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Oscarlyn

Hello and welcome to Truist Wealth, Economic and Market Insights Quarterly Livestream. We understand that your time is precious and we appreciate you joining this discussion. I'm Oscarlyn Elder, co-chief investment officer for Truist Wealth. My team is responsible for selecting and analyzing the investment solutions and strategies that your Truist advisor may use in creating your portfolio. Today, our focus will primarily be on 2024 and our outlook for the U.S. economy and for markets, as well as our thoughts on portfolio positioning.

Our discussion will provide a view of markets both from the near-term and the longer term perspective, and we'll also have an important conversation about the 2025 sunset provisions associated with the Tax Cuts and Jobs Act. Joining me is Keith Lerner, co-chief investment officer and chief market strategist. Keith and his team got Truist advisors and clients through market environments.

They provide timely investment advice with the objective of helping clients achieve their long term wealth goals. His work is highlighted regularly in financial press, and you'll often see him on CNBC, Bloomberg TV and Yahoo! Finance. Joining the discussion today as Mike Skordeles, head of U.S. economics, and Chip Hughey, managing director of fixed income. Both are seasoned investment strategist and help drive our investment guidance.

They publish and are cited frequently in the media. And our special guest, Jacquelyn Parks, advice and planning regional director, will be sharing her insights regarding the 2025 sunset. Now, let me take a moment to lay the foundation for our conversation. 2023 was a year of continued economic resilience and markets defying expectations. The S&P 500, supercharged by the Magnificent Seven, posted extremely strong performance and finished the year on a nine week winning streak, the longest such streak since 2004. The ten year U.S. Treasury yield started 2023, just under 5%, and then it touched 5%. Sorry, it started the year just under 4% and then touched 5% in October, but then finished the year considerably lower. Once again, registering just under 4%. Monetary policy dominated headlines and market action. Investors really grappled with assessing when the Federal Reserve would move to a more accommodating position and analyze the ability of the Fed to engineer a slowing of inflation to target at levels while also trying to avoid a recession,

the much desired and hoped for soft landing scenario. And now we are in the second trading week of 2024 with earnings season right around the corner. And of course, this is the year of elections, with 40 major elections globally and a much watched presidential election in the US. Keith, before we focus on 2024, let's take a moment to discuss 2023, our initial positioning coming into the year and then the changes we made along the way.

Keith

And great to be with you and the group again in 2024. And thank you so much for our clients who have joined us today as well. But we have a lot to talk about. And to answer your question specifically, as we came out of the pandemic, our group was really positive risk on and heading into last year, we were more defensive.

We thought that the fastest rate hikes really in decades was going to have a bigger bite to the economy than it did. But as you just discussed, things were pretty resilient. And another theme of ours coming into last year was to keep an open mind thinking that this post-pandemic period would be somewhat different and that traditional playbook would be challenged.

So what we did, as the economy proved more resilience as earnings proved more resilient, we shifted our view. In June, we upgraded equities, and then later in the year we had that sell off, which is over 10%. And we put out a very timely note right before the rally saying that that pullback was an opportunity as well.

Oscarlyn

And I remember during our last livestream, you talking about the tactical opportunity that the market was giving us. So I remember that and really our process really speaks to our ability to change, to take in new information. A number of firms came in to last year very negatively positioned and they kind of stay negative throughout the year, whereas you and the team really moved your positioning as more information came in. And also speaks to our monthly, our monthly process.

Monthly we’re communicating with our advisors and our clients on our tactical market outlook as well.

  

Keith

Yeah, that's why it's important to have an outlook. It really forces you to think about different scenarios. But one of the most important things that we do is how do you adjust as there's new information or if information comes in differently than you expected? And I think that's actually where a lot of the value that we provide comes in.

Oscarlyn

So now let's turn and talk about 2024. Your big theme is “Be Prepared”. Help us understand the key points of that theme.

Keith

Sure, just upfront, because we're going to cover a lot of material today, is the first point is 2024 is not the year to be on autopilot. The second point for equities, we expect modest gains, still positive, but also tactical opportunities along the way. And we're still finding some some value in fixed income as well, obviously.

Oscarlyn

Well, let's do this. Let's dig into the first couple of points. We're going to talk to Chip in a few minutes about fixed income. So what about 2024 is leading you to say this is not the year for autopilot?

