In this episode of Markets in Focus

Investor focus has shifted from fiscal policy to tariff effects, and the ensuing roller coaster of multi-standard-deviation market moves has left everyone wondering what comes next. Matt Orton, CFA, and Joey Del Guercio discuss what’s happening with inflation expectations, whether the “Fed put” is still in effect, and which narratives can be seen in hard and soft economic data.

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Transcript

Matt Orton:
Welcome everyone. I am Matt Orton, Chief Market Strategist at Raymond James Investment Management, and this is a special episode of our Markets in Focus podcast because it is the inaugural short-form episode. As part of our broader relaunch, we're going to continue to have the longer monthly episodes that I know many of you have gotten used to over the years, but we're augmenting that with more frequent and topical market-based updates between myself and my colleague. There’s a new face on this call, Joey Del Guercio, who is a key part of my market strategy operation at Raymond James Investment Management. So Joey, thank you for joining.

Joey Del Guercio:
Thank you for having me.

Matt Orton:
Excellent. Well, I don't think we need to do much more of an introduction. And given that we are trying to stick to short form for these podcasts, I think there's plenty to talk about, not enough time to talk about everything. We are going to do our best, and always share any feedback you have. If there are prescient things that you want us to talk about, let us know. But with that, why don't we get started, Joey?

Joey Del Guercio:
Yeah, absolutely. I think given where everyone's minds are, let's start with the macro. The last couple of weeks have been an absolute roller coaster. And since Liberation Day, there's been a few multi-standard-deviation market moves, both up and down. With that, let's kick things off with Liberation Day. How did it come in versus your expectations, Matt? And then I guess also, as we've seen all of these various amendments come through, has that changed your general thoughts?

Matt Orton:
Yeah, good question. I mean, markets certainly don't feel very liberated from Liberation Day. It hasn't been good. It hasn't been constructive at all. The markets have voted, and the markets have voted against the policies that we've had. The good news is that things broke so much in the Treasury markets that it forced the hand of the administration. We got the blink that we needed — and that I've written about over the past few weeks — to start to get some change. So we have a 90-day pause on tariffs across almost everyone except for China. There's still the baseline 10% tariff in effect for everyone. But in addition to the 90-day reprieve, we also have carve-outs starting to come right now from electronics, electronic manufacturing components.

There's still questions with respect to what's going to happen from semiconductors, from pharmaceuticals, which we hopefully are going to get more clarity on over the next week. But at the end of the day, we have a little bit more certainty that perhaps the left tail of this worst-case scenario has been shortened. I think all of the worst-case economic outcomes are off the table right now, but there are still a lot of questions. There's still a lot that we need to hear from management teams as we head into earnings season. So there's still a lot to digest. But there's no question that there will be impacts from wherever it is that we land.

Joey Del Guercio:
And I think it's pretty funny, because all that anyone talks about these days is tariffs. I can't go 30 seconds without reading a new tariff headline, but it was just a few short months ago that all we were really focused on was monetary policy. And for some context last week we had that CPI report come in, the stock market still melted lower. For additional context: we're recording this on Monday, April 14th, at 10:00 in the morning, just in case any more tariff announcements come through.

But in thinking about monetary policy, I would not want to be Powell right now. He's probably the last person on earth I'd want to be, just having to deal with all of this. So, what do you think's going through his head? And at the March FOMC meeting, he resurrected the whole transitory term, I kind of got some COVID or post-COVID flashbacks. How do you view the path forward for monetary policy, and I guess how it's intertwined with inflation?

Matt Orton:
Yeah, that's a poor choice of words — I did not like the choice in the reprisal of the word transitory. What I think is important here is that you've seen the Fed really showing that they're stuck between a rock and a hard place. You've got economic growth that you know is going to slow down as a result of tariffs; the question is how much. And again, I think we've lopped off the worst-case scenarios of the slowdown for economic growth, but there's still going to be an impact. At the same time, the Fed knows that inflation is going to increase as a result of tariffs. So even though all of the data that's coming over the last week is stale — it's been immediately stale — it still tells us where we're coming from.

The level at which we're coming from is important. I still think that context is important. I know the market's pricing in still 90 plus basis points of cuts so far this year. I think that's a little bit ahead of where we're actually going to go, because in recent comments at different speeches, Powell has reiterated and has been a little bit more resolute with the fact that they're going to look through some of the softer economic data, wait for that to be maybe corroborated, and hard data because of where inflation stands. The key here is what's happening to inflation expectations, right? You've called out the terrible chart with respect to inflation expectations, right?

I mean, short-term inflation expectations are totally de-anchored, but one could argue that's a little bit irrelevant. It's the longer-term inflation expectations that matter. But those are moving, those are picking up fairly significantly.

