MARK RIEPE: Welcome, everyone, to Schwab Market Talk, and thanks for your time today. It’s May 6^th, 2025. The information provided here is for general information purposes only, and all expressions of opinion are subject to change without notice in reaction to shifting market conditions. I’m Mark Riepe, and I head up the Schwab Center for Financial Research. I’ll be your moderator today. We do these events monthly, and we’re going to start out by discussing some of the top themes with our various strategists on the call today. We’ll be doing that for about 30 minutes, and then we’ll start taking live questions. If you want to ask a question at any time, you just type the question into the Q&A box that should be on your screen right now, and click Submit. And then for continuing education credits, live attendance at today’s webcast qualifies for one hour of CFP and/or CIMA Continuing education credit if you watch for a minimum of 50 minutes. That means if you watch the replay, you aren’t eligible for CE credit. To get CFP credit, please enter your CFP ID Number in the window that will be popping up on your screen right now. At least on my screen, it’s on the right-hand side. In case you don’t see it, don’t worry. You should see it again towards the end of the webcast as well. And then Schwab will submit your credit request to the CFP Board on your behalf. For CIMA credit, you’ll have to submit that on your own. Approximately 50 minutes after the show started, the directions for how to submit can be found in the CIMA widget that will be appearing at the bottom of your screen. Finally, I want to call your attention to a couple of extra resources that we’ve got today on the webcast console. In the top-right, you’ll find a link to our most recent quarterly investment outlook for advisors, and in the bottom right-hand corner, you’ll find a link, link to some additional resources, including a client-friendly chart that highlights some opportunities in international equity investing. Our speakers today are Kathy Jones, our Chief Investment Strategist; Kevin Gordon, our Senior Investment Strategist; and Jeffrey Kleintop, our Chief Global Investment Strategist.

And Kathy, why don’t we start with you, given the fact that we’ve got a Fed meeting going on right now and tomorrow. What do you think? Do you think the Fed will be staying on hold or did you think there’s going to be a rate cut at this meeting? And maybe go beyond that a little bit, what’s the outlook for the rest of the year?

KATHY JONES: Yeah, I think it’s pretty clear the Fed is on hold for this meeting. They’ve signaled that pretty clearly, and the expectations are very low for any change in policy at this meeting. And just to reiterate, just a few weeks ago in a speech, Powell outlined the conditions that would be required for the Fed to consider cutting rates. One would be inflation heading towards a 2% target. A second might be a significant slowdown in the economy, particularly with weakness in the labor market. And the third would be clarity on tariffs. Now, we know that the staff has been trying to evaluate the impact of various tariff proposals. Powell indicated the last time he spoke that those tariffs are much higher than had been anticipated than they had used for modeling, so they were back to the drawing board, but we still really don’t have any clarity on how high those tariffs are going to be, how long lasting, etc. And so until the Fed can model that, they want to stay on hold. And I would say, you know, also that they have said many times, you know, ‘We are in no hurry’ because the economy does look like it’s running along with some momentum, has some resilience. We do see it slowing down in coming quarters, but it’s still holding up. Inflation and inflation expectations are a bit on the elevated side, so that’s a concern for the Fed. And they just don’t have the luxury in this cycle of easing into an environment where inflation is high and could potentially go higher due to tariffs. So that’s not a luxury that they have in this cycle because they’re very concerned about losing credibility about inflation expectations going up and fear that they might have to reverse course very quickly. So it looks like they’re on hold.

The market is penciling in just a very low probability of a rate cut in June. There’s greater expectation in the market for rate cuts towards the end of the year. I think the market is reflecting about three rate cuts. We’re still at two. We’ve been there for a long time. Maybe the earliest, July. It seems unlikely. I would push that to September just given how long it would take to get the kind of information, the kind of situation where the Fed could go ahead and cut rates.

MARK: Thanks, Kathy. Why don’t we talk a little bit about the dollar? It’s been trading near its lower end of its range for the past couple of years. What are you expecting going forward and why?

KATHY: Yeah, we are looking for a weaker dollar to continue. We aren’t looking for the decline to be as rapid as it has been over the past month or two. And I think much of this has been a reflection of the markets’ reassessing the outlook for the US economy in light of the tariffs, and various policies that are being proposed and potentially put in place. So the market is looking at a weaker economy and pricing in lower interest rates, and that is contributing to the decline in the dollar, along with a lot of this policy uncertainty is causing investors to pull back. So capital likes to go where the expected returns are the highest, and right now it looks like the US economy will take a hit from tariffs, and investors are looking elsewhere for better returns after years and years and years of shifting into US markets and US dollars. Europe seems to be the primary recipient right now since, you know, they’re moving towards fiscal expansion that could boost economic growth. But in general, it seems that it’s just a reassessment.

One thing to note, though, because this always comes up is we aren’t seeing central banks moving out of dollars in any substantial way. Now, we don’t get the data in a timely manner. It’s usually a two-month lag. So we don’t have data of the last couple of months, but the data that we’ve seen from other countries doesn’t indicate that we’re seeing central banks selling of dollars. What we’re seeing is most of the outflows from dollar assets have been driven by private investors, whether that’s mutual funds, or other institutions or households. That’s given us a pretty big move in the currencies, some individual currencies as well. So that’s a different issue, but it isn’t central bank selling. That’s something that’s been a big concern, but it doesn’t appear to be that. It appears to be private sector selling of dollars or moving out of dollars into other currencies.

MARK: So Kathy, let’s imagine that continues, and then the dollar, as you mentioned, that it continues to get weaker. As a fixed income investor, how do you position your portfolio to either take advantage or protect yourself against that?

