feel like these layoff announcements are gaining some steam and gaining some momentum, I think they are going to be more solely focused on the on the job market today than maybe they would have been a year ago. Because I think that they viewed I think they truly believe what they say about disinflation being in place. And it's slower and it's stickier than they thought. But I do think that it is trending low.

[00:29:09] And I think they continue to believe that. Lindsay, same question. Where were you on the Fed coming into this year? Where are you after the last however many hours the last week has been since stuff's changed? I was definitely on the lower side coming into this year. I was like, you know, in zero to one camp. I think what's interesting is that if you look at like the FedWatch tool, for an example, even though the market has has moved so dramatically, including interest rates,

[00:29:39] you the FedWatch tool was that to two cuts, basically almost two cuts before the tariff news really started negatively impacting the markets. And now it's still like we're down like six percent or so on the market. And the Fed watches that we're almost at three cuts. So it hasn't moved significantly, which is interesting to me, because if the real question and the real fear in the market is this slowing of growth, you would expect that to move higher.

[00:30:08] I mean, remember where we were at the beginning of 2023? That was a growth scare, right? We were afraid that growth we're going into a recession. All the headlines were there, right? Seven, eight cuts for the Fed was expected. And we had to walk that back. But we're not. So in some regards, and you look at the bond market, you look at spreads and they've remained. They've ticked up a little bit more recently, but they're still low, very low compared to even pre-pandemic levels.

[00:30:35] So the bond market to me is is not sensing any sort of significant scare or it's not signaling that to me. I do think that the Fed would like to ease. I think it's interesting, too, that the Fed has their their long term neutral rate has moved up over the course of the last year or two. It's not super high, but it's still it's higher than it was and it's lower than where we're at today.

[00:31:03] So I think that Fed Chair Powell is going to try to square that. But I think it's very there. I have a very, very difficult job. Just like you started the question. Nobody wants that job, right? It's a very difficult job to thread the needle of between growth and inflation and what tariffs mean and how the market's going to react, how the consumer is going to react. And so at their March meeting, I kind of still expect a pause. I don't think they're they're very data dependent.

[00:31:32] They're not going to have the data that they need at that point in time. And, you know, that might make markets nervous. But I mean, the market's not pricing in a March cut, but I don't know. It's something to watch. How do we reconcile? And I'm struggling with this a lot lately. The thought of terrorists being likely inflationary to the degree that they happen and the Fed being in this mode where they might feel compelled to cut. How do you reconcile those two things, Shannon?

[00:32:00] I think it's I think that's what Powell has been telegraphing in the last couple of press conferences. I mean, he's he's he's they're concerned about that, you know, and they're concerned, especially at this time. Like the timing is so important to think about here because they know it's already going to run a little hotter because of the seasonality. And you couple that with tariffs and you start to think about even if the tariffs are only on for a couple of months. Right. This is not the couple of months we want.

[00:32:30] So, you know, in terms of, you know, setting the path for the rest of the year. So I think I think the Fed is very concerned about that. And if you think about the challenge that they had and and, you know, again, I'm not a Fed apologist in any way, because if you look back and and they're they're moniker transitory and they're they were behind the curve.

[00:32:52] Right. In terms of seeing PPI creep up, not understanding how that would how that would transmit to CPI, not seeing how fast wages were rising in the supply demand mismatch and in employment. They're loath, loath to make a move here against something that's so clearly potentially inflationary like tariffs.

[00:33:11] Right. And so I think it's more of a timing scenario right now, because I do think that if tariffs are implemented at the scope and level that would be meaningfully inflationary, they're also going to impact growth, which kind of takes a little bit of the pressure off. So I again, I think this is more about really trying to ride the line the next couple of months. It is going to be so challenging for them. But to Lindsay's point, they're really not expected to cut until the summer.