The Fed, I think, is hoping that maybe it's going to settle before they have to make a decision. But I think also maybe Powell's doing this to show that they are independent from the thinking of the administration. There's a lot going on there, but I think the market's a little bit too aggressively priced with respect to the number of cuts we're going to have this year. I still think it's probably closer to two, not three to four.

Joey Del Guercio:
Okay. And I guess off of that, do you think that there's the Fed put in play?

Matt Orton:
The proverbial “Fed put,” I don't know. Yes, there's still a put, but the strike price of Fed put is much lower than I think the market was expecting. And same thing with the Trump put: You could say the same thing. The strike price of the Trump put is really, really low. We saw it. We've gotten there, but it's lower than I think a lot of people thought. Yeah.

Joey Del Guercio:
And then also, during the March FOMC meeting, Powell harped on the difference between hard data versus soft data, where the soft data — like you had alluded to with the inflation expectations — it's been coming in pretty abysmally. We haven't seen the hard data deteriorate yet.

I guess, just really quickly, what's hard data? What's soft data? And then how do you think the soft data is going to filter into the hard data?

Matt Orton:
Yeah, so imprecise super quick definition: I mean, the soft data is the sentiment data. It's all the stuff that comes in from surveys, how people are thinking, how people are feeling, what expectations are looking like. The hard data is the data — What is CPI? What is PPI? What are the jobless numbers? What's unemployment like? Actual tangible things. And so far, hard data's holding up. The question is, when do we start to see cracks to that rolling over? That's the big question.

We know there's going to be some cracks, but I think this is why maybe I'm a little bit more constructive than the rest of the market. Because again, sentiment data needs to be taken with a grain of salt. It is valuable, but you can get whiplash from sentiment. And also, sentiment was abysmally negative for all of 2022, and the consumer didn't fall apart then. I didn't think they were going to fall apart, because again, you've got to look at what people do, not necessarily what they say.

The concern is: Have we had death by a thousand cuts? Has there just been too much pervasive uncertainty, for too long, that people just throw their hands up and say, "I'm done"? Couple that with, perhaps, maybe negative wealth effects from the equity market being down, or the feeling that more of their 401(k) or market gains are at risk. It's hard to say we're seeing that.

I mean, I'd look for American Express earnings on Thursday to get a sense of what the consumer is doing. Bank earnings that we've had up to this point are not necessarily showing that playing out yet. Again, I probably wouldn't be speculating in the destruction across consumer names. I'd be more looking across information technology or parts of the AI trade that had been blown up. But were there still really good long-term fundamentals in place? Or even financials, for that matter.

Joey Del Guercio:
Thank you. And yeah, I guess the whole recession narrative is front and center in the investor psyche, like you had alluded to. And we're saying stagflation. Again, this all kind of started about a month or two ago, and GDP now flipped negative. I guess it goes without saying that you don't think the economy is going to deteriorate to the point of recession. It's just a slowdown.

Matt Orton:
That's right. I don't think we're going to have recession, especially now that we've seen the blink from Trump in the White House. Inflation, yes, it is going to be inflationary. Things are going to be more expensive. I mean, I'm already hearing rumors of people paying an inflation premium when they go out or buy certain things. So that's going to be a very real problem. We've already been dealing with some more persistently inflationary challenges up until now. Within stagflation, I'm a little bit less worried about the “stag.” I'm a little bit worried about deflation, but not so worried about it that I don't think the Fed's not going to be able to do anything this year.

Joey Del Guercio:
I think that's more than enough macro context. So, I think it's time to turn to markets. The S&P 500 just drew down about 19%, I think 18 point something, rounded to 19. Just shy of 20%, which would be the official classification of a bear market. Russell 2000, Nasdaq, both officially in bear markets. And before we turn to equities, I want to ask you a question about something weird that happened last week: Equities sold off, but at the same time, we saw bonds also sell off. The 10-year spiked to about 450, and we've seen the dollar continue to decline. So, how unusual is that, and what is the market trying to tell us?

Matt Orton:
Yeah, it's unusual. It's not unprecedented. We have seen periods like this in the past. It doesn't happen very, very frequently. I think, at least the treasury market — I mean, when you look at the 10-year yield, it's up about 50 basis points from the lows, on what was it? April 4th, until where we are now. That's significant.

And I really think it was that the shoot up in yields that really forced the hand of the White House as well. I think a lot of it is structural with respect to the market. There is this basis trade unwind. You can look at some of my other work; I'm not going to dive into that right now. Or maybe that's the topic of a future podcast, in terms of what this is. But I think there were some very specific technical factors that work in the market with a really, really leveraged trade that was unwinding because people needed money to fund losses that they were having elsewhere. And just like we saw that yen carry trade unwind back in July of last summer, these things can happen very, very quickly and sharply.