Keith

Well, you kind of hit on some of these things in the beginning. You've mentioned 40 elections, the US election. So that's going to, I think, bring a lot of different headlines and volatility. I think there's also an open question about is the Fed going to be able to stick the soft landing that the market has really put a higher level of confidence in?

Keith

And then, you know, there's still some questions about the path of interest rates and inflation. And most importantly, we're going to have things that we're not talking about today that comes into light as well.

Oscarlyn

Alright. You still see some moderate upside for stocks. Talk about that.

Keith

Sure. So we had a big up year over the last year. But I will say this. If... if the economy can kind of chug along and grind forward and the Fed cuts rates somewhat, inflation comes down, that should support valuations. And then most of the gains I think, will be driven by earnings. We're thinking earnings, in earnings growth, in the 6 to 8% range.

Keith

So I think that's part of the thesis. The other part I'll say is, you know, we look at fundamentals, economy and also some technical signals as well. And that price momentum we saw in the fourth quarter, when you see really strong price momentum, that's actually a good sign looking at 6 to 12 months, we can test that out and that just shows an urgency of demand.

Keith

And looking at, you know, after we've had similar conditions historically, 12 months later, you tend to have high probabilities of the markets being higher. Those things don't tend to happen at a major market top. At the same time, it's not unusual to have such a big one on a short term basis to give a little bit of that back and, you know, and chop around, which is what we're seeing right now.

Oscarlyn

So as you think about 2024 and what's possible, what are the factors that lead you to think that repeating the really robust gains of 2023, it's less likely to happen?

Keith

Yeah, well, one thing we looked at what happens if you have big 20% gains the next year is actually around the average. And this variability in that as well. But I will say, you know, we think about markets. Markets are often not about whether things are good or bad. It's all about how things come in relative to expectations.

And as we discussed coming into last year, expectations were very low. There were a lot of concerns about recession. And as the bar for positive surprises was low. So as we were able to surpass that, the market went up. This year, we had a big market rally into year end and expectations are higher. So I think that's probably the biggest challenge is that you're coming into the year with higher expectation and somewhat higher valuation.

On a net basis, we still think the trend is positive, but I think it's possible but unlikely to see a repeat of what we saw last year.

Oscarlyn

So it's going to take more to surprise the market? (Keith: Correct) based upon where expectations are. Great. Well, I know you've got some slides. We heard from feedback that some folks, some of our listeners wanted more slides. And I think you've got some slides that you like to share with our listeners, to demonstrate some of your points. So let's turn to those slides.

Oscarlyn

I think the first is a slide that highlights the the action of the S&P 500.

Keith

Yeah, that's right. And, you know, I love slides. We only have three. I could do a lot more, but we only have so much time. But yeah, I thought it would be helpful just to put some of these moves in perspective. The first line is, like as you mentioned, a simple chart of the S&P 500 and it looks over the last two years.

Keith

So what's interesting is the market is basically back to where it was at at the beginning of 2022. So the way I think about this is, yes, the market's had a really big move. And yes, the market's somewhat stretched on a short term basis. But if you zoom out a little bit, we really haven't done anything over the last two years.

Keith

So I think that's notable. And then if we move to the next slide, the big story that you addressed in the opening was this magnificent seven, these dominant growth names that really drove the market returns last year. I think perspective is in order there as well. So the chart that we're showing now is showing the S&P 500 return and the Magnificent 7 on the left hand side is 2022, and then the returns for 2023 and then the cumulative returns over the whole period.

And this is what's notable. In 2022, the Magnificent 7 weren't so magnificent. They were down 40%. And then last year they were up 76%. Right? But if you look at the cumulative period, the overall returns about 6%, so maybe we should call it the magnificent 6% return. And the overall market's up about three or 4%. So I think that just provides a little bit perspective as far as how much, how much the market has come, but really a perspective, we really went back up from what we gave back to the prior year as well.

So I think that just good context. And then finally, my third and last slide is around the election years where we have a lot of questions that come in. And what we look at is just how does the market tend to act in election year? None of this always acts the same way, but this is a framework and this is a chart that shows the average path for the S&P during election years.

And what you will note is unlike most years, the first part of the election year tends to be choppy. I think that's partly because the prior year tends to be strong and then there's some uncertainty around the elections coming in and then around the, you know, the summer, you tend to make a little bit of a move up.