[00:33:41] So it's just going to be a really you know, these these next couple of meetings are going to be so tough to be able to have people feel like they still care about inflation. They don't want to see that resurgence, but also that they're very mindful of this potential growth impact. It's going to be painful to watch these meetings. Yeah, absolutely.

[00:34:04] What I would just say is, too, is like you see these these tariffs are different than like demand driven inflation. They create this inflationary situation that is temporary. It's you know, once you cycle it, yes, prices are higher, but it's over. Sure. And if you look back, the inflation impact in 2018, 2019, because everything was negotiated down, it depends on where you land.

[00:34:30] Right. But because things were negotiated down, the impact was like a tenth of a point to, you know, three tenths of a point on inflation, which didn't translate to a significant hit to GDP growth. I took a look back 2018 because I was like, what happened in 2018? The stock market was down six percent. Right. But you know what? Earnings were up 22 percent. And GDP growth was like three percent.

[00:34:58] So it just it really depends on the level and duration of the tariffs. So let's talk about this and the meta angle from investors and what investors are looking from this here, because this is a it's a confidence puzzle and it's a paradox. And I know you guys don't know what the market's going to do. I can pretend you do and we can hold you to it, but I won't do that to you. Shannon, what do you think does if the market's focused, is the market just.

[00:35:28] Is there one thing that you think matters more than anything else? Or is this a case of competing priorities where priorities was never supposed to be a plural word in the first place? Like, are we just scattershot or is there like a thing we should all be watching the closest? I think equity investors really want to see the market broaden out.

[00:35:47] I really think they want to be able to feel a high level of conviction buying financials and health care and industrials and and and and riding this industrial impulse wave. I do. I think they really want to see. Sick of Mag 7. They're like, give Exxon a chance. I think so. Well, not Exxon. I think energy is sort of that. That's a whole other story.

[00:36:09] But no, I do think that there is, you know, and I think that what investors want to do, because I think it's indicative to them, number one, of a broadening economy, which I think, you know, people want to really be invested in. And then, too, I think that investors as it relates to the Mag 7. And I think the drumbeat of asset light to asset heavier, a significant amount of investment before monetization, valuations that feel very vulnerable.

[00:36:38] I think that drumbeat is, you know, it's starting to really be more pervasive. And so I think, you know, just from a risk mitigation standpoint, I think investors, you know, want to take a little bit of that risk off the table, but they don't want it to be such a difficult relative trait. And so if you go into this environment where you say you're having decelerating earnings for the Mag 7 and you know that from an absolute perspective, earnings on the rest of the market are not going to be as strong as those earnings.

[00:37:08] But that delta from a relative perspective is going to start to compress. That's just the justification. So I think that's where investors are looking at. So I think that's why tariffs are particularly concerning, because, again, they want to see that earnings growth out of the rest of the market. And they understand that, you know, during periods of uncertainty, large cap tech has become sort of the safer trade.

[00:37:34] And so, you know, are we going to all kind of revert back to that? That's really, I think, the biggest push and pull. And I think more investors are being pulled to want to diversify rather than what we've seen over the last two years. What do you think, Lindsay? Are we is that broadening? It's definitely not baked into the cake yet. But is this the thing people are most excited about? I think they're excited about it. But there's a caveat that that the Mag 7 that tech does does have to hang in there.

[00:38:02] You know, we can't just if it doesn't perform well, it's going to take the whole market down with it. Right. And I think, too, the interesting thing is you look at tech, you look at communication services. And from a valuation perspective, they still look very rich, even though we've had the pullbacks that we've had. Right. You look at the Mag 7, though, many of them last I looked were in correction territory. Not sure where they're at right now. But their valuations have come in quite a bit.

[00:38:29] And there's a handful of them that are trading under their like 10-year average P. P.E. So I think that the sector or like some of the names within the sector are starting to look interesting. And before this tariff situation started to really escalate, what you were seeing is that there was this not just this rotation into the broader market in general, which I agree with Shannon. I do think like investors are really excited to get that going. You know, we went a little variety.

