Latest / Views from 6,230 / Resilient Economy. Rising Risks

Transcript

Resilient Economy. Rising Risks · Views from 6,230

• 0:10
  video1069598612: Welcome everyone to the Views from 6,230 podcast.
• 0:15
  video1069598612: I am your host, Ryan Nauman.
• 0:18
  video1069598612: Economic growth has remained resilient, supported by consumer spending, business investment, and corporate earnings.
• 0:26
  video1069598612: But as we approach year-end, higher energy costs, persistent inflation, and rising interest rates could put that resilience to the test.
• 0:35
  video1069598612: Joining me to discuss the outlook is Rob Haworth, Senior Investment Strategy Director at US Bank Wealth Management.
• 0:45
  video1069598612: We'll explore what consumer behavior is telling us about the economy, whether AI investment is translating into subs- sustainable profits, and how investors should think about stocks, bonds, and diversification in today's market.
• 1:04
  video1069598612: We'll also examine the potential impact of the midterm elections.
• 1:09
  video1069598612: All right, enough from me.
• 1:11
  video1069598612: Let's go ahead and bring on the star of the show.
• 1:13
  video1069598612: Rob, welcome to Views from 6,230.
• 1:17
  video1069598612: Thank you so much for coming on the show.
• 1:19
  video1069598612: It's really an honor to have you, and I'm really excited about this conversation.
• 1:23
  video1069598612: Can you please tell us a little bit more about yourself and US Bank Wealth Management?
• 1:29
  video1069598612: Yeah.
• 1:29
  video1069598612: Thank you so much, Ryan.
• 1:31
  video1069598612: It's, it...
• 1:31
  video1069598612: I'm really excited to be here.
• 1:33
  video1069598612: So, uh, let me start first with the broad.
• 1:35
  video1069598612: U.S.
• 1:36
  video1069598612: Bank Wealth Management really serves a broad range of clients, from those just starting out in their investing journey, to those that have, uh, you know, millions in our private wealth business, to those that have tens and hundreds of
• 1:50
  video1069598612: millions in our family wealth business and Ascend Private Capital.
• 1:54
  video1069598612: And our job in wealth managers really, ma- wealth management is really to seek solutions to the specialized problems that each of these clients face as they try and build wealth and savings, whether it's for retirement or family legacy
• 2:10
  video1069598612: around the, around the table.
• 2:13
  video1069598612: I myself have been in this investment business, uh, for over 35 years, uh, starting back in Chicago, and now I work out of Seattle for Private Wealth.
• 2:22
  video1069598612: Um, my focus today is really all on investment strategy and portfolio construction across those, uh, client cohorts, and I'm now based in Seattle working with our clients really around the country.
• 2:35
  video1069598612: But today, for example, I'm working out of St.
• 2:38
  video1069598612: Louis, Missouri.
• 2:39
  video1069598612: Just, uh, happened to be here for some other events.
• 2:41
  video1069598612: So very excited to be here with you, Ryan.
• 2:44
  video1069598612: Awesome, Rob.
• 2:45
  video1069598612: Yes, I started my career in Seattle.
• 2:48
  video1069598612: Great city, great city.
• 2:50
  video1069598612: So it's good to have somebody, even though you're not in the West Coast right now, good to have some West Coast people on the podcast.
• 2:58
  video1069598612: Thank you, yes.
• 2:58
  video1069598612: Always get the East Coasters on here, so good to, good to have you on.
• 3:04
  video1069598612: So it's really interesting time right now, Rob.
• 3:07
  video1069598612: Lot of different dynamics happening that financial advisors, investors have to really take into consideration when they're building investment portfolios, especially when we're looking for the...
• 3:18
  video1069598612: I can't believe I'm gonna say this, really the last two months of the year.
• 3:23
  video1069598612: Your outlook for the rest of 2026 is constructive but disciplined, which I found that very interesting.
• 3:31
  video1069598612: What are your strongest fundamentals supporting that view, and, and what could make that path ahead more difficult?
• 3:39
  video1069598612: Yeah, it, it's, uh, it's a great...
• 3:40
  video1069598612: And, and frankly, I often, as I'm sitting here, as you point out, with two and a quarter months, uh, to go in the year, I think about where we started the year.
• 3:49
  video1069598612: I think when we started the year, we were thinking of this as a four-peat year, right?
• 3:54
  video1069598612: It, it's not, uh, usual in sports to get from a three-peat to a four-peat.
• 3:58
  video1069598612: It's very rare.
• 3:59
  video1069598612: Growing up in Chicago as a Bulls fan, we had two three-peats, uh, n- not a four-peat.
• 4:05
  video1069598612: And, uh, I think the, the surprising thing to us is, is what we expected in terms of a strong market really came through, but it's not the path that we expected, right?
• 4:17
  video1069598612: We've had a lot more thrown in our way in terms of, uh, uh, the Middle East conflict, higher inflation, right now a Fed raising rates.
• 4:26
  video1069598612: None of those were in the cards when we started the year.
• 4:28
  video1069598612: As we close out the year, I'd say there's two key things that continue to drive this market One is the, is the corporate investment cycle.
