In this episode of Markets in Focus

Are rising risk asset prices the result of long-term allocation changes or short-term trades? Matt Orton, CFA, and Joey Del Guercio Talk about debt downgrades, risk asset prices, and whether bond market disruptions are caused by structural flows or genuine increases in the costs of capital. They also discuss the expansionary effects of the One Big Beautiful Bill Act and possibly the most important — but also most overlooked — catalyst for growth in U.S. markets.

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Transcript

Matt Orton:
All right. Hello everyone, and thank you very much for joining us again for another episode of Markets in Focus. I'm joined as usual by my colleague Joey del Guercio, who's going to help ask some of the questions that are on the minds of I think a number of investors. And why don't we just dive right in because there is no shortage of headlines around the market right now.

Joey Del Guercio:
Yeah, let's get into it. And let's start with the debt downgrade. So last week, Moody's downgraded the United States' Credit Rating. It was a third of the three major credit rating agencies to do so. They were just about a decade late. So S&P downgraded them back in August of 2011. Fitch downgraded them back in August of 2023. Then you have Moody's coming in on May 16th, 2025. I personally view this as a non-event, and I think that's generally consensus, but wanted to get your opinion on a matter, was this a game changer or just noise?

Matt Orton:
No, it's noise. I mean, it's not just noise, but it's just confirming what we already know, that the fiscal situation continues to deteriorate here and there's absolutely no willingness on the part of policymakers on either side of the ledger to do anything about it. So what Moody's is doing really is just re-informing us of what we already know. So I don't think that's the result of why we've seen curve steepening and why you've seen longer dated bond yields starting to rise. That's much more of an effect of what's actually happening in Congress right now, irrespective of what Moody's is observing is taking place and has been taking place, like you said, for the better part of a decade.

Joey Del Guercio:
Yeah. And so I guess one quick question about government bond yields rising is first of all, it's happening all over the world. So is that just a function of US yield spiking or is something else going on in Japan and in Germany and et cetera?

Matt Orton:
You've got to break it down to each specific region. So longer dated government bond yields are rising across the major markets of the world, but the reasons for the rises, while some of it can all come down to fiscal concerns, I mean, Germany is going to be spending a lot more money. The US is continuing to spend a ton of money, but there's nuance to it. So Japan has been experiencing the sharpest rise in, call it 30-year yield, and a lot of that is more just structural with respect to flows in the market. Big buyers of bond yields in Japan are pensions and life insurers. They just haven't been active in the market. They've, in some cases actually, have been net sellers. And so that has weighed on some of the longer term bond yields. But when you talk to some of the leaders of those pension funds, it's not like they're not buying bonds.

It's more a result of just what's happening with respect to rates rising in Japan sitting on larger paper losses, and that's going to work itself out. So what's happening in Japan is not, I don't think, a long-term situation that we should be concerned about, whereas say here in the US, the rise in longer-dated bond yields are reflected in rising term premium. You're seeing real rates continue to push up. That is more of a concern because real rates correspond with the actual cost of capital. And that can be more concerning. I think maybe it's overplayed in the short term, but we definitely have to keep our eye on it. And once this big beautiful bill makes its way through the Senate, we're probably going to see even more expansionary fiscal tendencies involved as they get rid of some of the cost-cutting from healthcare measures, et cetera. So I think there could be a situation where the market reacts negatively unless we really thread a very fine needle with respect to the final product that actually gets put out.

Joey Del Guercio:
I'm glad you brought up the one big beautiful bill because I thought we needed to talk about the one big beautiful bill.

Matt Orton:
It's another triple B, right? We had a build back better. Now we've got a big beautiful bill.

Joey Del Guercio:
So could you just give me a quick overview, what is that? What's in it? What matters for markets, and then we'll move on from there.

Matt Orton:
Yeah, absolutely. So the big beautiful bill started off as simply the amalgamation of passing the Tax Cuts and Jobs Act. So it was the first attempt to make the TCJA in 2017 permanent, but it has expanded on that. So there's a lot more expansion that has been put into it. And so some of the things that are included from the expansionary side are one, making the 2017 tax cuts permanent. We're expanding 199A deductions which allow businesses to deduct a percent of their qualified business income. So helping out small businesses potentially. You have an increased state tax exemption, boosted child tax care credits, higher standard deduction, no tax on tips, tax relief for seniors. So I joke it's a Christmas tree of just anything and everything.