[00:38:57] I guess we're tired of eating the same lunch every day. But you were seeing a rotation within technology also, too. So it was like this. Let's look for better valuations. Let's look for a better trade at this point in time. So you were seeing like the old school tech names of the world do better again ahead of the tariff fight. You were starting to see semiconductors level out.

[00:39:25] And even even from an earnings perspective, the semiconductor earnings were starting to stabilize, too. We even know there was still significant uncertainty from a competition perspective and and and from the potential tariff situation. So I think there is this this desire for investors to broaden out, but they're still going to keep their their waiting within. You can't get out of it. Right. It's such a significant component of the index. You just can't ignore it.

[00:39:55] So we touched on it and this isn't to comment on any particular company, but I do want to talk about sort of industries and sectors and stocks because of what you said, Shannon. But the if we are broadening out, are there other sectors or industries where you see their traditional quality or like quality with a growth bias? That actually looks like where money would flock to now, maybe not as the flight to safety, but where money might flock to say this is a good opportunity in 2025. Yeah.

[00:40:24] So I think, too, that we talk about a lot are financials and health care. You know, I probably talk more about health care just because I feel like I don't know, back in my back in my very early days, I covered health care. And so I feel like that's my, you know, my bread and butter, if you will. Although it's probably health care industry has changed a lot in 20 years. So I don't know if I'd be able to drop right back in.

[00:40:47] I think I think that the thing about financials is obviously one of our one of our strongly held views is that M&A activity is going to pick up and that there's going to be opportunity in public and private just from an activity perspective. There's also a lot of places to go in financials in terms of, you know, sub industries that that you might be interested in investing in. There's a number of different ways you can play financials. And I feel sort of the same way on on on health care, actually. You know, the interesting thing about health care is it's always been viewed as a defensive sector.

[00:41:17] And then you had all of this innovation over the last couple of years with mRNA technology, with the GLP-1s and the growth of those. That's very different from what we saw with, you know, sort of the cholesterol drug fad, you know, and growth that that, you know, really benefited companies like Pfizer back in the day. But but I think what you're seeing is that you're also seeing this demographic tailwind within health care that not a lot of the sectors have that they just don't have. They have a lot of headwinds, if you will.

[00:41:46] So I think that the broadening out is, you know, and I know other people are playing this differently. You know, they're playing it in, you know, they might be playing it materials. They might be playing it in energy. I think energy is sort of a standalone concern at this juncture because there's just a lot of supply overhang that I think is on the horizon. And and and to go back a little bit to Washington, you know, the U.S. government has made it very clear and the Trump administration has made it very clear that they do not want to see a high energy prices.

[00:42:15] And so between that and OPEC plus wanting to get more production online and a potential resolution in Ukraine, I may be not quite as excited about energy. But I do think that the broadening out has, you know, a lot of a lot of places where you can go and then you can also go outside the U.S. And I think that's something that has done really well to year to date as sort of ex-U.S. exposure in the equity market.

[00:42:39] But but that's, you know, that's another part of your portfolio that a lot of investors, especially over the last 10 years or so, you know, have either, you know, been under invested in or perhaps not invested in at all. We are definitely talking international in a second. Lindsay, do you have any other thoughts on industries, subgroups that you think if the money's not all chasing big tech, where else do you think people are looking that feel like a good value?

[00:43:06] Oh, I hate to be like a broken record, but I feel I do feel like like financials, the banks have, you know, have come in over the last couple of weeks, too. So I think that there is opportunity there. But like Shannon kind of hashed that out. I like health care. You look at health care. It's like the second biggest earnings growth sector for 2025. So I think there is opportunity there. I mean, granted, I always think about health care. I don't know how you feel, Shannon, but I feel like people just like forget about health care.