• 4:38
  video1069598612: Uh, we're seeing, uh, you know, year over year thirty-seven, thirty-eight percent investment growth expectations on the S&P 500.
• 4:48
  video1069598612: That's very solid and a very solid under-underpinning as we move through year-end.
• 4:53
  video1069598612: Additionally, earnings expectations remain really strong, right?
• 4:57
  video1069598612: Thirty-two percent earnings expectations for full year twenty twenty-six on the S&P 500, looking forward to fourteen to fifteen percent for twenty twenty-seven.
• 5:06
  video1069598612: Those are very good numbers when we think about history on the S&P 500.
• 5:10
  video1069598612: And so investors have a lot to look forward to, and the great news is they're not paying up to get it.
• 5:15
  video1069598612: If we think about where price earnings multiples are relative to ten-year averages, you're not paying much more, if at all, than what you've paid over the last ten years, and yet you're getting investment-- uh, you're getting earnings expectations
• 5:29
  video1069598612: that far outstrip that.
• 5:31
  video1069598612: The second strong support in our view is the consumer.
• 5:34
  video1069598612: The consumer has been resilient through this whole thing.
• 5:38
  video1069598612: Uh, spending, I think to many people's surprise, remains elevated, whether it's five to six percent on, uh, the Bureau of Economic Analysis number, around six percent for, uh, the Census Bureau retail sales number, uh, somewhat stronger if you
• 5:53
  video1069598612: look at, uh, Johnson Redbook weekly retail sales.
• 5:58
  video1069598612: All those numbers are really solid.
• 5:59
  video1069598612: I think the fear is those are coming out of inflation, and the story is, is no, right?
• 6:05
  video1069598612: Because inflation, if we look at CPI, is yes, three point seven percent year over year is elevated when we think about the numbers through September.
• 6:13
  video1069598612: But that's still below what we're talking about for sc- for consumer spending.
• 6:16
  video1069598612: So consumers remain resilient, and it's that solid labor market.
• 6:21
  video1069598612: We heard it again this Thursday morning, a hundred and ninety-four thousand weekly jobless claims.
• 6:26
  video1069598612: We're averaging, averaging a hundred and ninety-eight thousand over the last four weeks.
• 6:31
  video1069598612: It's just this low fire environment, and yes, it's low higher, but it's low fire as well, and that's giving the consumer that resilience.
• 6:39
  video1069598612: If I think about risks, I'd highlight two things, and, and one we've talked about, it's that inflation gets hotter, right?
• 6:47
  video1069598612: This, this conflict in the Mida- Middle East has been dragging on since early March, end of February, much longer than any of us expected.
• 6:55
  video1069598612: We've had elevated energy costs, CPI The last go on CPI had energy costs rising 34%.
• 7:03
  video1069598612: That is a challenge for consumers, and it's led the Fed to start a rate hiking cycle.
• 7:07
  video1069598612: Now, where does that end?
• 7:09
  video1069598612: We're not really sure.
• 7:11
  video1069598612: It seems like in talking to the US Bank economics team, we've probably got another hike here in December, maybe another one early in the year.
• 7:18
  video1069598612: The market's thinking you may get two or three more in 2027.
• 7:22
  video1069598612: I think the, the, the further the Fed has to go, the more risk that comes in.
• 7:27
  video1069598612: But that's not a year-end problem yet, right?
• 7:29
  video1069598612: It, it's just one more, right?
• 7:31
  video1069598612: So that's not a year-end problem.
• 7:32
  video1069598612: That's probably more of a 2027 problem.
• 7:35
  video1069598612: Uh, so there's not a lot to derail this market and maybe some worries we can get out of our way in the short term Rob, that's fantastic.
• 7:42
  video1069598612: And yeah, maybe we'll just kick that can down the road until we get to 2027.
• 7:48
  video1069598612: Uh, we'll worry about that then.
• 7:50
  video1069598612: But right now, for 2026, I...
• 7:53
  video1069598612: So as you were talking, talking about the, you know, the drivers of the economy right now and how, you know, strong consumer spending is, the, you know, um, corporate spending, investment, corporate investment is strong, and then earnings, part
• 8:09
  video1069598612: of it, as you're talking, it's like, well, we're in a good spot here, right?
• 8:13
  video1069598612: But what's really interesting, especially on the consumer, I did...
• 8:17
  video1069598612: looked into this about a month ago, but it's really interesting when you look at consumer confidence and compare it to consumer spending, and even the market performance, consumer confidence is telling a whole different story about how- Yeah consumers
• 8:32
  video1069598612: feel, yet, and you said it perfectly, it's resilient.
• 8:37
  video1069598612: Consumer spending remains resilient.
• 8:40
  video1069598612: Markets remain resilient despite the consumer feeling a whole different way.
• 8:45
  video1069598612: How do you reconcile what consumers are saying and what they're actually doing?
• 8:51
  video1069598612: Yeah.
• 8:52
  video1069598612: I, I think the link there for us is jobs, and, and that's really been the key, right?
• 8:58
  video1069598612: The, the...