KATHY: Well, I think if the dollar continues to go down, one of the strategies is to have international diversification in other international developed markets. You do give up a little bit of yield, but given the fact that the dollar has been up for so long that there is room for it to move lower, the currency change would likely offset the difference in yield. So yields in developed markets are anywhere from 80 basis points to maybe close to 200 basis points lower with the exception of a couple of countries like Canada, Australia, where they’re pretty close to US. But in general, you give up some yield if you do that, but you gain diversification, and you likely, if we’re right about the dollar continuing to go down, then you would see the international, total return on international developed market bonds do well.

MARK: One of the… another question we’ve gotten, and you see speculation about it in the press is that other countries who are big holders of US treasury bonds, they’ll start to use those holdings as a weapon, if you will, in the trade war. What do you think about that? What are the consequences of that?

KATHY: Yeah, first of all, it seems unlikely that we see foreign central banks selling their treasuries, you know, as a weapon. Now, it has been talked about, which is unusual. Up until now in my career, very rarely have you heard trading partners, particularly allies of ours like Japan, talk about using their dollar reserves as a weapon in a trade war. But it has come up as I think that kind of an illustration of maybe those trade talks aren’t going so well. But again, a central bank would be selling their own assets and driving down the value of those assets, which in and of itself would be bad for them. Right now, reserve assets, dollar reserve assets constitute about 58- to 60% of holdings among central banks. That’s been fairly stable over time. And the reason the dollar is the reserve currency, it really remains intact. We have the largest, most liquid bond market in the world, it’s a very large economy, and treasuries are still seen as risk-free.

So again, it’s challenged somewhat on these issues because of the trade war, and we are hearing some commentary that shows that maybe some of the countries want to use that as a threat. But again, if they were to sell their holdings, that isn’t a logical outcome for them. It would be sort of self-defeating. But if you are an investor who is really concerned about this, look, you could have that international diversification into other global developed market bonds. I would not suggest emerging market bonds. Typically, emerging market does well when the dollar goes down. This cycle, they haven’t done so well because it is a trade war, and many of the emerging market countries are very trade-centric in terms of their economic activity. So I would stick with international developed markets and have some allocation there. And again, if you’re really, really concerned about all of this or you have clients who are, one popular trade has been people moving into gold as a safe haven. We don’t particularly have a recommendation on it, but I do know that that has been a driver behind some of the gains in the gold market.

MARK: Kathy, last question for you, and then we’ll switch to Kevin. Where do you think the sweet spot is on the yield curve right now?

KATHY: Yeah, and US yield curves, you know, that intermediate part of the curve, five to seven years, we like. That’s consistent with the AG. I think the AG’s duration is about 6.1 years, so it’s right in the middle there. And we like it because you get most of the yield offered across the curve without potential interest rate volatility of going very long duration, and you avoid the reinvestment risk that goes with staying too short. So we’re still advocating an up in credit quality intermediate-term duration for most portfolios.

MARK: Thank you. Thank you, Kathy.

And Kevin, question for you. First of all, thanks for joining. Welcome back. We had a Jobs Report come out last Friday. What did you think about that? And I know you spend a lot of time thinking about hard economic data versus soft economic data. Are they in agreement? Are they in the disagreement? What do you think based on Friday’s news?

KEVIN GORDON: Yeah. Hey, Mark. Good to be back everybody. Thanks for tuning in. You know, for really the entire report itself, if you just looked at the headline numbers, they were pretty good. It was a pretty solid report, especially relative to expectations. I think in the Bloomberg survey, I don’t think there was one economist actually that got as high, quite as high as the figure was for non-farm payrolls. So notwithstanding the revisions to the other, you know, the prior two months which were negative, the report itself was pretty solid. Unemployment rate was steady, growth in the household, survey data was good, growth in the labor force was good. So not a ton of blemishes, but it also probably wasn’t fully reflective of what is expected to be at least a little bit of labor market weakness as we now start to bake-in the effects of tariffs, you know, the ones that are already on, and then the uncertainty that’s been associated with the tariffs that may come, that may stick, that may not stick for, you know, the rest of the year or the rest of how long this lasts. So you talk about the hard data, you know, still looking relatively okay.

The payroll statistic is, you know, in that camp of hard data looking relatively fine. It’s definitely not yet consistent with some of these other surveys that have come out, you know, notably from the regional Fed manufacturing and services prints. Whether it’s from the Dallas Fed or Richmond or the Empire one out of New York or Philly, all of those are pretty much saying the same message and giving the same story of expectations around not just business conditions in general, but also employment not completely cratering, but at least taking a breather, you know, because businesses don’t necessarily know, especially in this environment of all the tariff related uncertainty, but I would also put in there also the immigration policy uncertainty, those two levers together, those two, you know, sort of thicker clouds that are blinding businesses right now in terms of being able to put together any kind of capital spending plan, but also any kind of hiring plan.

So the expectation right now is that as far as what the survey data is telling us is that you probably just go into maybe more of a continuation of this low hiring, low firing environment, where businesses kind of just put themselves in a timeout mode, a timeout situation where they don’t make any big decisions because they effectively can’t. So the big question or the big tell will be how big, in today’s cycle, how big is that gap between weakness in soft data versus weakness in hard data? I mean, it could be pretty big if tariff rates eventually come down and you get a little bit more clarity on that. But if you start to see at some point margin compression for businesses, and we’ll find that out when we start to get earnings data for the next earnings season, if you start to see some margin compression there, that’s where you could potentially see more of a direct hit to the labor market because of labor being pretty much the biggest cost for US businesses.

MARK: So Kathy alluded to the policy uncertainty. You’ve alluded to it. We see all these recession probability indicators that various firms put out, they’re all ticking up. What do you think you need to see to really bring those recession risks back down? Is it just a matter of resolving some of the uncertainty that’s been plaguing everyone?