[00:43:35] They just they don't want to do it until it's like you need something defensive in your portfolio. I mean, health care wasn't doing that great when we entered the year, but it does. It's coming with double digit earnings growth from a valuation perspective. It's trading at a much smaller premium. It's still at a little bit of a premium, but versus the other sectors, there's opportunity there. That's also why I like financials, because from a multiple perspective, it still looks reasonable. And there are places to go in between.

[00:44:04] I know the insurers have had a really big run this year. So maybe. But I do think there's opportunity in the banks. If you really, truly do believe that the second half of this year at least is going to maybe return us to, you know, the growth path. And we'll focus on the growth policies of the Trump administration once we get through all this tariff stuff. Then I think that the financials are going to be a sector that absolutely benefit from that deregulation, too.

[00:44:32] The other sector I would look at, too, is consumer discretionary because it's been beaten down significantly. A lot of that has had to do with Amazon and Tesla's in the consumer discretionary sector. So you always have to be mindful of those two. But I also think when you listen to retail earnings this quarter, they were kind of provided like conservative guidance. But you have to remember when they reported, too, they knew this tariff stuff. They had like a leg up. They knew this tariff stuff was was happening.

[00:45:01] And if you reported this week, you really had a like a little bit of an edge to like cut your guidance a little bit to give yourself a lower bar to step over in the year ahead. But but when I heard when we heard from Walmart, they talked about a consumer that was was was resilient, that was still spending. And again, I know this can change very quickly. If the job environment changes quickly, then this will this will all be different.

[00:45:26] But I do think that some of these names have been beaten down so significantly that it's it is worth kind of looking into because there has been the consumer that is price sensitive has turned to Walmart and other value oriented retailers. Amazon as well to really do their shopping, too.

[00:45:48] So I think that the consumer discretionary sector is just something to to consider and keep an eye on as as we get through the next several weeks or months. On that specific point, if if there's no recession, if the world doesn't end due to tariffs or we don't go into some tailspin, something like consumer discretionary would be one of the places you would expect to be the most mispriced against that scenario. Right. Yeah, exactly. And so I think that like kind of perfectly sums it all up.

[00:46:18] And that the consumer is kind of being starting to be they haven't been fully left for dead. But the people are starting to really be uncertain about the the growth potential for the economy and who is the main driver of the economy. It's the consumer. And if they lose jobs, that's that's exactly what's going to happen. But, you know, I also think that corporations are going to have a harder time laying off people unless growth really does substantially slow. We do get negative GDP numbers.

[00:46:46] But I think they're having going to have a hard time. It's going to be a continuation of what we saw over the last year or two where people are holding on to their employees. They're not really hiring, but they haven't been laying off significantly. I know some of the layoff data is starting to tick up. So you've got to keep an eye on it. But I think it's going to be really hard with worker shortages. That's a trend that's not going away based on demographic, the demographic situation.

[00:47:10] So I personally don't expect the layoff situation to get significantly worse outside of the government sector because of that. All right, Lindsay, I'm giving you at least first pass on this one because I don't want to rob you of echoing Shannon in case you both agree on this. Hopefully you'll wildly disagree on this. Give me a wildly different take. You both talk to a lot of allocators, investors, people who aren't just thinking of what sector or stock or, you know, weird meme coin in the moment to invest in.

[00:47:40] And I feel like as a as a professional investor, it's I look back and say, first, we wanted to kick EM out of the portfolios 10 years ago. And then it's just been several years of reducing international diversification that EFA, those European banks, what a bunch of deadbeat losers. Everybody wants to invest in the U.S. and they forgot about the rest of the world. And all of a sudden, the last couple of weeks, it seems to matter again. Yes. Lindsay, what do you think about that? It does seem to matter again.

[00:48:10] You know, international markets, whether it's emerging markets or developed markets are both outperforming the U.S. And, you know, I think a lot of portfolios have gotten concentrated in the U.S. You look the last six years, the U.S. has been the S&P 500 has been the best performing asset class by far. And so this year has been an anomaly. I don't think you should get out of the U.S. But I do think it's a reminder of, again, looking at your portfolio, looking at the balance of your portfolio because of that performance.