And then before the election, a lot of headlines, a lot of anxiety, and markets tend to chop around. And then as you get past the election, the market tends to kind of have a sigh of relief, regardless who wins, that we're moving past some of the uncertainty. Again, I want to make sure that the markets don't always move this path each year, but it's a good framework and it kind of fits in with that thinking that we came into this year a little bit extended and we're working off some of that, that kind of excess coming into the year, which fits along with this election cycle.

Oscarlyn

So a number of folks, when they registered for this live stream, asked about, “Hey, how does the presidential election impact your outlook?” So my question to you is, how do we factor it in to how we're thinking about the outlook?

Keith

It matters. But I will say in our work and I've been doing this for a long time, we've been doing this for a long time, the business cycle matters much more, whether the Fed is able to stick that soft landing in our view is going to be much more important than who wins the election. I'm not saying that that doesn't matter, it does, but again, historically, that's more important. And even if you go back to the 2020, there was so much emphasis on that election. At the time we were saying then it's going to be more important, the path of COVID and also what happens with therapeutics and vaccines. And the same week of the elections, Pfizer came out with that big announcement and the market took off.

So just again, keep that in mind. And the bigger picture, is... is the economy tends to be the biggest driver.

Oscarlyn

So short term, the shorter term view, is that the business cycle matters more in the shorter term than the presidential election.

Keith

I would also say that in the longer term as well.

Oscarlyn

And the longer term.

Keith

Because because companies will adjust, corporations will adjust once they understand the rules of engagement.

Oscarlyn

Okay, great. So, Mike, we just talked about politics. We've had a development this week regarding a budget deal. So quick thoughts on that.

Mike

It's a big deal, maybe not necessarily for markets immediately, but from a macro and economic standpoint, it does remove a big negative that had a potential to have a lot of bad headlines, especially at the end of this month. So it was set up for, and lot of expectations, including ourselves, that there was a high risk of a government shutdown at the end of the month and had they done that, that a short term deal, it might have kicked that along several months, that we would have had multiple times where we would see bad headlines.

So very quickly, yeah, this removes a pretty sizable negative from a macro standpoint for 2024.

Oscarlyn

But now that we've got that covered, let's move on and talk about 2024 and our economic outlook. A year ago, most economists were expecting a recession by now. The recession has not happened to this point, right? And so there seems to be this growing sentiment that this soft landing may be possible. As we think about our 2024 economic outlook, what are the key points that you want folks to take away?

Mike

Yeah, certainly today the three big points are there's going to be a step down in growth. There's the cumulative effects of of rates, among other things. And that's a reason why some of those other folks expected a recession for most of the year, ourselves included. The next big thing, though, for, you know, kind of just going through the points is wages growing faster than inflation, and that's a big deal for consumers. And then lastly, the linchpin for the whole thing, is it's all about jobs.

Oscarlyn

Okay, So you've got your three main points. Let's start with the first one, which is the step down in growth. What does that look like?

Mike

So after, you know, really good 2021 bounce back year, 22 kind of middling, 23 was again better than expected and a lot more resilient, particularly for consumers. But the cumulative impact of these dramatic increases in rates, that's happened not just because of the Federal Reserve but in general, is that that's going to cause and weigh on growth as we move forward.

So, again, boiling it down, look, we had good growth last year kind of along the trend that we had pre-pandemic, but step it down to 1%. We're vulnerable to something that we're not really thinking about. And if you think about some of these prior years, no one was expecting the Ukraine-Russia conflict. This past year, no one was expecting the Israeli-Palestinian conflict.

Those things have impacts, certainly geopolitically, but also things like, in real terms, crude oil prices and other things and those impact inflation and impact consumers here at home because they affect prices at the pump.

Oscarlyn

So expect that step down in growth. So we have that message. But what could lead to us upside surprise to your expectations right now.

Mike

Yeah. So that point about wages growing faster than inflation, we've gone through this period for a couple of years where the inflation was dramatically increasing. Now we're starting to see inflation moderating, but we're still seeing wage growth growing in the on a year over year basis, roughly 4%, which is almost twice the pre-pandemic trend. That's not slowing down.

So that's a good thing, a net positive for consumers and it puts more money in their pocket and lets them continue to spend. And if they're able to continue to spend, pay their bills and what have you, it does good things for the economy. It's kind of a virtuous cycle rather than a, than a downward spiral.