KEVIN: Yeah, I mean I really think that’s a big key to the puzzle, especially as it relates to the labor market because, you know, for most of this post pandemic cycle, I would say that the real kind of standout in terms of economic data has been kind of just this remarkable stability of the US labor market. And yes, we’ve gone through what Liz Ann and I have called at times rolling recessions within the US economy, where there have been certain sectors in industries at times, whether it was manufacturing or consumer goods, or even at some point parts of the services sector in the US economy, there have been times where you’ve gone through many cycles, many labor cycles, where we saw, you know, a couple of years ago, lots of layoffs in the higher paying sectors, whether it was consulting or financial services or professional services broadly, but then that kind of subsided, and then that cycle started to heal for some of those industries. The fact that the labor market broadly in an aggregate sense stayed intact throughout that entire period was definitely a testament to, I think, just to the resilience of the US economy and how we recovered from the pandemic, but also still puts us in a relatively fragile place now because businesses had been stuck in that low hiring/low firing environment. So it does put the spotlight and shifts the spotlight to, and it continues to keep it on that profitability aspect of US companies, if they can remain profitable through this or if they’re going to get hit with higher tariff costs and higher input costs. But in addition to that, whether those tariff costs and import costs change on a sometimes day-to-day basis. If that’s going to continue to be the case, then that’s really where the business investment piece, which is a really key contributor to the US economy… I mean, it was strong, thankfully, in first quarter GDP, but that’s where the business investment piece and the capex piece really comes into play.

So I think it does shift everything and all focus back to US labor because at the end of the day, if you don’t have that as an engine for consumer spending and for business spending, then you probably don’t have an economy that it can keep up the momentum.

MARK: Kevin, we’ve seen a pretty good run back from some of the April lows, in the 8,500 last couple of days notwithstanding. What can you tell me about… have you seen that kind of breadth in the market? Has that continued to improve, or is it kind of backtracking a bit?

KEVIN: Yeah, I mean we’ve slipped in the past couple of days, but we’re also… you know, before yesterday, we were coming off of nine straight days of gains for the S&P 500, which the last time that happened was 2004. So definitely, you know, not something you see a lot in the history of that index. So a couple of days of taking a breath are not surprising. But in terms of overall breadth statistics, there has been a pretty significant improvement over the past couple of weeks as you’ve gone through what looked like this pretty strong V-shaped recovery. I would say, though, the recovery has been a little bit disjointed or there’s been some disconnects under the surface which actually have been reflective of what the broader economic story has been so far. So if you look at the parts that have weakened the most or have had the weakest rebounds from those April lows, it’s been everything in the air and freight and logistics space, all the way to energy, all the way to, you know, parts of tech, actually, that are most exposed to the trade war and to international trades. So very much consistent with what you’re seeing developing in the economy. The parts that haven’t been affected as much have been, you know, probably, no surprise, some of the more traditional defenses that are not exposed to international trade or foreign sales, but also some of more of the kind of mega-cap growth areas, again, not exposed to trade that investors tend to pile into when they get some sort of nervousness or anxiety that creeps back in. So those and, you know, being a bigger part of the market, the math is such that it just benefits the overall index, and that’s why we’ve seen such a strong recovery in the S&P. But I would be careful to just say that it’s been this broad recovery that has lifted the entire market. It hasn’t really been the case.

So I think until you start to see a meaningful recovery in those areas that have been hardest hit by the trade war, then I think you could still view it with some degree of skepticism, but also respecting the tape, in terms of if the market continues to rip higher and bring everything along with it, that would, you know, sort of show some signal of confidence that at least investors have that the worst is behind us in terms of uncertainty,

MARK: Kevin, does that apply to small-caps as well, or what do you need to see in order for that kind of gap, if you will, between large- and small- to start shrinking?

KEVIN: Yeah, I mean this is also another thing that… you know, I talked about profitability earlier with the broader economy. You know, same applies for the small versus large debate because even though small-caps have been shunned for what feels like a really long time now, I mean, basically the past three to four years, especially at the expense of large-caps, a lot of that has been justified to a certain extent because if you look at forward earnings estimates and actual earnings for small-caps relative to large- or even relative to mid-caps, the forward earnings have barely moved for small-caps over the past, you know, nearly two years. Versus for something like the S&P 500, you know, forward earnings estimates have been relatively strong. Even though they’ve gotten cut for this year, the cuts have not been nearly as aggressive as they have for something like the Russell 2000. So until you start to see a really durable recovery in confidence for small-caps broadly, and that they can actually get some kind of lift in a profitability sense, it probably means that they have a weaker recovery relative to large-caps. Especially because, you know, you think about small companies and small businesses in the US, being able to stay nimble or get ahead of any tariff related uncertainty or figure out substitutes easily, not just in terms of actual goods, but just in terms of countries and where they source things from, it’s much harder for small-caps to do that relative to large companies. They just don’t have as many advantages. It’s just the sort of default, I guess, disadvantage that they have when it comes to trade. So I think that becomes a really important part of the story, especially because you still have close to 45% of members in the Russell 2000 that have no profits on a trailing one-year basis. So until that comes down meaningfully and they get more relief on the tariff front, and I would also throw in more relief on an interest rate front, those three legs really need to move together and move in a cohesive manner, and so far, that’s not happening for them.

MARK: Thanks. Thanks, Kevin. Jeff, let’s bring you into the conversation. So maybe a two-part question here. And we certainly appreciate this is sometimes changing at a moment by moment, but what’s the US doing right now in terms of tariffs? And then that’s the first part of the question, and the second part is what are the responses that you’re seeing on the part of other countries?