[00:48:40] It's probably gotten misallocated over the last several years. Right. And I do think that there's opportunity, particularly when you look at Europe. I think the one thing that's coming out of the Trump administration is certainly he's lighting a fire under the Europeans to really spend on defense, has been the announcement. Right. To really look at their debt situation. Germany is getting a little looser with their debt. I mean, can you imagine? So I think there's opportunity.

[00:49:08] But also I think the reason folks are piling into these different parts of the world is because exactly what we said earlier is that the valuations there look much, much more attractive versus earnings compared to what we're seeing here in the U.S., which has gotten very stretched because of that performance. So I still think that there's opportunity in international, but I'm not leaving the U.S. Okay. So a rebalance, at least from you. You still have to have it. Shannon, what are you guys thinking?

[00:49:36] What are you saying about international diversification for equities? Yeah. So, I mean, we've been there. We've been in it. And we've been waiting for the time.

[00:49:48] So I think you just go back to some of the – and I don't want to echo exactly what Lindsay said, but I think a good point and one that I do think is important for people to think about is, you know, if you're looking to increase – if you do believe that there is going to be this industrial impulse or this industrial inflection and you would like to have more cyclical exposure in your portfolio, you can invest outside of the U.S. because just they naturally have more cyclical exposure in those markets.

[00:50:18] And so you actually don't have to get that cute even by – and just – you'll get more cyclical exposure just by diversifying outside of the U.S. So if you're really looking for kind of the easy button on that cyclicality trade, you get it outside of the U.S. The other thing to think about is that, you know, if you think about what's happening – and Lindsay talked about fiscal spend in Germany. You hear all this talk about stimulus in China.

[00:50:43] Then you think about rates coming down in Europe and coming down in the U.K. Wow. What did we do the last few years that created this period of relative outperformance? We had really accommodative fiscal and monetary policy. And the other thing is that, you know, outside of the U.S., the consumer is much more interest rate sensitive. There's much more floating rate debt in terms of housing.

[00:51:10] So there's these catalysts that are kind of coming together that compound the valuation argument. But I think more importantly, it just comes back to what do you want more of? And if you want more of cyclicality or you're overweight in technology just on the basis of two really strong years, you can sort of add to that cyclicality pretty easily by investing outside of the U.S. What about the – they almost feel like the most taboo of the international exposure. Any thought on China?

[00:51:40] Dare I say nobody can really invest in Russia anymore. But what about China? Any view on China and investing there, Shannon? I would say that we're becoming more constructive. And our views are based on the fact that we are starting to hear more positive sentiment directly on the ground in China. So the consumer remains the huge challenge in China, right?

[00:52:05] You think about the commitment to trying to fund business investment and a lot of what's happened with state-owned enterprises in China has really been focused on businesses, right? State-owned enterprises getting support from the government and infrastructure boom, real estate boom. None of that's really been focused on kind of direct stimulus to the consumer.

[00:52:30] And I think what you're seeing and hearing from the Chinese government is that they're starting to acknowledge that, once again, looking to the U.S. and what we've done, you know, kind of more direct, if not direct, stimulus for the consumer is really what's necessary. And so I would say we're becoming a bit more constructive on China. I think that the tariff situation is kind of a known risk, unlike what we've seen with maybe other trading partners.

[00:52:54] And so incrementally more constructive, partially because the sentiment is just so negative, too. I mean, you know, at some point, it's a state-controlled economy. And not a small one. And not a small one. And they will make efforts to counteract and offset some of the slower growth that they have been experiencing. Very, very interesting way to frame that.

[00:53:21] Lindsay, do you have any view on any of the emerging markets in particular? Or, you know, I still hate that we're even still calling them emerging. But, you know, China, one of the largest economies in the world. Any feeling on their markets? Yeah, I mean, I just think that there's, you know, I'm not the expert on the emerging markets. But what I would say is, like, I do I just think there's opportunity there from from a growth perspective and from a valuation perspective, too. So I think it has a place in your portfolio.