Oscarlyn

And there's another piece to that as I think about the ability of consumers to spend, and that's jobs. And you talked about jobs a second ago. So help us understand the jobs picture.

Mike

Yeah. So we, we think that we're in a structural change that happened after the pandemic. Some of it was we didn't have legal immigration. The other piece is that we had so many people that dropped out of the workforce and that are permanently out of the workforce. Maybe they chose to retire or what have you, but they're out of the workforce.

And now four years later, they're not coming back. (Oscarlyn: Right.) Regardless of wage increases and what have you, they're not coming back. So we have this structural gap, if you will, of not enough workers. So if we look at whether it's the unemployment rate or other things, job openings, those are still at not where they were peak numbers in 21 and 22, but they're still a lot higher than normal as far as the job openings and reverse-so on the unemployment rate.

So the unemployment rate today about 3.7%. Even if we increased it by a full percentage point, we're still below 5% on the unemployment rate, which is historically a very low level, not somewhat something to really worry about. So again, net net: jobs are the important piece. Again, if you have a job, that's the main way that people get income.

If you have income, you're going to end up continuing to spend and people continuing spend pay their bills or what have you. That means the economy keeps working. It's not growing as fast as it was again, that stepped down and growth is still there. (Oscarlynn: Right) But the wage piece is critically important when we look at the jobs situation.

Oscarlyn

Thank you for that information. And again, that's just that's one of the metrics that we follow, right? We look at initial jobless claims. (Mike: Yep.) You know, as as an indicator and then also just employment overall. So we're looking at the health of that. A number of folks wrote in about inflation, and that's not surprising because inflation has kind of been the word of the year for many years now, it seems like. (Mike: Yeah) Is inflation no longer a worry? And I say this knowing that CPI came out, (Mike: Yeah) I think a couple of hours ago, we're digesting some of that information. But talk to us about inflation.

Mike

And today's inflation report. CPI report is a kind of microcosm of where things are. It's surprise of the upside. So back to Keith's point of like the numbers matter, but the relative to what you were expecting, folks were expecting that to cool a whole lot more than it has. (Oscarlyn: Okay.) It's not the issue that it was. And I don't think that people are going to be talking about inflation that they were in 21, 22, and even in 23.

It's not going to be that sort of issue, but it's not going away. And the rate of inflation is not going back down to pre-pandemic levels. There's a couple of key reasons why. One is housing and the other I mentioned earlier, which is crude oil prices and ultimately gasoline prices. We're seeing that crude oil prices have come down from those peak levels, but they're not going all the way back down to where they were pre-pandemic.

So that's going to keep inflation generally higher than it was pre-pandemic. The good news, or the silver lining, is we're still seeing wages and our expectation is that we're going to continue to see wages growing faster than inflation, which gives consumers a really nice buffer to continue to spend.

Oscarlyn

Okay. Well, with that, I'm going to move over to Chip and we're going to talk about fixed income. As we know, inflation hasn’t... inflation expectations have impacted the fixed income market pretty dramatically in 2023. And it was not a dull year at all within the bond market. It was a very exciting year and we had really yields pullback late in the year because of some changing around inflation expectations. With all that said, what should bond investors be focused on in 2024?

Chip

Yeah, as we kick off the year, I think we're really focused on three key points. We're still seeing a lot of value in quality, fixed income and that includes the recent decline in yields that you just mentioned. We still see a lot of value there. Two, we see an opportunity to deploy cash. So we get a lot of questions about T-bills.

Is now the time to get that money to work? When is the best time? We think the answer is basically now. We expect to see the yields in that part of the curve fall as we move through the year. So we would suggest a little bit of urgency for those that are looking for that, that type of solution.

And then also we really continue to emphasize quality in fixed income. We still identify this risk reward imbalance in in the higher risk areas of fixed income. We're patient there at the very least, be very selective there and really focus on these productive, high quality areas of fixed income.

Oscarlyn

Alright, so we've got three main points. Let's start with the first one, which is that you're still seeing value in fixed income. So talk to us about that.

Chip

Right. So if you go back to the third quarter of last year, we saw the tenure rise very rapidly. It was around concerns about federal budget deficits. How much debt are we going to have to issue in order to backfill that? And also at that time, the Fed was in a very hawkish stance, still in the middle of its fight with inflation.