JEFF KLEINTOP: Well, Mark, looking back since the April 2^nd tariff announcement, the Trump administration claimed it’s engaging in tariff negotiations with like 70 countries out of the 100-plus it put tariffs on. Last week, the Treasury Secretary Bessent said the US has put China to the side for now. It’s focusing on, I guess, 15 to 17 other countries, and reiterated that earlier this week. I think Trump is meeting with Canadian Prime Minister Carney today. I think those meetings started at 9:30 eastern. So all that’s going on. We’ve got talks with India, Japan, and South Korea that have been described by the administration as making good progress, but there’s few details. And it’s worth noting that from 1985 to the start of Trump’s first term in 2017, the average US trade deal has taken 18 months before that deal was signed and 45 months before it was implemented. So 90 days is like a sprint, and may just lead to another possibly… maybe the upside of this is maybe there’s another delay coming for countries where there seems to be progress, but very few of our trading partners sound very optimistic about getting a deal here in this 90-day window.

But they aren’t running out to invest in the US. In fact, a survey of 1,500 German businesses that was just released this morning, or maybe it was late yesterday, I saw it this morning, shows less than 5% of German businesses plan to relocate factories in the US. So instead, to answer your second question… you know, the first question is negotiations are being worked on. The second question is what are our trading partners doing? Well, they seem to be implementing economic stimulus, rather than expecting a deal or to move their operations to the US. I mentioned Canada’s prime minister is meeting with Trump this morning, but there isn’t really a sense of urgency to work towards a deal. Canada’s planned fiscal stimulus in the form of tax cuts and spending growth, along with maybe two more rate cuts this year by the Bank of Canada, points to stable economic growth for Canada. It’s not plunging like you might expect, given that dependence Canada has on the US for exports. The GDP forecast for 2025 and 2026 from the IMF just came out last week, they’re stable, really looking at, I think it was 1.4% this year, 1.6% next year GDP growth. That compares to 1.5 last year. So not really seeing GDP growth fall off a cliff. Pretty stable, actually. And that’s important, right? Canada is one of US’s biggest two trading partners, so interesting to see. And that’s a common way countries are dealing with Trump tariffs. Forget the exports to the US, just focus on domestic stimulus. Europe is also doing this. Europe’s economic exposure to US exports is relatively small compared to Canada. EU goods exports to the US account for about 3-1/2% of EU GDP. So tariffs of 20% were they to be implemented at the end of this 90-day window might shave, let’s say, you know, just under a percent off of Europe’s GDP, but that as an offset is the amount of spending that they’re looking to spend. You know, Germany’s chancellor just approved this morning in the second vote as the new chancellor, his plan is to implement over a trillion dollars worth of spending, defense spending, public investment spending, and those programs could add as much as 2-1/2% annually to German GDP. You combined that with a couple other rate cuts this year, and you’ve got that added fiscal and monetary stimulus delivering a sizable boost to growth, potentially more than offsetting any drag from stimulus.

So to sum it up, it’s stimulus, not trade deals that most US trading partners feel more confident about in order to avoid a tariff-induced downturn, Mark.

MARK: So Jeff, you raised some interesting points, and we got a question that somebody submitted when they registered for the event. Can China outlast the US in a trade dispute? What do you think?

JEFF: Well, there’s no winners in a trade war, but China is starting to experience a demand shock. You know, maybe the last 10 days of last month we really started to see container goods’ shipments coming out of China begin to really slow down. And that drop off in exports to the US will be felt to some degree. At the same time, the US is experiencing a supply shock in terms of not getting imports from China. And history shows that it’s much easier in the near term for a country to overcome a demand shock by boosting domestic demand with stimulus than it is to replace lost supplies with new factories and workers and materials, right? And that’s what China is planning. They’re looking to boost domestic growth as an offset to weaker trade with the US. About 40- to 50% of China’s GDP comes from consumer spending inside China. Only about 3% comes from direct exports to the US. I think there’s another maybe 3% or so of indirect exports from China to the US that pass through other countries or otherwise not accounted for directly. So clearly, domestic spending is far more important to growth in China than exports are to the US, and if they can meaningfully boost that, it can offset those US exports on overall GDP. China’s GDP was about 5% last year, and most of that, though, was exports. Consumer spending is very weak in China. So if that can turn around this year, it can offset that slide in exports, and that’s the plan.

Just quickly summing this fiscal situation in China up, China has three budgets. The government funds budget, the state capital operations budget, and the social insurance fund budget. And if you combine them, you get a plan to spend 11% of GDP this year. That is a record for deficit spending in China, even more than they did in the pandemic. So far, spending… that’s the plan. So far, actual spending in Q1 was only about 6% greater than last year. It’s a boost, but we’re not seeing the full-scale stimulus begin just yet. Officials were likely waiting to see what the April 2^nd tariffs look like to really begin to implement. So the incoming data for April, we’re going to be watching very closely. In fact, we’ll get total lending numbers this week when they come out a little later this week for April. And tonight, I saw this morning a headline coming across, Chinese authorities are holding a press conference that… well, 9:00 PM our time, 9:00 AM Beijing time, to provide an update on their financial support policy.

So the takeaway is that at least for this year, China has the ability to generate demand, and the US may be hard-pressed to generate new supplies. And so China may be better positioned to deal with this trade war here, at least in the near term.

MARK: Jeff, earlier I was talking to Kathy about strategies for dealing with a weaker dollar if that comes to pass from the standpoint of a fixed income investor. What are your thoughts from the standpoint of the equity investor?

JEFF: So simply speaking, typically, when the dollar falls, that boosts the return on international investments for US-based investors, right? So, so far this year, the euro is up about 10% against the dollar. So generally speaking, when the dollar falls, it adds to the return of non-US stocks. We’ve benefited from that this year. But it can have some offsetting effects like slowing domestically reported earnings growth that can act as a little bit of a drag in terms of domestic stock market performance.