I think what we are trying to suss out now in the treasury market is whether or not there are any elements of a buyers’ strike. Other foreign governments, who have been buyers of U.S. treasuries, are they pulling back on that? I think it's too early to say. I don't think there's very much validity to the Chinese not buying anything else. I mean, Chinese haven't been net buyers of U.S. treasuries in the past 15 years. That story, to me, doesn't carry a lot of water, at least right now, until we can get some more data. But I think there is some element of that playing out to a small degree across the rest of the world, at least in the short term.

Whether or not that carries over longer-term to create structural challenges, I'm not so sure right now.

Joey Del Guercio:
I completely agree with you on that. I think the Trump link came from the treasury market, and not from equities, which a lot of people were speculating. But he, self-admittedly, is not looking at the stock market.

And with that, let's turn to equities. You had alluded to the banks kicking off earnings last week. We got another one this morning, and we've seen a few key companies already pull guidance this quarter. I've noted a pretty notable flipping in sentiment, and I guess last quarter everyone was riding high on animal spirits, pretty notably.

What are you seeing in earnings so far? What are you learning, and what do you think that investors need to key into going forward?

Matt Orton:
Yeah, it's early in earnings season to be drawing any conclusions, but the results so far have been good. I mean, not unsurprising. We knew financials were going to post great numbers. They did. That's encouraging.

Guidance hasn't been terrible. It's what you would expect. They're increasing provisions for risks by increasing the loan loss reserves that they have. That's not surprising. I think the key thing I've heard with respect to banking pipelines — which were notably weak — again, not a surprise because of the macro uncertainty.

And the macro uncertainty didn't just start on Liberation Day. We've been talking about tariffs, worrying about tariffs since really inauguration and even before then. So there has been probably a calculus in the minds of management teams, CEOs of companies, to think about waiting with respect to projects or big investments they're making. And I think that was very much on display in the first quarter results.

What's key, though, is certain bank bosses have also alluded to the fact that these pipelines haven't been completely derailed. They're just delayed.

I think the question to listen to, especially over the next week or two, with respect to financials and kind of tech industrial earnings picking up, is what are we getting a sense of with respect to their calculus? How delayed are these projects? Because that's going to be important not only for earnings downstream, but also for the economy. Because fixed business investment from capex has been an important part of keeping GDP numbers in a stronger position.

So if that falls apart, that does have an important impact across the rest of the economy. Those are a few things that I'm looking at and trying to figure out, in addition to seeing real-time what results are for the consumer. What are consumers doing in reaction to this?

And I've got to say, just as a quick aside, we're based here in Florida. I was on Clearwater Beach over the weekend, and my God, were there a lot of people. I don't think it's still spring break, but it was packed, absolutely packed. And by Florida standards, it wasn't really a beach weekend, it was a little cooler.

So just seeing that level of consumer out at restaurants, at bars, hotel capacity fairly elevated, that, to me, says that people are still spending money and doing things. And while it's an informal barometer, I usually do use kind of beach capacity around our area as a sense of what's happening to just American families and what they're doing.

Joey Del Guercio:
Yeah, no, it does not look like anyone's pulling back from spending in downtown St. Pete right now. But I’m thinking more broadly about equities. I don't know if you remember, but way back when, the narrative was all about narrow leadership, lofty valuations, the Mag Seven, the non-breadth expansion. This year, we've actually seen breadth expand. Value has been beating growth, internationals beating domestic. Finally, a reason to own bonds. Is diversification back? Is active management back now?

Matt Orton:
Yeah, it is. I mean, it's been back for a little while, because we've been seeing breadth expand for the past six plus months. It's nothing new.

But I think some of these trends — especially with value working better — seeing those sorts of jumps with respect to factor changes, I think that's important. I think it's durable. I think we can lean into that going forward, which is why financials to me are particularly interesting. To sift through some of the rubble, and as we get a little bit more clarity with respect to where we're going on a tariff front, I do think it makes sense to start dipping your toes into the sell-offs that we've had.

Joey Del Guercio:
All right, and so before we sprint through the rest of this, I have one more kind of deeper question. Europe has been the best performing geography of the year, pretty dissimilar to the past few years. My read through is that most of this is a fiscal story, where the U.S. is a bit of a mess, but we're cutting spending broadly. We don't know what's going on with tariffs. And then over in Europe, they're being a lot more stimulatory, especially with the ReArm Europe, kind of picked as the best example. Do you buy the end of the U.S. exceptionalism narrative, and how do you explain the domestic underperformance year to date?

Matt Orton:
Yeah, I don't know if I buy the end of U.S. exceptionalism. We can have a longer debate about what is U.S. exceptionalism in the first place. Was it just predicated on the Magnificent Seven? Or was it about a lot more things that honestly are still in place with respect to the U.S., from the potential for deregulation, from the state of the consumer, the vibrant environment with respect to corporations and startups, and how our economy exists?