• 8:59
  video1069598612: You know, what we've seen in past recessions is where consumers really have to stop spending is when they don't have a job, right?
• 9:06
  video1069598612: That's when they have to make the really hard choices.
• 9:09
  video1069598612: What we think we're seeing right now in the consumer spending data is selectivity and choice.
• 9:16
  video1069598612: They're really focusing on, on what they want to spend their money on, maybe foregoing some other things.
• 9:24
  video1069598612: Uh, and, and we've seen, you know, that, that there's really been more of a focus on value.
• 9:30
  video1069598612: You're hearing that from some of the earnings comments from the big box retailers in Q2.
• 9:34
  video1069598612: We're still a long ways from getting their Q3 numbers, but they've talked a lot about people looking for value.
• 9:40
  video1069598612: As you get into the middle of that, it's been about choice, right?
• 9:43
  video1069598612: Uh, where, what, what preferences do they have looking for more unique experiences?
• 9:49
  video1069598612: And then, uh, but they're, they're maintaining their discretionary spending, right?
• 9:53
  video1069598612: The interesting thing to us is, one of the things we look at every week is OpenTable reservations, right?
• 10:00
  video1069598612: I mean, there's nothing more discretionary than going out to eat instead of, you know, opening up a, you know, bag of Top Ramen at home, right?
• 10:08
  video1069598612: That, that's a real discretionary choice when you're going out, and we're seeing those reservation numbers remain strong.
• 10:15
  video1069598612: Same thing when we're looking at TSA security line throughput.
• 10:18
  video1069598612: Travel remains strong.
• 10:20
  video1069598612: So consumers are still able to make some of those choices.
• 10:23
  video1069598612: They may just be compromising elsewhere, and that doesn't mean they're not frustrated by high inflation and other things, right?
• 10:30
  video1069598612: That's really what we're hearing in the consumer sentiment data is they are very frustrated, but it hasn't changed their behavior, and that linkage to us is really jobs.
• 10:41
  video1069598612: Yeah, that's a very good point.
• 10:42
  video1069598612: And I brought-- I'm glad you brought that, just, uh, maybe some soft data.
• 10:46
  video1069598612: You know, the open table, that's hard data.
• 10:49
  video1069598612: But here in Tahoe, one thing I like to look at is you can tell exactly discretionary spending by the amount of traffic coming up over the pass into Tahoe, the lines, the, you know, occupancy at these hotels.
• 11:06
  video1069598612: Now, we're in the shoulder season.
• 11:08
  video1069598612: It's quieter here in Tahoe, but there's still a lot of people coming here.
• 11:12
  video1069598612: There's still a lot of people coming to visit.
• 11:16
  video1069598612: You know, reservations are still really hard to get at restaurants.
• 11:20
  video1069598612: So just by the views of Lake Tahoe, now it's very isolated.
• 11:25
  video1069598612: It doesn't look like there's many cracks, or people aren't too concerned about the economy right now because they're still coming up here and spending the money to, to visit on their vacation.
• 11:35
  video1069598612: Yeah.
• 11:36
  video1069598612: No, they're, they're-- Uh, I mean, it's interesting.
• 11:37
  video1069598612: I've been traveling around the country over the past few weeks, for sure, and even here in St.
• 11:41
  video1069598612: Louis, the airport was busy.
• 11:44
  video1069598612: Uh, I wandered out to a restaurant last night.
• 11:46
  video1069598612: That was fairly full.
• 11:48
  video1069598612: Um, and you know, it, it's not like it's peak travel season for, for St.
• 11:52
  video1069598612: Louis, Missouri.
• 11:53
  video1069598612: So- uh, you know New York, yes, right?
• 11:56
  video1069598612: Lots of, lots of travel there.
• 11:57
  video1069598612: But yeah, certainly the, the anecdotal read is lots of activity.
• 12:02
  video1069598612: Yeah.
• 12:02
  video1069598612: So you mentioned jobs, and I completely agree with that.
• 12:05
  video1069598612: People are gonna spend until they lose their job, and then, you know, they have some hard decisions.
• 12:11
  video1069598612: Is that really what would change your views on consumer spending then from remaining resilient is unemployment increasing?
• 12:21
  video1069598612: Yeah, I, I mean, honestly, the thing I look at every Thursday morning is the jobless claims data.
• 12:26
  video1069598612: And, and as I've heard, uh, other media providers talk about it, right?
• 12:29
  video1069598612: It's becoming like watching paint dry.
• 12:31
  video1069598612: We've been around 200,000 for, for months now.
• 12:35
  video1069598612: Um, but it-- but that's maintained some real stability to the market.
• 12:40
  video1069598612: And I-- and so I think that's really where we, where we start.
• 12:43
  video1069598612: I think the second factor, and we haven't seen any evidence of this, is we do look hard at bank lending data, right?
• 12:50
  video1069598612: And if that really changed, right, if the appetite for lending changed significantly, I think we'd have to wonder.
• 12:56
  video1069598612: This is not an economy where the, um, where the consumer has been driven by, by borrowing for their spending, right?