Clearly we are trying to grow our way out of the deficit problem if we are even addressing the problem at all. Other things that come on the other side, maybe on the raise revenue side, taxes potentially on university endowments and thinking through leveraging tariffs to raise revenue. So it's a very net expansionary bill any way you cut it. So to me, great for equities potentially assuming the bond vigilantes don't come home and start to question what we're doing. So it's going to be interesting, I think to see how this plays out over the coming months in markets across asset classes.

Joey Del Guercio:
Is the big beautiful bill the impetus for rates rising around the world right now? Is there something more pernicious under the surface that's been going on for longer? And are we seeing long rates rise because the vigilantes are basically just calling bull on the revenue offsets to the cuts within the bill?

Matt Orton:
Well, I mean if bond vigilantes were here actually making their presence known, I don't think you're going to see such a gradual rise if you could describe what we've seen as gradual. But if vigilantes were here, we'd know it and we wouldn't just be casually talking about it in a conversation. So I would argue that no, I think we're seeing some early innings of concerns around the fiscal situation, but we still don't know how everything's going to pan out. The rise in longer dated yields is part related to challenges with respect to the fiscal situation here in the US, it's part reflective of higher growth over the longer term.

I would argue what we've seen more recently is rates rising for the wrong reasons, not just because of growth, but earlier into this year, that's I think why we were starting to see that, especially from September into the end of 2024. So it's been happening for a while. And again, we'll know more once we actually see what direction the Senate is going to take this to know just how much we're going to cut from potential revenue raising sides of the equation.

Joey Del Guercio:
Agreed on that. And I'm sorry, I'm going to put you on the spot. So given all of this, where do you see yields heading into year-end? Can the Fed do anything or is the long end just basically buoyed higher now because of all this fiscal nonsense? And then I guess follow up, what scenario would you have to see play out to see long rates fall?

Matt Orton:
Yeah, so good questions. You always like to put me on the spot in these conversations. I would say I would not be surprised to see medium terms, some continued steepening of the curve. I can see a situation where you continue to see longer dated yields rise, but I think what could offset that is some sort of resolution with respect to tariffs, a little bit more certainty to know maybe what the revenue raise picture could be from tariffs that might offset some of the fiscal spending. And I think what also could just generally help is a positive bond auction. I mean the market's reacting to that negative 20-year auction, which is kind of a random part of the curve. That's not terribly surprising. Again, I think Bessent's attuned to this, so his ability to plan for these auctions and be able to try and provide more depth to them or make sure there's no technical glitches that also may have been the result of the poor 20-year auction.

All of that's there. My expectations for the 10 year for now are that we're going to continue trading in a range. My range has been between like 420 and 485. Anything between like 485 and 5, I think is a good opportunity for longer term investors to lock in some yield. So I think that's a decent opportunity and I think we've seen that play out. So yeah, I'm not in the bond vigilantes coming home in the near future unless a number of other negative catalysts to the economy come into play at the same time as us trying to pass this bill.

Joey Del Guercio:
Yeah, and I agree with you in saying that rates are probably going to keep being volatile and range-bound, but I do find myself-,...

Matt Orton:
That's a good summary of my long-winded answer.

Joey Del Guercio:
I do find myself asking with those fears you just mentioned the kind of recession fears, growth fears, where would long rates be if we didn't have those fears? Would they be 50 basis points higher? Maybe. I don't know. But let's move on to tariffs because we have to talk about tariffs and so we're recording this on Monday, May 27th after 5:00 PM, markets closed, S&Ps up about 2% plus, and that's really because of the kind of weakened contained trade war that we had. So on Friday, Trump threatened 50% tariffs on the EU on Truth Social to go into effect on June 1st. On Sunday, the ECP European Commission President, Ursula von der Leyen, and Trump had a phone call and jointly announced in social media that the tariffs were on pause until July 9th. So what do you think of this weakened contained trade war, Matt, and do you think there are any real investment implications or this is just kind of noise?