So yeah, I think international diversification is a positive here. As the dollar slides, you get that benefit. It’s not a universal positive, however.

MARK: Jeff, last question for you, and then we’ll start taking some of the live questions that have been submitted. If you would like to ask a question, just type it into the question box and click Submit, and we’ll take a look at those. Kevin talked about where we are in the US business cycle and how some of the recession risks have been going up. What’s your perspective from a global standpoint, and how do you see that kind filtering through filtering through to company earnings?

JEFF: So regular listeners to this little show here we do every month would know that I’ve been calling, you know, a cardboard box recession for the last couple of years in Europe. That seems to be over. So the downturn that we saw, we saw Germany every other quarter for the last two years has been in recession, and finally beginning to rebound here this year. Last week, many major countries released the initial reading of first quarter GDP. It wasn’t just the US. Eurozone GDP Q1 expanded by 0.4%, or you can call that 1.4% to put it on the same basis as US GDP is reported. That was double what was expected and double the increase in the prior quarter. And the gains were broad-based. We saw Germany and France, the two largest economies, were turning to growth after what had really been two years of wandering in and out of recession because of this manufacturing downturn.

Now, the weaker-than-expected Q1 decline in US GDP was largely due to that surge in imports by the US ahead of those April tariffs. But that wasn’t the driver of strength outside the US. It wasn’t just, ‘Oh, well they sold more to us temporarily, and then we’re going to see a payback for that.’ We don’t have the exact contribution from net exports-to-GDP in that preliminary release from European countries last week. We’ll get the update on May 23^rd. But we do know from the press releases that exports were not a big factor driving growth. As a matter of fact, in France, net exports were a drag of 0.4%. Italy’s press release also noted that it was a negative contribution from net exports. So there’s not a reason to believe based on US exports that Europe’s economy will necessarily give back the stronger growth and better than expected growth in Q2. I think we’re actually seeing a recovery in economic momentum outside the US, most notably in Europe. So a brighter outlook there.

And that translates into earnings as well. As a matter of fact, we continue to see rising earnings estimates in Europe. They’ve been cut in the US. In fact, the number of companies seeing earnings estimates being cut is near what we saw during the pandemic and the great financial crisis. Not true in Europe. In fact, it’s barely ticked up at all, and the estimates continue to climb. So that’s encouraging that we’re not seeing this fallout. In fact, I mentioned that survey earlier where only 4-, I think less than 5% of German businesses were even thinking about relocating their operations to the US. Only 22% of German businesses said the US tariffs would have any effect at all. So they’re really not seeing that show up in their businesses, and as a result, they’re not guiding lower to the same degree we’re seeing in the US. So economic growth and earnings growth seems to be intact here for Europe. Another reason why international diversification may make some sense.

MARK: Thank you, Jeff.

Let’s see. Let’s take some live questions here. And Kathy, I’m going to send this one to you. ‘Are defaults higher than 2008-2009?’

KATHY: No. So if we’re talking about the corporate bond market, I think in 2009 the peak default rate in my investment-grade got to about 5.4% according to Moody’s. And the speculative-grade default rate was over 15%. It was very, very high in the high-yield area. We’re looking now at about 4-1/2% default rate this year according to Moody’s and S&P in investment-grade and speculative-grade, really only about in the 5% area, 4-1/2- to 5% area. And I think that is the big difference in this cycle than in other cycles… or the financial crisis 2008-2009, is that there was a wholesale de-leveraging of households and in the financial system. This time, companies came in into pretty good shape and many had termed out their debt before interest rates went up. So we’re not seeing as much stress in the corporate sector as we saw in that cycle.

The only caveat to that is that most of these estimates were made before the tariff policy was announced. So we may see, particularly among smaller companies in the high-yield area, some more defaults.

The other caveat is that in this cycle we have a lot of private credit holding the speculative-grade debt. And a lot of times before they actually get to default, they don’t default, but they do a distressed exchange, which is essentially swapping debt for equity. So it’s not apples-to-apples comparisons. And that’s why if you were trying to apples-to-apples, probably the speculative default rate in high-yield would be higher, probably closer to 8- or 9% in this cycle, assuming we hit a downturn. But I think in this cycle is different because of the structural differences in the market, and because this is not a wholesale de-leveraging in the economy, and cyclically companies came in in much better shape.

MARK: Thank you. Thank you, Kathy.

Let’s see. Kevin, this one is for you. ‘Can you discuss the tougher immigration policy on stocks generally?’

KEVIN: So, you know, I think it’s probably going to be a slower burn or a slower impact over time, you know, relative to something like tariffs. It’s a harder thing to see day-to-day. You know, it doesn’t show up until a while in terms of it being lagged in the employment data.

I will say, though, I think, and this is somewhat related, actually, to tariffs, so in the area where you can see the impacts of both of those is potentially as we get into the summer on the labor market in particular, you know, one of the bigger hits that we’ve seen to the US economy, and it was just as recent as this morning in the trade data that we got, you know, it’s lagged, but we got it for the month ending March, was a pretty big hit to exports of services and in particular exports of anything tourism- and travel-related. So essentially another way of saying that is foreigners spending money here. There was an 11% drop in March, and there’s been a huge drop off in tourism arrivals into the US from around the world. So when you think about the industries that are most impacted by that in the United States, leisure hospitality is a huge one. It’s one of the biggest employers that we have in the country. So if that sector is going to start seeing more material weakness in not just the ability to hire, but you start to see more of a pickup and layoff activity and that starts to filter into the May and the June Jobs Reports, that’s where you could see more of a disruption to the labor market and then you would get, you know, the attendant equity market response.