• 13:04
  video1069598612: We've seen those growth rates really taper off.
• 13:07
  video1069598612: Delinquencies have really tapered off, right?
• 13:09
  video1069598612: This is not a, a space where we think consumers are over their ski tips.
• 13:13
  video1069598612: But if we saw a significant change in the lending environment, that might be a secondary thing we'd consider, uh, after we looked at the jobs market of maybe, right, the growth rate is really going to, to dampen.
• 13:24
  video1069598612: But, but the, those unemployment claims remain really important.
• 13:28
  video1069598612: Yeah.
• 13:28
  video1069598612: A very good point.
• 13:29
  video1069598612: Very...
• 13:30
  video1069598612: And maybe that's one area where it's good that it's kinda like watching paint dry.
• 13:36
  video1069598612: Absolutely.
• 13:37
  video1069598612: So, uh, let-- it's hard to talk about markets, the economy, without talking about AI.
• 13:44
  video1069598612: You know, it's a-- AI is much more than just investing in NVIDIA or the hyperscalers.
• 13:51
  video1069598612: Much more.
• 13:51
  video1069598612: It's really expanded well beyond that.
• 13:55
  video1069598612: And expanded beyond software, semiconductors, into now data centers, power, cooling, construction, financing.
• 14:04
  video1069598612: How significant is that capital spending cycle for the economic and the earnings growth?
• 14:10
  video1069598612: Yeah, it, it's vital, right?
• 14:13
  video1069598612: I, I think, you know, when you think about 37% infrastructure, 37% investment spending growth on the S&P 500, right?
• 14:21
  video1069598612: That is just a tremendous number, right?
• 14:23
  video1069598612: It's the highest in, in a couple of decades, right?
• 14:25
  video1069598612: So, so this build-out is meaningful when it comes to the S&P 500.
• 14:29
  video1069598612: But maybe, you know, we can put it another way.
• 14:32
  video1069598612: One of the, one of the things we talk about is by 2030, we're going to need 12 gigawatts of energy to power the data centers and AI, a- additional, right?
• 14:44
  video1069598612: That's 12 New York Cities, or for Back to the Future fans, that's, you know, 12 times you get to do time travel, right?
• 14:50
  video1069598612: 'Cause it took one gigawatt, uh, 1.21 gigawatts, I think, for, uh, for Doc Brown to, to power Marty back to the, back into the future or back into the past.
• 15:00
  video1069598612: And, and so the, the power spend itself is huge and a meaningful change for this economy.
• 15:08
  video1069598612: And I think that takes us from...
• 15:09
  video1069598612: It, you know, be- It's really interesting where we can't think about this as a normal technology or technology cycle because we're moving from just building out software, things that are easy to transport, right?
• 15:22
  video1069598612: It's not on another CD-ROM that I plug into my computer to do my tax, uh, taxes anymore, right?
• 15:27
  video1069598612: It's, it's something that is requiring physical investment in, in infrastructure, in a center, in chips, in servers, and power.
• 15:39
  video1069598612: And power takes a lot of investment, a lot of copper, a lot of silver, a lot of rare, rare earth metals, uh, in addition to space for people to build it out.
• 15:49
  video1069598612: So it's, it's a very important element of the investment cycle that doesn't look like it's going away anytime soon.
• 15:56
  video1069598612: And we have pretty solid expectations, even from the hyperscalers on their investment cycle, well into 2027.
• 16:03
  video1069598612: Maybe they can start to change that if something changes it- by the time we get to 2028.
• 16:09
  video1069598612: But for now, it looks like the next year and a half at least are set.
• 16:12
  video1069598612: And if we think about that power infrastructure, we know how long it takes to get anything built, particularly an, a, a, a electrical grid build out.
• 16:21
  video1069598612: And, and so, you know, that is still coming and, and providing that support as we look in the next, over the next few years.
• 16:29
  video1069598612: Mm-hmm.
• 16:30
  video1069598612: Yeah.
• 16:30
  video1069598612: So you talked about expectations.
• 16:32
  video1069598612: A perfect segue here, expectations for this AI investment.
• 16:37
  video1069598612: They're, they've been elevated, they're lofty, those, and rightfully so.
• 16:42
  video1069598612: Because of the huge amount of spending that is going into AI, those expectations have increased.
• 16:49
  video1069598612: What evidence will you be looking for to determine whether the companies are actually earning the adequate return on that spending?
• 16:57
  video1069598612: The ROI, it's gonna be, you know, probably a high, you know, bogey to hit.
• 17:03
  video1069598612: Um, what evidence are you gonna be looking for?
• 17:05
  video1069598612: What data points are you gonna be looking for?
• 17:08
  video1069598612: Yeah, and this probably takes us well into 2027 rather than being a 2026 story, Ryan, because, uh, you know, the evidence has been pretty mixed, right?
• 17:17
  video1069598612: Companies are still really building out how they're going to talk about this.
• 17:20
  video1069598612: But also when we think about hyperscalers and chip companies, they're still in the build-out phase much more than they are the, the marketing and merchandising phase.
• 17:29
  video1069598612: So we're, we're a ways out because they're scaling for so much future demand.