Matt Orton:
Well, I mean we can't consider anything tariff-related just noise, but you can also consider a lot of Trump's bluster to be noise until we know exactly where things are going to land. So I think first and foremost, there's increasing pressure to get deals done. We don't have a lot of deals. How many deals are there, Joey? There's one, right? I think it's just the UK and the US. That's it. So we're still waiting for India. We're still waiting to see some tangible progress with respect to China. There's a lot of things that are missing right now, and I'm guessing part of this bluster is to force quicker negotiations because we are approaching the deadline of those 90-day reprieves that we had in place.

So I think the general 90-day deadline for the reciprocal tariffs is July 9th, and then the deadline on China is August 12th. China continues to push its own reinvest in China, which kind of flies in the face of what the US is trying to do. So it's going to be dicey to see how all of this plays out. So again, my expectation is just for some more near-term choppiness, after we've had a 20, almost 20% rally from the lows on April 8th, it makes sense to have a little bit of a pause, and I think you're going to see more bluster from the White House as they try and resolve some of these trade deals and really push the envelope as much as they can.

Joey Del Guercio:
Agreed, and I'm glad you brought up the bluster and we're talking about the bluster because it leads into my next question. So it was interesting to see Trump specifically call it the EU, and as a macro investor, do you try and avoid these country risks? Maybe. But it's been even more interesting to see the president call it individual businesses like Walmart needing to eat the tariffs, Apple needing to build US iPhones in the US or they face company specific tariffs, all of the PBM middleman comments and then Bill Pulte versus FICO these last couple of weeks. So how should we think about this kind of evolving dynamic Trump versus X or Y, and is there anything for us to do as investors to avoid this kind of risk?

Matt Orton:
Well, buckle up.

Joey Del Guercio:
Yeah.

Matt Orton:
Or my main thesis coming into this year is make diversification great again. Diversified portfolio will help you weather a lot of these ups and downs, and it has helped you weather these ups and downs quite well so far this year. So I think that's the first thing investors can and should do is if you need diversification, and by that I mean across asset classes, geographies, sectors and industries, this is the time to do it and to use downside to your advantage. But we're just going to see more disruptions. Do I love seeing companies called out by the White House? Absolutely not. But am I surprised by it? Absolutely not. We knew Trump has a proclivity to do these sorts of things, and again, I think it's just something we're going to have to live with. But to me, if a company like a Walmart is talking about basically offsetting some margin hits that are going to happen and passing them along to the consumer, you know that's a last ditch effort on their part to preserve margins.

So those are conversations that have to be happening around other boardrooms and management teams. So it's certainly on a number of company's minds, but it'll be interesting when we see Q2 GDP reads, especially during this 90-day period, how much inventory restocking are we going to see in advance? I think that'll be interesting as we try and weather the next phase of this question mark with respect to tariffs. So I think there's going to be more to come, but hopefully the objective of putting tariffs on Apple isn't to bring things back as Lutnick said, millions of people putting screws into iPhones. It's doing what we need to do, which is reassuring the high value add services of actually building the chips in the full supply chain. But it's complex. It takes time. You can't just build that stuff in the span of one, two, even three years.

Joey Del Guercio:
Agreed there. And so, one thing that is pretty interesting right now is just how risk on the market feels in the face of all of this uncertainty that we've been talking about. Bitcoin just hit an all time high last week at $112,000. It's at about 110 right now. And I mean maybe this is because of the deficit, maybe it's not, but at the same time, you have very speculative equity starting to run. Quantum stocks are up big, space stocks are up big, high short interest stocks are flying. I mean, like I said, it's Monday AMC's up 20%. Why do you think Bitcoin's up? What are your views on it? And then what do you think of all of these speculative assets starting to fly?

Matt Orton:
Yeah, it's interesting. I'd love to know why AMC is up so much, but we may never action the real answer to that. I think part of it is risk appetite. There's a demand to take risk. After we got through maybe a couple, once we had the initial wobble after the April 8th bottom, I was pretty aggressive in saying this is the time to add risk and add higher beta risk because it hadn't only sold off post-Liberation Day. Higher beta has been in a sell-off since the end of last year and then further accelerated after DeepSeek. So a lot of parts of the market were on sale. So I think part of the move and some of the speculative assets is just people looking for quick wins. I don't think these are longer term movements of assets in the overall market. I think these are trades, these are short-term trades that are taking place.