[00:53:46] And and now's a better a good as good of a time as any to start to look at it and to consider it for all the reasons that Shannon said she's she's much more articulate on it than I could be. An extra credit, though, on that even just the point of rebalancing the average portfolio, if you had not rebalanced in the last few years, is a pretty dramatic overweight to the U.S. even after this round of volatility. Well, and even in international technology, U.S. is the technology component of international.

[00:54:16] And it has a heavier weight than it's ever had, too. So there's there's that aspect. Yeah, it makes a big difference. Let's stick on technology before we skate into these fun final closing questions I have for both of you. The the technology that you're using, I'm really curious as a strategist, as investment thinkers. Use an A.I., Lindsay. You're not A.I., right? You showed up authentically as yourself today. What A.I. tools are you using in your day job?

[00:54:42] Well, so I sometimes time use perplexity to like when I'm writing and I'm like, this sentence is not that good or like, can we smooth this out? So I will like drop in a couple sentences that I might be like writing in a research note to kind of help me and surprisingly and impressively. It's a pretty good job. And sometimes I'll use it to do a little bit of research, but I don't know. I feel like I'm getting old and falling behind on the tech loop.

[00:55:10] I definitely need to take some A.I. courses or something. What do you guys do you think? Interesting. Shannon, what do you got? What's in the tool? So I think we've been thrust or at least I've been thrust into using it because our firm is using it. And so, you know, we have our own ecosystem. We've built a lot of we built we built a lot of assistance and tools on top of our internal data. And I think it's actually helped.

[00:55:38] And to that end, we're also, you know, we're getting trained on prompts where, you know, we're sort of being taught how to use A.I. as part of our job. And so I don't I wouldn't say it's like my first spot to go and look for something because I'm not quite there yet. But I will say that I especially for the the data and the research that we produce internally, it is increasingly become the first place that I look for that.

[00:56:06] So rather than going out to a SharePoint site or, you know, reaching out to an analyst, I just go in there and I know I'll be able to find what I'm looking for. But I think it's more about like sort of training your brain, like using that mental muscle to be like, how do I get a more and it's and it's when you do it right, it's really much more efficient than other ways of looking things up. And I don't disagree. I mean, I think reframing, recasting writing, I I don't know. I love the voice that I write in.

[00:56:34] So it's hard for me to have that, you know, not sound like me. But I would say, you know, that is something that I utilize, especially if it's a long form piece and I know I've just gotten tired of it. I'll throw it in there to see how they can tweak it. And I I make some of the changes. I'll put it that way. It's just an idea generator.

[00:56:53] I should I should add, though, like just a little plug for Clearnomics, because we are fintech and what our technology does is it allows advisors to use the research that my team writes and and the charts. So we it's a it's a database full of charts, all the different macroeconomic charts you could you can imagine and some that go deeper and market charts to that.

[00:57:18] You can imagine you go in there, you can find them and as an advisor, you can use them to create either your own notes to clients or you could take what we've written. And we have, you know, a place where you can personalize it and edit it as much or as little as you'd like to to fit your tone of voice or anything like that. So it's a pretty cool tool. So Clearnomics, check it out. Little plug.

[00:57:42] And it sounds like what you just described sounds very familiar to what Shannon was just describing on how like you're querying the internal data that you guys are capturing and the way you're using professionally. Right. This is an efficiency boost for both of you that you're seeing. For sure. Oh, absolutely. Yeah. Yeah. My experience, too, me and my dear friend, Claude and perplexity and occasionally Grok. But something's weird about Grok. And I just can't. Not just the name, not just the ownership structure.

[00:58:11] Standard closing questions. We're going to ask two of them. Shannon, I'm going to let you take this one first and then we'll flick it for the other way. The question is, if you could teach one lesson to the average investor, what would you want to teach them? I would tell them to wait a week before doing anything that they think they want to do and sit on it for a week and let it season.