So we saw the ten-year, as you mentioned, really moving very rapidly up and touching 5% back in mid-to-late October. Since then, the narrative has really shifted. We've gone from five down to about 4%, right down 100 basis points, and that that shift has really happened as inflation has started more broadly to cooperate a bit over the course of the past several, several months, we've seen labor market conditions ease a little bit, cool a little bit, and that's allowed the Fed to really change the way that it's talking.

So the Fed is signaling that the end of its rate hike cycle has already arrived and and they're actually seeing discussions pick up around what's the appropriate amount of to reduce interest rates, the Fed funds rate in the year ahead. So we see that we saw this this big pullback down to 4%. But if we look back past that recent spike that we saw in the ten-year, we're still at yields that are the highest we've seen since 2010, 2011 in the ten-year. That's still, that's still really productive.

Right? So it's easy to get distracted by that recent spike, but we're still at productive level, so we still see value there. I think one thing to mention is sort of where we think yields go from here. I think if we look more broadly across 24, we think that yields generally will trend lower as inflation cools, as the Fed does ease policy, lower interest rates.

We think that that is a a general trend lower. In the very near term, I think that over the next few months when the novelty of this Fed pivot kind of wears off, I think the focus is going to turn back to these budget deficits, the strong issuance of government debt that will be needed. And so we do think there may be some tactical opportunities to get in longer dated fixed income as yield maybe rise in response to that.

But as this moment now, it's more of a balanced view right now.

Keith

Would you mind if I interject? Because it was interesting that you talked about, you know, as far as interest rates potentially moving up a little bit before they ultimately come down (Chip: Right.) and then the equity markets, a big part of that market rally at the end of last year (Chip: Absolutely.) was rates coming down. So as we're seeing the choppiness in the equity markets, that's very correlated with the ten-year instead of going down, which was almost like energy for the equity markets with the ten-year all kind of stabilizing, I think, you know, is going to a consolidation just like (Chip: Yep.) the bond market is as well.

Chip

Very good. Yep, true.

Oscarlyn

Talk to us about your second item, which was it's okay to deploy cash now. (Chip: Yeah.) Right? That... there's an impetus to do that right.

Chip

So yeah so we still see you know kind of fair value out in longer dated fixed income. I think what you'll see on the screen is that is there is an opportunity still to capture multi-decade highs in areas like T-bills where we have seen tremendous demand for that. Right. We've seen above 5% yields for the first time in a long time.

It's generated a lot of interest. So the question is, well, is now the best time or should I wait? We actually think... on the expectation that the Fed is going to be lowering interest rates this year, we actually think that these yields are actually going to be declining as we move through the year.

So if there is a wait and see, there's a cash balance about when to deploy it, is the question actually now is probably a pretty opportune time to get that money to work. I think what I will say is that our expectation about what the Fed will do is that they will lower rates this year. It just may arrive a bit later than the market is expecting.

And I think today's CPI print kind of supports that. It's there's going it's not going to move... inflation is not going to move down in this perfectly straight line. (Oscarlyn: Right.) So the Fed is going to want to wait for that validation. But ultimately, we do think that they're lowering, that they're lowering rates this year. And therefore, I think that these yields that we see today are attractive.

Oscarlyn

So if I'm translating that market's expectation as the Fed starts to pivot in March, (Chip: About March.) about March, our thought pattern is right now it may not be March. It may be later. (Chip: That's right.) It may be later, which probably also means maybe we're not pricing in as many rate decreases as the market is. (Chip: That’s true) Is that fair?

Chip

That's true. The market is pricing, you know, 5 to 6 25 basis point decreases. The Fed has signaled about three. We’re probably somewhere in the middle in our expectation. I think it's fair to say.

Oscarlyn

As folks think about deploying cash, I know another element that I've heard you talk about is reinvestment risks (Chip: Yes.) and that, you know, going ahead. And within an asset allocation that's appropriate for your situation, deploying cash on the fixed income side (Chip: Right.) you know, helps guard against some reinvestment risk. So maybe talk about that too.

Chip

Yeah, I think that we need to go in eyes wide open that if we're buying things in the front end of the curve like T-bills, that more than likely that when those instruments do mature, when they reach maturity 6, 12 months from now, we're likely to going to be in a lower interest rate environment. So I think that's an important thing to take into account in how long do I want to lock in these potential yields. Because if they're very short and we get into immaturity and we get into this falling rate environment, we're likely going to be facing a lower yield at that point.