Bitcoin, I would put the caveat on Bitcoin. I would say the trades that are happening in Bitcoin are number one, it's a tangible reflection of just more elevated willingness to take risk across the market. Perhaps more talk and more formalization of Bitcoin as more of an institutional asset class within risk assets, and I think you've got all of the attention from the White House around regulation. I think all of that is coalescing into some of the moves you're seeing in something like a Bitcoin or the rest of the crypto complex. So that to me is not that surprising. And then you also see the moves, the longer dated bond yields. Gold is up. Bitcoin ends up moving up in that case too. So not only is it maybe they're not just reflection of a risk, but also is diversification as well for some investors. So I think there's a lot packaged in there, but I think most of these moves we're seeing are trades short squeezes, and then probably not much follow through would be my guess.

Joey Del Guercio:
Yeah, I agree there. And I think it's funny how you brought up Bitcoin because some days it's triple Q, Some days it's GLD and it's starting to be a little bit more of both right now, but nonetheless, I'm glad you also brought up regulation because I want to finish this off by just talking about your general outlook specifically around policy. So coming into the year, we've talked about this, but the kind of outlook was how bad are the tariffs going to be. Now it's kind of flipped to where it's how marginally beneficial might deregulation be. Same thing for how stimulative might these tax cuts be. So I view the policy risk outlook as kind of having flipped heading into the back half of the year, but I just want to get your thoughts on this and specifically around deregulation going forward.

Matt Orton:
Yeah, I think deregulation is something that no one's talked enough about. I mean, we were all hyped up about deregulation post-elections in January, and then that fell by the wayside as we shifted our focus to tariffs, as we shifted to maybe the economy is slowing down a little bit, DeepSeek, all of that other stuff, but it's a very important catalyst and there's a number of different sectors and industries that it can touch. I've talked in the past about the fact that we're overbanked in the US, you have a ton of community banks, it's a right for consolidation. I've talked to a number of CEOs across the country who run community banks and they are all looking for opportunities to consolidate. So the appetite is there. We just need the case in point around the fact that we're not going to have such a negative regulatory environment like we've had over the past four years. So I think that's one area you're starting to see some more IPOs come to market, that is encouraging. Maybe we see some follow-through. Same thing with M&A. We are starting to see a little bit of an increase in M&A, which has really been on ice for a while. So that is also encouraging to see. So we've got to let these green shoots grow, and what I hope doesn't happen is that the uncertainty with respect to tariffs causes a longer-term delay, pause, or rethink of some of these strategic combinations and acquisitions across the rest of the market. That's not what I'm hearing from a lot of management teams, but it's certainly in the back of their minds. So a lot of what we expected to happen has been delayed, not derailed, but there's still the potential for that to happen if we let the uncertainty persist for too long. So that is the biggest risk with respect to the policy brinksmanship that we're playing.

Joey Del Guercio:
And yeah, I mean, I'll say if I was a CEO and I saw the CoreWeave IPO, I would definitely feel pretty inspired to get liquid.

Matt Orton:
Yeah, a lot of these... Yeah, these numbers are pretty good. No one thought that company was going to do great and look at it now. So it's been good. We needed some wins.

Joey Del Guercio:
Yeah, definitely did. And so just to close, what big events are you looking forward to this week?

Matt Orton:
So I think the biggest event, the last of all the mega cap earnings is NVIDIA, and that is always a market moving event. So we'll see what's in store, but based on what we've seen from semis and demand read throughs, I think it certainly has the possibility to surprise to the upside. But either way, once we get through that event, the markets are transitioning from being micro focused at the company level to being very macro driven, which again, increases headline risk volatility, which is why I think we're in for a little bit of choppiness as we digest the great gains that we've had since the lows in April. But I think, Joey, we are out of our time with everyone. So I want to thank you for joining today. I want to thank 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.

You can also subscribe to our podcast on Apple Podcasts, Spotify, or your favorite podcast app.

Until next time, I'm Matt Orton.