[00:58:36] And then if they want to make that move in their portfolio or reallocate, then, you know, it's probably, you know, they probably have enough confidence or conviction in it to do that. I think there's I would love to say a longer time period, but I'm just being realistic about people who look at their accounts every day. So if you look at your account every day, wait a week before you make a change. Solid, solid advice. You don't need those extra shares of NVIDIA at two in the morning, right? That's right. Very good.

[00:59:06] Lindsay, what about you? If you could teach the average investor one thing, what would you teach them? I think it really would be compounding because it really is the seventh wonder of the world, right? And it kind of lines up with what Shannon said, too. Like the longer you're invested, the more money your money makes and it works for you, right? So I think it's just it's something that it should be taught in grade school. That simple thing of what is it? The grain of rice on the chessboard where you just double it each time.

[00:59:35] It's like, yeah, permanently changed, rewired my brain to just understand that, that by the end of that board, you can't even see the board anymore. All right, Lindsay, you get the upper hand on this one. What is one thing you believe about investing that the majority of your peers would disagree with? Name your own peers at your peril, but go ahead. I'm not going to name any peers, but I think it is kind of relates also to the individual investor. And I think it's you and I kind of talked about this.

[01:00:03] What I would say is that most people fail into investing. So they don't read the book and they don't learn to do it the right way that all of us are here to help educate people to do. They don't hire an advisor. They just put money in the crypto coin that their neighbors are talking about. You know, they buy the meme stock or maybe buy a good stock. And then they learn along the way.

[01:00:28] And usually it's through failing that you realize, oh, I have to learn how to do this the right way. And but you got to get your feet wet. Right. And so I think getting your feet wet and learning through failing when it comes to investing is perfectly OK. Only if you're doing it in small amounts, though, you can't just put it. Don't fail too big. But failure is actually maybe one of the most important ways to learn investing. I love that. All right, Shannon, this is this is you.

[01:00:57] What's one thing you believe about investing that the majority of your peers would disagree with? So I will preface this as saying that I I went to school and I got degrees in history and economics. So but I believe that we spend far too much time as historians and not nearly enough time as futurists, as investors.

[01:01:19] So I think anchoring to these periods, having experienced them, you know, there are so many things that have happened in history that were point in time that if you put the actual context around, you realize that they may be at all applicable to what you're experiencing today. And so I think in order to actually be a successful investor, you know, you have to think about what might be instead of what's happened in the past. That's fantastic.

[01:01:46] Without saying this time is different too many times or torturing yourself with whatever way that's. Well, it may or may not be. But more importantly, you know, you're not investing for something that's happening today. You're investing for what's happening in the future. And I think we just spend a lot of time trying to anchor ourselves to something that we've experienced or that somebody else has experienced in a book and really not thinking about, you know, what does the world look like in five, 10, 15 years?

[01:02:13] And being willing to kind of go out on that limb with people that are already there. Brilliant. Lindsay, if the people want to learn more about you or economics, or Clearnomics, they can learn more about economics too. They want to learn more about Clearnomics, follow your work. Where should they find you on the internet? Clearnomics.com or I put stuff on LinkedIn all the time as well. Fantastic. Shannon, same question. They want to follow more of your work. Where should they find you?

[01:02:42] Either at nb.com or nbprivatewealth.com. And I too use LinkedIn on a regular basis. All right. Find both of these people on LinkedIn. You're watching Excess Returns. Like, subscribe, comment, all the things. Thank you both for joining us so much. Thank you. Thank you. Thanks so much for tuning into this episode. If you found this discussion interesting and valuable, please subscribe on YouTube or your favorite podcast platform or leave a review or a comment. We appreciate it.

[01:03:09] No information on this podcast should be construed as investment advice. Securities discussed in the podcast may be holdings of the participants or their clients.