So again, it’s not something that whipsaws the market on a day-to-day basis like trade and tariffs because clearly trade and tariffs is the headline driver seemingly every single day. But I think that creeping in the background is immigration policy, and, you know, not even immigration policy itself in terms of the potential reduction to the labor force, I think just the overall impact from foreigners arriving into the US and what that means for a sector like leisure and hospitality, that number one, is heavily reliant on those spenders, but number two is also heavily reliant on immigrants just as a percentage of the workforce. I mean, more than 20% of leisure hospitality is made up of immigrants. So if there’s going to be any disruption there, a sector like that, which is heavily, you know, a big part of our services economy, that’s something to watch.

MARK: Thanks, Kevin.

Jeff, a couple of questions that are related. I’ll send your way. ‘How much has the valuation gap between US and foreign equities closed given the rally in foreign stocks and weakness in the US?’ And then a related question, ‘For investors that have been underweight international relative to US, is it too late to neutralize that position?’

JEFF: Okay, great questions. So the gap has closed very little, maybe a point or so. The US forward PE on my FactSet screen right now, 20.4 for the S&P 500 and 13.9 for EAFE. EAFE is still below its 10-year average. The 10-year average is 14.3. So stocks have been below average on valuation in Europe, in part because a rolling two-year recession, a war on the eastern border, lots of pessimism. That’s starting to turn around. We’re seeing the PE lift off… it was around 12. It’s come up to 13.9 now. But the gap is still very wide. I think the US PE got up over 22. It’s come down a little bit, but there’s a long way to go. It’s closed by very little, and that’s because maybe non-US earnings per share of growth has remained solid, while it’s pulled back just a little for the US.

So there’s still a good amount to go. Historically, there are periods where those PEs are very similar. I guess if you look over long periods of time, maybe there’s a two PE point gap based largely on the sectoral differences between the two indices. So there’s still the potential for a lot of convergence there in terms of valuation.

And if you look at Europe finally turning around on stimulus after I’d argue almost two decades of austerity. So more stimulus, more economic growth, better earnings picture, and then interest rates coming down, lots of different factors, really setting up for I think what is a longer term cycle of international outperformance, you know, just based on better… just simply a better fundamental backdrop on top of the valuations and some of the other factors I’ve spoken to on the show already.

So all of that, I don’t think it’s too late. I think that we have seen a bit of a move here this year. But I take you back to the start of this bull market in October of 2022. I’ve been banging at a table international since then. It’s been a while. And we’ve seen the outperformance by international markets since then. Not a lot. But Europe’s been a lot, maybe 30 percentage points since then. But overall, international, it’s been a little bit weaker on the Japan side. We still see out-performance this cycle, so since this current bull market began. And I think that’s just what we usually see, a cycle for US leadership, a cycle for international leadership driven by growth versus value, and tech versus financials, and all those types of things.

So I think the leadership we’re seeing in the markets now I think is durable and I think we continue to see international. So it is not too late. Those who remain underweight international relative to your longer-term strategic baseline, I think you can still bring that back, and over the next few years continue to see outperformance by international markets. Obviously, there’s a lot we don’t know. There can be no guarantees, but we seem set up for a longer-term period of international outperformance.

MARK: Alright, thank you Jeff.

Kathy, this one’s for you. ‘Are you concerned about the debt maturing with the US treasury debt ceiling this summer?’ I think what that means is are concerned about the debt maturing about the same date that we hit the debt ceiling?

KATHY: Right. We still don’t have an X date. Treasury Secretary Bessent was just speaking today in front of Congress, and he said they don’t have an X date, but it’s getting closer, meaning the date when they run out of the potential maneuvers that they’ve been doing to try to keep funding going under the debt ceiling. You know, we do this every couple of years, and we haven’t managed to default. The Treasury is able to continue to maneuver for a while. But if Bessent doesn’t have the X date, I certainly don’t have it. So he says it’s approaching, and is believed to be approaching this summer, but a lot will depend on tax revenue taken in, etc. I don’t really think at the end of the day that we’ll default on the debt. We haven’t, and I don’t think we’re going to start, we’ll make a lot of noise, but Congress always gets around to doing something before we get that default.

Now, if you’re really worried and you have treasuries maturing in June, July, August, whenever the time period is, that it gets close, perhaps you want to roll, say, if a T-bill is maturing, maybe you want to roll into a six-month bill, or something like that to avoid getting caught in some sort of temporary congestion around that. But we’ve always managed to get through it before, so I’m assuming we’ll get through it again.

MARK: Thank you, Kathy.

Let’s see, Kevin, let’s go to question number 23 here. This is a good one. ‘What would make you more positive on the S&P 500? For example, upside surprise, tariff negotiations settled? And then what would be a negative surprise, for example, earnings fall short, or tariff discussions get more drawn out or something else?’

KEVIN: I suppose the answer is probably the same for both, and it is tariff-related. I do think that… and you’ve seen actually a lot of businesses come out and say this, whether it was publicly in an earnings announcement or whether it’s in some of the surveys that you get from some of the regional Fed data that I was mentioning earlier. A lot of companies have said, ‘If there’re going to be an increase in tariffs, that’s fine. Just tell us what it is and don’t move it.’ And I think that’s a really key component in all of this is setting a policy and not changing it constantly. So not going through a series of delays, not going through a series of, you know, potential trade deals or potential trade talks where all of these rates look different for every country on a different timeline. That’s really what forces businesses to be put in a timeout.