The good news is it's probably in the context of cooling inflation. If our expectations play out, that's good on an inflation adjusted basis. But that reinvestment risk is something that we'll be discussing.

Oscarlyn

Okay. Thank you for pointing that out for folks and bringing that to our attention. Let me ask one more question, and that is we're emphasizing high quality, (Chip: Right.) and certainly within the fixed income, within the bond world, you know, there are opportunities and high yield that perhaps have higher... higher yields than we're seeing in investment grade bonds.

(Chip: Right.) And certainly within treasuries, too. Why are we leaning in to that higher quality right now?

Chip

Right. If you look if you look at what, where yields are in these riskier areas relative to where yields are in the highest quality parts of the fixed income market, that extra compensation that an investor would expect for that additional risk is actually historically low. And another way of saying that is credit spreads are tight. That's, if you hear that, that's that's what that means.

And so we think that there is this risk-reward imbalance in the riskier corners of fixed income. I think that's especially true if you look at the fact that we do expect the economy to slow. And also if you look in areas like high yield corporates, leveraged loans, we're seeing defaults tick up. Right. That's, and so where those yields are in those areas relative to say, where U.S. Treasury yields are, for instance, does not align with the economic reality.

And so we do think that as those two become more aligned, there will be opportunity there. We just recommend patience or at the very least selectivity right now in those spaces focusing on these productive, high quality yields that we have.

Oscarlyn

So bottom line is you're not getting paid enough for the risk of the high yield exposure right now. (Chip: Correct.) And at some point, if we see that calculus change, that imbalance change, we’ll come to our advisors and our clients and let them know. But right now we're really arching towards the... towards the higher quality fixed income.

Chip

That's right. If we see that come back more into balance, we'll certainly be communicating that readily. Yeah.

Oscarlyn

All right. Thank you for that information on the bond side. So, Keith, in light of everything that we've talked about, we've talked about equities, we've talked about the economy, fixed income, how would you summarize that and put that into our tactical positioning for portfolios?

Keith

Let me give you nine points. Three for me, three for Mike, three for Chip... No, we went through a lot of information. So I think the first thing just to remind folks is we think there's be tactical opportunities not the year to be on autopilot. We're starting the year more in line with long term targets as far as asset allocation mix among stocks, bonds and cash. The bigger differentiation that we continue to have is within those buckets. And within that bucket

we still like the U.S. relative to international, the economic trends and the earnings trends are still stronger and within the US we're still more focused on large caps relative to small caps as well. Now, just to give a little bit more information on that, you know, US has outperformed for some time. We've been Team USA for several years. (Oscarlyn: Long time.)

So we all wait, I mean... international markets are cheap. I would say that valuation is a condition, not a catalyst. We're waiting for a catalyst. Earnings trends to change. And typically, if the economy or the global economy surprise, that would be good for international. We were just not there yet. So we'll be patient there as well. We've been we've had a more negative view on emerging markets for the last two years.

We still have a negative view. It's a being-up area. I wouldn't be surprised at some point, if you have a nice bounce there. But we just think the structural issues that are likely to continue. We’re seeing foreign direct investment come out of China for the first time in 20 years as well. (Oscarlyn: Right.) So we're... again, at this point staying away from some of these markets. When you think about the US, we still like the large cap area.

You do have some of the big growth names there as well. So I would say I think you also have to think about how do you diversify some of that concentration risk. So something with the S&P 500, along with something called the S&P Equal Weight Index, where each stock in that index, has the same weight, make some sense. So again, big allocations to the traditional S&P.

But how do we diversify some of that concentration risk? (Oscarlyn: Yeah.) Equal weight index is one.

Oscarlyn

And I want to emphasize that equal weight. I want to make sure people hear that. So you've got the S&P 500, that's price weighted.

Keith

Correct.

Oscarlyn

And there's an S&P 500 equal weighted that's constructed differently.

Keith

Correct. And the main difference is, as an example, Apple, which maybe 6 or 7% is only say 2%. Every stock in the index has the same weight. So just to be clear, we like the traditional. (Oscarlyn: Yes.) Well, that's where we have our biggest emphasis, but (Oscarlyn: Right.) to diversify some of the risk on the concentration, we think that makes sense as well.