• 17:34
  video1069598612: So what we're, we're expecting this to really evolve over quarters, not over months, not over weeks, right?
• 17:40
  video1069598612: It's going to take quarters for companies to develop the reporting, and this is really on both sides that we have to watch.
• 17:46
  video1069598612: One, we have to...
• 17:48
  video1069598612: You know, the companies have to really be able to articulate what they're selling, not just for the build-up, but for the end user.
• 17:54
  video1069598612: And end users have to be able to articulate the value they're getting as well, right?
• 17:58
  video1069598612: We wanna hear from the healthcare companies, from the insurance companies like UnitedHealth who are starting to, to make use of AI, and how is that benefiting them?
• 18:07
  video1069598612: How is that benefiting their cost line or their revenue line, right?
• 18:10
  video1069598612: We're, we're very early in that.
• 18:13
  video1069598612: We're getting some anecdotal reports, but it's not clear, and I think we need that, that cycle to really develop over time so that we can split out what are the revenues coming from those early investments.
• 18:25
  video1069598612: How much of those early investments are sunk costs?
• 18:27
  video1069598612: 'Cause we know, uh, when it comes to infrastructure, right, you have to spend a lot of money up front to start to generate those revenue streams through time, right?
• 18:36
  video1069598612: It's like building a power plant, right?
• 18:38
  video1069598612: You spend a lot of money up front to build that power plant, and then you sell electricity to people over time, and you generate revenue to pay back those early investments.
• 18:46
  video1069598612: I think we'll see the same thing here, and then so it's going to take some time.
• 18:50
  video1069598612: But we're hearing some early, right, some early indications, and I think there's a lot of exploring by a number of companies as to what is the revenue generation story.
• 19:02
  video1069598612: But we're, we're early days yet.
• 19:04
  video1069598612: Yeah.
• 19:05
  video1069598612: Yeah, that's kind of what I've been hearing too, is we're still pretty early here.
• 19:08
  video1069598612: I mean, like you said, they just started, uh, just now started investing in it and building the infrastructure.
• 19:16
  video1069598612: It's gonna take some time.
• 19:18
  video1069598612: Um, so it, it's gonna be fascinating to watch, Rob.
• 19:22
  video1069598612: Yeah.
• 19:22
  video1069598612: It's gonna be fascinating to watch.
• 19:22
  video1069598612: No, it's absolutely fascinating to watch.
• 19:24
  video1069598612: I think one of the other interesting things, um, is we've seen a lot of, uh, uh, back and forth with, uh, the chip companies, right?
• 19:30
  video1069598612: The how long are the G- is, are the GPUs really going to last, right?
• 19:34
  video1069598612: How long are they going to re-remain viable?
• 19:37
  video1069598612: And early reads were, oh, there's probably two years of life to them.
• 19:40
  video1069598612: Well, turns out there's, you know, you have NVIDIA talking about there's some, some ways to make their live- their lifetime longer, right?
• 19:48
  video1069598612: So, so even that isn't clear yet as to how long will some of these investments last.
• 19:53
  video1069598612: Is it short?
• 19:54
  video1069598612: Is it longer term?
• 19:56
  video1069598612: Uh, yeah, there's, I think there's a lot of moving parts yet as this gets built out.
• 20:00
  video1069598612: Yeah.
• 20:01
  video1069598612: I completely agree, uh, completely there.
• 20:04
  video1069598612: So on energy prices, real quick, and this is probably more of a 2027 question here too, but energy prices, they connect geopolitical risk, inflation, interest rates, corporate profits.
• 20:18
  video1069598612: It's amazing all, like, what go, what energy prices impacts, is, like, the whole economy.
• 20:25
  video1069598612: How could a prolonged energy disruption really change your economic and market outlook that you have?
• 20:32
  video1069598612: Yeah.
• 20:33
  video1069598612: No, it, it, uh, frankly, it definitely can.
• 20:36
  video1069598612: It's one of the, one of the worries we have.
• 20:38
  video1069598612: Uh, you know, this constraint in terms of oil supply, and frankly energy supply, has lasted longer than we expected.
• 20:45
  video1069598612: But the market has been more resilient than we expected, right?
• 20:48
  video1069598612: We've seen, uh, alternative transportation channels.
• 20:51
  video1069598612: We've seen some ships getting through periodically.
• 20:54
  video1069598612: Um, we've seen a drawdown in inventories, not only here in the US, but in China as well, right?
• 21:00
  video1069598612: So there's been a lot of adapt- adaptation, but that's increased the fragility of this environment, meaning, uh, we don't have as much in the tank if, say, we get a surprise shutdown, a natural disaster or something like that.
• 21:13
  video1069598612: So that's something we have to watch for.
• 21:16
  video1069598612: Um, Ian, we're hearing from companies that it's getting tougher too.
• 21:20
  video1069598612: I think it's interesting that in the, uh, third quarter for airline reporting season, they all talked about the high cost of jet fuel.
• 21:27
  video1069598612: I think the question we have is, do these high costs start to bleed through and change consumer behavior?