So I think that the longer this uncertainty or the timing, or the runway is for us to get to some sort of deal, or some sort of agreement, or a purchase agreement with other countries, the longer that takes then if in that waiting period tariff rates stay relatively elevated, I think that’s where there probably is more downside or at least there’s probably less of a strong upside for the broader market because you still operate in this pretty, you know, thick haze of uncertainty.

Obviously, the somewhat obvious, I think, downside cases that you don’t get any kind of progress on deals and you start to see not only more of a chipping away at overall consumer spending in the labor market in the US because of tariffs themselves, but I think on the flip side of that, or in addition to that, more weakness in the labor market driven by weaker immigration policy because the labor market has become increasingly reliant on the immigrant workforce over the past five years. It’s still the case, even with Friday’s Jobs Report, it’s still the case that about 95% of the labor force growth since right before the pandemic has been from the foreign-born labor force. It hasn’t been from the domestic-born labor force. So if you start to chip away at the former, you could see a scenario where potential GDP growth by virtue of potential labor force growth really starts to weaken. So I think that’s where you open up more of a downside case.

But I think that getting past that sort of peak tariff rate uncertainty in terms of the effective rate getting somewhere close to north of 30% and moving down, that’s certainly a better direction of travel. It’s just where do we ultimately settle, and in that process, what happens to overall business spending and hiring intentions. And that’s why some of this higher frequency data or some of this sort of peripheral data from the Fed, the regional Feds, that’s why I think that really matters.

MARK: Thanks, Kevin.

Jeff, this one is for you. ‘Where do you think the China tariff percentage will ultimately end up, for example, 50%?’

JEFF: I have no idea. I mean, I would just be guessing. I think that if you take a look at some of the key industries that the US has been wanting to bring back to the US from China, a lot of pharmaceutical precursors and personal protection equipment, and maybe some, let’s say, more defense-related industries, I think you could see those coming back, and maybe there’s quotas or something else involved, or just outright sanctions involved in some of those things that simply block it. But I don’t know where the percentage is going to come in. As I’ve mentioned, China is sort of taking a wait and see approach to see how this works out for the US, figuring they can withstand more of this pressure than the US is, and we’ll have to see where it all shakes out. I know on the campaign trail, Trump talked about 60% and we’re north of that. So even what we thought was the upper end of the potential tariff scenario has been exceeded. So it’s really difficult to put a handle on that. I’m sorry.

MARK: Thanks, Jeff.

Kathy, this one’s for you. ‘What are your thoughts on the so-called Mar-a-Lago Accord positing replacement of treasury maturities for China, for instance, and the ramification for the risk-free rate on US treasuries?’

KATHY: Yeah, so for anybody who hasn’t followed it closely, the Mar-a-Lago Accord is based on the Plaza Accord from the 80s when the dollar was sky high. It was hurting our manufacturing sector and exports. And the administration, at that time under James Baker, got together with foreign counterparts and agreed to weaken the dollar. They had the benefit of Paul Volker, at the time, cutting interest rates, so that was helping really send the dollar down. And the idea was to revitalize the manufacturing sector and US exports.

So the Mar-a-Lago Accord has a similar goal of weakening the dollar and reviving exports, or boosting exports, maybe reviving manufacturing in the US. But what it doesn’t have that the Plaza Accord had was widespread agreement among our trading partners and other major countries that hold US treasuries. So one of the thoughts that was expressed, Steven Miran, who is an advisor to the White House, said, ‘Well, maybe what we do is we tell China and other large creditor countries like Japan that we are going to swap out the maturity of the treasuries that they hold, which are generally under five years, maybe an average duration of two and a half to three and a half years, we’ll swap those out for very long-term treasuries in exchange for some sort of security agreement or some other benefit.’

I think it’s dead on arrival. Personally, I don’t see why any of our creditor countries would go for this. And I don’t see that what we have in the US is a strong dollar hurting the economy. The economy is doing quite well as the dollar went up over the past decade, somewhat overvalued, it can come down, and that will benefit certain exports, agricultural sector, etc. But if your goal is to try and create a weaker dollar, that’s still the dominant currency for trade and for reserves, you need the cooperation of other countries to do so. And I just don’t know what country would go for this sort of an agreement. It doesn’t seem realistic to me.

MARK: Hey, Kathy. You’ll have to switch your, swap out your microphone and go to the phone when we come back to. You’re starting to break out there.

So you’re working on that. Let me switch to Kevin. And Kevin, in light of everything we’ve heard, where will we stand in the second half of the year and 2026 for the US market?

KEVIN: Oh, man, that’s a tough call. I mean, I suppose a lot of it depends on the most recent question you asked me just around tariff-related uncertainty. I do think that you’re going to get a lot of… you know, talking about the original question you asked me in the prepared section, that was the first 30 minutes, you know, the difference in the gap between hard data and soft data, in particular, when we’re going to see a lot of this show up in the hard data if we see it at all. I think that there could be a lot of… to use a technical term, a lot of funky statistics and readings into the summer, maybe into the second half of the year, especially for things like GDP. Because when you look at US GDP for the first quarter, yes, it was negative, just slightly. The economy contracted by 0.3 percentage points. But all of that and more was driven by the export-import differential. So the fact that we saw just a massive surge in imports relative to exports, that actually accounted for a 4.8 percentage point decline in GDP. So had you not had that distortion on the trade side, you would’ve had a pretty solid growth statistic in the US. And in fact, when you net out trade inventories, government spending, and you just look at a common statistic that is looked at, which is the private sales to domestic purchasers that was strong at just slightly over 3%. So the underlying growth for the economy in the first quarter was pretty strong. But I think you’re going to get a lot of mixed signals from some of the hard data statistics biased by trade as you go into the summer. And I think that’s probably going to whipsaw markets around a lot.