But there's very much a reason to think that Europe can do better, because it is a fiscal story. And I'm glad you put it that way, because you're finally starting to see some of these countries invest in their own economies. ReArm Europe is very important. German fiscal spending is important. It's going to take a while for that to play out, though. So, some of this pullback that Europe has had, in relation to tariffs, I think makes sense.

But I think ReArm Europe is important. I also think the fact that you're looking at this trajectory of U.S. defense spending coming in less than what we're spending on interest payments, that's something this administration is looking at — Ferguson's law, I think is what it's called, that you can't be a superpower if you're spending more on interest payments than you are on defense.

I have heard some rumblings of a trillion-dollar defense budget going forward. So, I like to say investors should play offense with defense. That means global defense as NATO nations continue to increase their level of spend. ReArm Europe plays into that.

Again, it's one of the secular growth narratives, where I think there's durability to the investable landscape and to the investment theme. When you see those sorts of pullbacks, those are good opportunities. And also, think about all of the ESG funds, different strategies that have basically de-levered themselves from any sort of defense spending. I think that's starting to change. You're seeing more long-only investment in the space, especially as some of those rules are relaxed in the U.S.

So those are important structural drivers of long-term gains, and we should be following those going forward.

Joey Del Guercio:
Thank you. And so we're already running up on time, and this is meant to stay pretty short. I want to try a new format, especially since we have so much to catch up on: I'm going to just name a subject, whether it be an asset class, country, etc., please just give me about 30 seconds. And then we'll just rapid fire through these and end there.

All right, small caps?

Matt Orton:
Don't like them right now. I've been wrong about them, thinking they were going to do better this year. I'm very concerned about their earnings growth trajectory. Their correlation to interest rates. I would avoid, there's better places to put money to work right now.

Joey Del Guercio:
Okay, 10 year?

Matt Orton:
10 year is... I think it's going to be range bound still. We've kind of see it play the range, and until we have more clarity, I think it's hard to see it sustainably moving below four. Also, hard to see it moving above five.

Joey Del Guercio:
It's got a wide range on it right now.

Matt Orton:
Yeah, it is a big range.

Joey Del Guercio:
All right. The dollar?

Matt Orton:
Dollar, I think it's going to be structurally weaker. We're seeing that play out right now. On the currency front, if you are looking to hide from some of the tariff fears, I've been recommending clients look at the Swiss Franc. I think that's the best place to hide. Japanese yen to a lesser degree.

Joey Del Guercio:
Gold?

Matt Orton:
Gold, gold. I have been talking about gold for a while. I know Warren Buffett hates gold, but it's hard to argue with a 25% plus gain so far this year. If you think you missed the rally on gold, which I don't know if you did, I think it can go north of $4,000 an ounce. Look at gold miners. Gold miners, while they're up 40% or so this year, they have underperformed the historic beta to the actual metal. Earnings have been good. Not necessarily tied up in tariffs, so that could be a place to look as well, to maybe ballast portfolios, especially on weakness.

Joey Del Guercio:
India?

Matt Orton:
India. I think India is a unique offset to the tariff story as well. Market's already been down 15 plus percent, less than 2% of the GDP's tied to what's tariff-able. Strong domestic economy, I'd be looking to add to India as a ballast and to emerging markets, which plays into my expectation of a weaker dollar.

Joey Del Guercio:
All right, last one. Magnificent Seven.

Matt Orton:
Yeah, I don't love all of the Magnificent Seven. They've kind of gone from magnificent to maleficent this year, but I think there's opportunities for investors that want to start sifting through the rubble. Everything is not radioactive waste. There's some really good companies with multi-hundred billion dollar balance sheets there, that are still generating significant free cash flow, that are tied to long-term durable secular growth themes. Some of these stocks are trading below the forward PE of the S&P 500. So there is a lot to like, especially in the more durable themes that are there. So again, might make sense to start dipping your toes.

Joey Del Guercio:
Agreed there. I mean, yeah, some of them just relative to themselves are the cheapest they've been in a decade or so.

Matt Orton:
Yeah.

Joey Del Guercio:
But with that, Matt, I want to thank you for letting me do this with you. I really appreciate the opportunity, and I'll hand it off.

Matt Orton:
Absolutely. Thank you, Joey. And thank you everyone for tuning in. And until next time, take care.

Thanks for listening to Markets in Focus from Raymond James Investment Management. You can find additional episodes and market insights at marketsinfocuspodcast.com. You can also subscribe to our podcast on Apple Podcasts, Spotify, or your favorite podcast app. Until next time, I'm Matt Orton.