• 21:33
  video1069598612: And that's what takes us all the way back to where we started, Ryan, is do we start to see not just consumers be frustrated, but do we see their spending really start to contract, or do they have to,
• 21:43
  video1069598612: do they have to stop taking these trips, right?
• 21:46
  video1069598612: And that's the good news, is we haven't seen consumers or business changing their spending activity yet.
• 21:52
  video1069598612: But a, you know, a sustained surge of West Texas Intermediate crude oil prices above $120 a barrel, that would be a really bad sign to us.
• 22:00
  video1069598612: Um, or kind of a, a change in that, in that day-to-day spending, uh, would, would be the other sign to us that we'd be become really worried.
• 22:10
  video1069598612: Yeah.
• 22:10
  video1069598612: Very good point, Rob.
• 22:12
  video1069598612: And continuing on with inflation here too, you know, if inflation, the latest print CPI, I believe, is 3.7, core PCE is 3%, so well above the 2% target of the Fed.
• 22:26
  video1069598612: So if inflation remains elevated and the Federal Reserve has to continue to raise rates, you guys are thinking maybe two more hikes potentially.
• 22:35
  video1069598612: What if maybe there's three because inflation and energy doesn't come down?
• 22:40
  video1069598612: Which areas of the economy and financial markets are most vulnerable to more hikes and sustained higher inflation?
• 22:50
  video1069598612: Yeah, and, and it's something we've really seen over the last six weeks in the market where it was the interest rate sensitive.
• 22:56
  video1069598612: Up until the last, the last couple of weeks it's been a little more, uh, uh, tech and AI related sell-off.
• 23:01
  video1069598612: Before that, it was the interest rate sensitive elements of the market that really got punished as Fed rate expectations got priced in, and then priced out, particularly for October.
• 23:11
  video1069598612: Um, so that takes us back to, you know, utilities, staples, eventually financials, right?
• 23:17
  video1069598612: That, that really are gonna be under pressure if we see higher interest rates.
• 23:20
  video1069598612: I think the interesting thing about this cycle to keep in mind, as the Fed has been hiking rates, what we've seen in bond prices is not that investors are baking in higher inflation expectations.
• 23:31
  video1069598612: They're baking in higher real rate expectations, just meaning Fed hikes.
• 23:36
  video1069598612: They're baking in Fed hikes.
• 23:37
  video1069598612: They believe the Fed can tame the inflation, uh, gene- tame inflation and, and will take care of it, um, but it's, it, it's taking some time.
• 23:46
  video1069598612: I, I think the other are- the other areas I'd mentioned are already under distre- duress with these higher rates, right?
• 23:53
  video1069598612: Housing has been the epicenter of this.
• 23:55
  video1069598612: With 7% mortgage rates, right?
• 23:56
  video1069598612: It-- we know housing activity has been dampened.
• 23:59
  video1069598612: That has been a challenge.
• 24:01
  video1069598612: Home builder sentiment recently made a, made another new low, right?
• 24:04
  video1069598612: There's a lot of frustration there And real estate, right?
• 24:08
  video1069598612: I'm, I'm not sure there's another drawdown to be seen in real estate, but we know funding and financing in real estate remains a real challenge, and that's probably the other area that remains under duress here, right?
• 24:19
  video1069598612: A- what we usually see in an environment like this where the market's dealing with Fed rate hikes and challenging inflation, is they look to secular growth as part of the story, and that's probably the case as you see
• 24:32
  video1069598612: this rotation from, from those that require immediate financing to those that maybe have better long-term growth prospects.
• 24:39
  video1069598612: Mm-hmm.
• 24:41
  video1069598612: I'm really glad you brought up housing.
• 24:43
  video1069598612: I kind of, uh, questioned for a while now, when are we gonna see a real pullback in housing, potentially maybe a recession in housing?
• 24:51
  video1069598612: Might be happening now, or maybe 2027, but if rates, if mortgage rates continue to stay around 7%, I can't imagine, you know, a reci- a recession might be happening soon in housing.
• 25:04
  video1069598612: Uh, it, you know, uh, w- it's interesting, Ryan.
• 25:07
  video1069598612: I was talking to someone else about this, uh, the other day, right?
• 25:10
  video1069598612: A- and I look at the numbers, and what's interesting is, is we know existing home transactions are way down because people are staying in their homes because they've locked in low mortgage rates, right?
• 25:22
  video1069598612: So, so we're seeing, uh, I think it's 25% less in terms of, uh, 20% less in terms of kind of annual existing home sales, right, than we used to see before we got to these higher interest rates, and
• 25:35
  video1069598612: that hasn't been replaced by new home sales, right?
• 25:37
  video1069598612: New, new home sales have made up about a quarter of that difference.
• 25:41
  video1069598612: Mm-hmm.
• 25:41
  video1069598612: N- not much, right?
• 25:42
  video1069598612: So, so we are dealing with kind of a, a market that is frustrated and seeing fewer transactions, and, and we seem to have adapted to that, right?
• 25:51
  video1069598612: People are making either more rental choices, waiting to buy a home if they want, right?