So I wouldn’t be surprised if you, and we wouldn’t be surprised from a US equity strategy standpoint to see a lot of chop back and forth, and to see a continuation of this kind of volatility you’ve seen over the past couple of months, where you get these wild swings, you know, down more than 10%, up more than 10% because of how much is trying to be processed and analyzed in real-time, trying to figure out what is the exact hit to corporate earnings going to look like, if any, and how long does that last?

And I think… there was a question I saw that came in in terms of how long these tariffs last, and whether when we get a change in administration in the future, whether they stay on. And I think that’s really… it’s more of an existential question and thing to think about, but I think that’s a really important component in all of this and trying to assess, especially from a business standpoint, do you just put yourself in timeout for an extended period of time if you’re able to do so, and not really make any sort of decision in terms of bringing production or manufacturing back to the US or even moving it from country to country, or do you start to implement those changes and does that cost a lot of money? Those are really important questions that are multi-year, maybe even multi-decade, that have multi-year ripple effects. And I think that starts to bring in a much more important discussion point. So that, in turn, I think will impact the market in terms of the outlook for profitability.

So it makes it a tough decision or a tough way to analyze it for the second half of the year. But the main message that we still have is pretty considerable volatility up and down the cap spectrum because that’s what we’ve seen over the past couple of months.

MARK: Thanks. Thanks, Kevin.

I actually got a question here maybe for both you and Jeff, but why don’t we start with Jeff. ‘Jeff, it seems like with movies, Trump is potentially initiating a trade war in services. What could happen if companies begin placing tariffs on US services in response?’ So Jeff, why don’t you take a crack at that, and then, Kevin, if you’ve got anything to follow on, that would be great. So, Jeff, take it away.

JEFF: Sure. Europe has long been looking at digital services taxes on the US. They largely have been kept in check, but that’s certainly on the table. And so that is something… obviously, the US is a big services surplus, so the more that’s targeted and brought on the table, it could become an issue. I think that certain destinations will be more impacted than others. It’s really not something I’d worry about from China. China doesn’t import a whole lot of US services. It’s more Europe where that will be on the table, the UK, a few other places, Canada, Mexico as well, more so than China. But it’s certainly something that could be increasingly a risk and something that international, our trading partners have been considering for years. So this isn’t out of the blue, it’s something that they’re prepped to do and it’s something, I imagine, they’ll be bringing to the table, and probably something that’s come up in back channel negotiations.

KEVIN: Yeah, I would just add that the services side of things in this whole trade war discussion often gets ignored, at least in the context of the US. There’s always this focus on the goods deficit, or there has been this focus on the goods deficit. I rarely see a reference, whether it’s from administration officials or whether it’s from Wall Street, people on Wall Street, I just don’t see a lot of reference to the services surplus we have, and how seemingly vital that is to our economy. Exports in the US are almost 12% of GDP. That’s not an insignificant statistic. And when you look at how dominant services are in that category, especially for things like tourism, which we talked about earlier, that starts to pose a risk to a key part of the economy, not only in aggregate terms, when you look at the chunk that services is of the US, way larger than goods, but when you look at the recovery in this post pandemic era, and how resilient and strong services has been, both on a spending front and also on a labor front, in a net hiring front, that has been a really key and vital part of our recovery and of our sort of stability at an aggregate economic level over the past several years.

So I would really pay attention to that because if we do have one playbook to use from the first trade war back in 2018-2019, you did see a pretty material rolling over in services exports in the US. You’re starting to see that now. Since November, actually, there’s been a pretty significant decline in services export. So that services import-export differential has really narrowed, which would not be in the favor of US growth. So if you combine that with goods struggling, goods import struggling and that hurting companies here, that’s where you start to see more of a material downside risk for US GDP.

MARK: Thank you. Thank you, Kevin.

So let’s wrap it up maybe with one question for each of you. We’ll start with you, Jeff. What is one final thing that you want people to take away?

JEFF: Well, it’s not too late to rebalance your portfolio back towards international and get back to the longer-term waiting. It’s easy to let that drift lower. But you’ve got a better earnings momentum, better economic momentum, you’ve got valuations on your side, you’ve got maybe relative policy certainty, a lot of factors, I think moving in the direction of continued international outperformance, so it’s not too late to reconsider those allocations in your portfolio.

MARK: Alright. And, Kevin?

KEVIN: Yeah, I would echo, actually, and build on what Jeff said in terms of diversification. If this year has proven anything, it’s that diversification, not just within the US, but around the world, has really proven to be a smart thing. And, you know, it’s not a recent thing, at least in terms of what Jeff has been talking about, in terms of diversifying around the world. But even within the US, I mean, you look at what the initial driver of the weakness was dating back to February, a lot of it was big tech-centric or mega-cap-growth centric, and then it filtered over into the rest of the market. So there are still concentration risks in any index that has significant weighting of just a few companies or just 10 companies. But that’s still the case for the United States. So making sure that you’re not out over your skis in any particular sector or any particular area of the market, and making sure you focus, especially in these times, on areas like profitability or high interest coverage ratios or strong revenue, strong profit guidance moving forward. Those have really been key areas to focus on, and that rings true around the world as well.

MARK: Thanks, Kevin.

And Kathy, are you connected back?

KATHY: Well, I hope so. Can you hear me?

MARK: Yeah, we can hear you. Take it away. What’s your final thought?

KATHY: I was going to say there’s lots of opportunities in the fixed income markets right now. You have yields that are pretty attractive without a lot of credit risks. Areas we like are still investment-grade corporate bonds. They’re really like municipal bonds for high income clients who are particularly in high tax states like California, New York. You’re seeing tax equivalent yields close to 7% or plus in those markets. And the credit risk in municipal bonds is very, very good.

MARK: Alright, thank you, Kathy.

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