• 25:57
  video1069598612: It, it's, it's definitely a market that is kind of stuck in neutral gear and, and maybe it's not a price pressure problem because we have so much in terms of, like, I think, uh, for existing mortgages, uh, our
• 26:09
  video1069598612: data would tell us it's about, uh, the average mortgage rate is about 3.5% and climbing, right?
• 26:15
  video1069598612: Kind of as everyone adds a new one.
• 26:17
  video1069598612: So, but so for existing mortgages, right, you've got a lot of kind of captive capital, but it's keeping it affordable.
• 26:23
  video1069598612: So we may not have the kind of price drawdown we fear, but we could stay in this low transaction environment for some time.
• 26:31
  video1069598612: Yeah.
• 26:31
  video1069598612: Uh, I don't know very many people, Rob, that would trade in a 3.5% mortgage for a 7%.
• 26:38
  video1069598612: Uh, it's a lifestyle change.
• 26:40
  video1069598612: I, I'll tell you that, Ryan.
• 26:42
  video1069598612: Exactly.
• 26:43
  video1069598612: So we talked a lot about the macro.
• 26:46
  video1069598612: You've brought such great insight about just the impli- implications of what's going on in the macro environment, the economy.
• 26:53
  video1069598612: Parts of it's strong.
• 26:55
  video1069598612: There are some risks out there.
• 26:56
  video1069598612: But what does all this mean for equities and for, you know, financial advisors who are trying to build, you know, diversified portfolios for their clients?
• 27:08
  video1069598612: Yeah.
• 27:09
  video1069598612: No, it, it, it's great.
• 27:10
  video1069598612: And for us, um, I, I'd highlight a couple of things.
• 27:13
  video1069598612: So, so one, we talked about a great growth story in equities, and you're not paying up a lot for it.
• 27:18
  video1069598612: And I...
• 27:19
  video1069598612: So I think equities, and particularly global equities, have to be an important, uh, part of the story.
• 27:23
  video1069598612: A, a, a, a solid piece in, in US large cap, right, that is, that is a strong element, ele- element of the market.
• 27:31
  video1069598612: Um, but global stocks offer you some, some other diversification factors as well, right?
• 27:36
  video1069598612: Emerging markets, you have another set of the AI build-out happening there.
• 27:41
  video1069598612: That's been a good performer this year.
• 27:43
  video1069598612: We'll see if that can continue.
• 27:45
  video1069598612: Um, but developed international as well.
• 27:47
  video1069598612: And, and you're getting just such tremendous growth rates, and you're not overpaying for it.
• 27:51
  video1069598612: Mm-hmm.
• 27:52
  video1069598612: So equities remain at, at the heart of the matter.
• 27:55
  video1069598612: And yet, right, you turn to fixed income, and, and I think we're all conditioned after the last decade and a half of near zero interest rates to say, "Ah, you don't get enough from fixed income."
• 28:05
  video1069598612: Well, you're getting the highest investment grade bond yields in more than 10 years, right?
• 28:10
  video1069598612: So, so all of a sudden, uh, for clients, you can start to think about, "How do I balance o- how do I really take on risk for them?"
• 28:20
  video1069598612: Because I'm finally getting paid 4.5, 5, tax equivalent yields of 7% on municipal bonds, right?
• 28:26
  video1069598612: I'm getting paid something really reasonable to own a more defensive asset class.
• 28:32
  video1069598612: And, and we think that's a conversation to have, right?
• 28:36
  video1069598612: From a, from a strategy perspective, we offer portfolios across the efficient frontier, some with high bond allocations, some with low bond allocations.
• 28:45
  video1069598612: For advisors and clients, it's really about where should you be on that efficient frontier, right?
• 28:50
  video1069598612: You should definitely have equities, but you should think about where you should be on that efficient frontier.
• 28:53
  video1069598612: And then within fixed income, I think as we think about it, uh, right, this is an elevated interest rate environment where, right, it gets frustrating to be sensitive to rising interest rates.
• 29:06
  video1069598612: And so we've really focused and pointed to more diversification in fixed income portfolios in areas like structured credit or collateralized loan obligations, uh, non-government agency-backed residential mortgage-backed securities where you have less sensitivity to rising rates, and yet you're
• 29:22
  video1069598612: getting a yield premium over, say, an equivalent corporate bond to own that.
• 29:27
  video1069598612: So you don't have to take on that duration sensitivity, we call it, and yet you're getting these higher single-digit yields that, that really help provide some ballast in your fixed income portfolio.
• 29:39
  video1069598612: And, and then the other area within fixed income we'd look is catastrophe bonds or reinsurance, right?
• 29:45
  video1069598612: It-- This is something where, uh, uh, you're really not sensitive to the business cycle, you're sensitive to the global disaster cycle.
• 29:54
  video1069598612: And that's, that's the...
• 29:56
  video1069598612: You know, it, it, it's, it's a great way to provide capital and get paid for providing capital there.
• 30:00
  video1069598612: And then the, the third and last area I'll mention that we think provides diversification and some balan- and which really helped us as we dealt with higher, uh, energy costs this year is global infrastructure.
• 30:13
  video1069598612: Right?
• 30:14
  video1069598612: Now, the utility side ebbs and flows with interest rates, but you have some transportation, you have, uh, some energy infrastructure, you have industrial infrastructure.
• 30:25
  video1069598612: And what we've seen from that asset class is it provides you some protection in both sorts of environments.
• 30:29
  video1069598612: It's providing you some growth as rates rise And as the economy expands and it's providing you some defensive characteristics as we've seen higher energy costs as well.
• 30:40
  video1069598612: So diversification does still matter in this environment, but it's, it's unfortunately not simple diversification anymore.
• 30:46
  video1069598612: Yeah.
• 30:47
  video1069598612: No, you're...
• 30:47
  video1069598612: I love that.
• 30:48
  video1069598612: It's, it's not simple diversification, the 60/40 portfolio, and I love what you're talking about fixed income too.
• 30:56
  video1069598612: It's a place where y- you should take a active approach to it versus a passive approach.
• 31:01
  video1069598612: All the different areas of fixed income that you can provide some, find some alpha.
• 31:08
  video1069598612: And but there is still some risks out there, 5% is very attractive right now, but like you said, there's still some risks in fixed income.
• 31:15
  video1069598612: And real quickly, talking about yields, fixed income yields, a lot of people say, you know, 5% we're starting to get to the point where it's gonna really negatively impact equities.
• 31:25
  video1069598612: Are you seeing that or do you think yields have to go a little bit higher for it to really negatively impact the attractiveness of equities?
• 31:35
  video1069598612: Now there's an alternative.
• 31:37
  video1069598612: Y- well, yeah.
• 31:38
  video1069598612: A- and, and I think, um, you know, a, a year ago we were thinking about that 5% number as well, and, and what's different between a year ago and today is how we've gotten to 5%.
• 31:51
  video1069598612: If you'd asked me a year ago, I would have expected inflation expectations to really be ramping higher, and that's not really what's happened.
• 31:58
  video1069598612: When we started 2026, expectations were for two more or three more Federal Reserve interest rate cuts, and now we've pivoted to two hikes in 2026 and maybe two more in 2027, and the market's repriced around that.
• 32:13
  video1069598612: A- and the earnings story hasn't changed, right?
• 32:15
  video1069598612: And th- that's kind of the key.
• 32:17
  video1069598612: With the earnings story not changing, I think the 5% as a problem area cut off for equities is kind of gone because it's, it's really following the Fed.
• 32:27
  video1069598612: If we'd seen this show up as inflation expectations, that's where equity multiples can get really sensitive is, is if the market thinks equity multiples are getting out of hand, and that's not what we're seeing priced into the bond
• 32:40
  video1069598612: market right now.
• 32:40
  video1069598612: So there's...
• 32:42
  video1069598612: You know, that's really what I would worry about for equity multiples is, is the inflation story.
• 32:48
  video1069598612: Uh, and right now the market and inflation expectations are well anchored in that 2 1/3, 2.4% level.
• 32:55
  video1069598612: So the market thinks the Fed has this in hand for the, over the course of the next year.
• 33:01
  video1069598612: Rob, uh, that is a great way to tie a bow onto this conversation.
• 33:06
  video1069598612: You start...
• 33:07
  video1069598612: Great information about the economy, what's happening there, and brought it down to, uh, the implications for portfolio construction.
• 33:17
  video1069598612: I love it.
• 33:18
  video1069598612: Thank you so much for coming on the show.
• 33:20
  video1069598612: Really, it's an honor to have you on.
• 33:21
  video1069598612: I love the conversation and all the insight you brought.
• 33:24
  video1069598612: Where can our audience get more information about U.S.
• 33:27
  video1069598612: Bank Wealth Management?
• 33:30
  video1069598612: Yeah.
• 33:31
  video1069598612: Great.
• 33:31
  video1069598612: Thank you so much, Ryan.
• 33:32
  video1069598612: It's been great to be here.
• 33:33
  video1069598612: Uh, as always, it's through the internet, right?
• 33:36
  video1069598612: Usbank.com/wealthmanagement.
• 33:39
  video1069598612: Uh, but also you can check out what we're publishing on a regular basis at usbank.com, Market News, right?
• 33:44
  video1069598612: And that's, that has all our latest and greatest, uh, investment insights, views on the economy and markets.
• 33:51
  video1069598612: Uh, look forward to, to seeing people there.
• 33:54
  video1069598612: For sure.
• 33:55
  video1069598612: I've been there before.
• 33:56
  video1069598612: Great, great information there, Rob.
• 33:59
  video1069598612: Keep it up.
• 33:59
  video1069598612: Lot of great education information insights.
• 34:02
  video1069598612: I love it.
• 34:03
  video1069598612: Thank you everyone for listening to this episode of Views From 6230.
• 34:08
  video1069598612: You can watch all of our other episodes on the Views From 6230 YouTube channel and Spotify.
• 34:14
  video1069598612: Please be sure to like and subscribe to those channels, and give us a follow on LinkedIn.
• 34:19
  video1069598612: Thank you very much and have a great rest of your week