And then going towards small caps, we’re more neutral there as well. I will say they're relatively cheap. They had a big bounce in the fourth quarter. So as a pullback, and we're seeing that, I think folks that are underweight, I think moving more towards a neutral position still makes a lot of sense. And then lastly, I think Chip covered well already on the fixed income side, still finding opportunities, but really emphasizing the high quality part of fixed income.

Oscarlyn

Thank you. You also lead our sector strategy. And so as you look at the sectors right now, what do we like? And then it's a compound question. Also, how are we thinking about A.I., generative A.I., and are we still going to be talking about it in a few years from now?

Keith

Yeah, well, the first thing is as far as sectors, we've come into the year, still overweight technology and consumer discretionary. On tech, if we have the step down in growth that Mike’s talking about, I think investors will continue to gravitate towards companies that can grow their topline, or their sales, even in a slower environment. And I think, in going back to the A.I. question, you know, companies are going to need to continue to spend even if the economy slows down, otherwise they can be left behind.

And then consumer discretionary is kind of a sector that has some growth and it has also some characteristics that would benefit for what Mike talked about as far as, you know, wages being above income as well. So, you know, our sector will shift over time. I will also highlight our our head of equities, Scott Yuschak. He's been writing some papers on A.I. We’ll expect to do more of that as well and talk about some of these trends.

But you did have a question specifically.

Oscarlyn

I did. So are we going to be talking about A.I. in two or three years from now? Is this going to be an enduring part of the economy that we need to be aware of?

Keith

Absolutely. I mean, I really think that we're in the early innings of this, and there's different ramifications. One, from an economic standpoint, you know, I think A.I. will certainly help with productivity. When you think about economic growth, it comes down to how many people are working or the growth of that labor force and how productive they are. So I think we're all trying to find out how to be more productive with these tools.

So that means from our capital markets, our long term assumptions, our economic growth force forecast are actually moving higher, partly because of A.I. and then more from a market investing standpoint. You know, what we've seen here initially is the companies that have done really well are the enablers, the ones who are building the infrastructure, the chips who have the data, kind of Magnificent 7.

So that's the early phase. The next phase is going to be more of what we think about as the adopters, who are going to use A.I. to amplify their business. And for those who were around in the 90s, which I, which I was and I know you were, and a lot of our clients were, you can think about it, when Internet came out and you had like Cisco Systems, which was, you know, building the infrastructure, the picks (Oscarlyn: The network.) you know, shovels and so forth, and then who leverages that technology really well.

Well, Amazon's a perfect example back then. So I think we're going to go through that same process now, but it's going to also move at a very brisk pace as well.

Oscarlyn

All right. Any final thoughts around portfolio positioning economics that you like to leave folks with?

Keith

Sure. I mentioned it at the forefront. I mean, we really pride ourselves on is following the weight of the evidence. We said that often. We write about it often. And, you know, today's a starting point as far as how we're thinking about things. And, you know, as new information comes through, we're going to adjust, follow that way of the evidence.

And, Mike, you alluded to it as well. You know, there's always these things that that are known or even if you look back before last year coming into the year, A.I. wasn't a big part of most outlooks, but that became the dominant theme or as you mentioned, the Ukraine-Russian war. So just realize, you know, part of this is a starting point and then, you know, expect to see us adjust as new information comes that's even more positive or negative along the way.

And again, I think that's where hopefully we add the most value.

Oscarlyn

So bottom line is you got to be prepared. It's not the year for autopilot. (Keith: Be prepared.) Be prepared. (Keith: Well said.) And so on that note, I'm going to talk to Jacqueline. Jacqueline Parks, welcome to this livestream. We're so excited to have you. You are an expert who helps our clients and our teammates in complex estate planning, and you've been a guest on Truist Wealth’s podcast: I've Been Meaning To Do That. So I'm really glad that you're here today to talk to our clients, to help them be prepared. Right? Tying the two together, to help them be prepared for what is being called the 2025 sunset. So with all of that, what is the 2025 sunset?

Jacqueline

Thank you. Oscarlyn. So the Tax Cuts and Jobs Act, which was passed in late 2017, included a number of tax law provisions that impacted both individuals and businesses. Now, many of those provisions are scheduled to sunset at the end of 2025. That is, if Congress does nothing, we will automatically revert to the pre-2017 tax law. Some of the provisions that would be impacted would be, for example, our current lower marginal income tax rates and expanded tax brackets, the increased standard deduction and child tax credit that we have today, the limitations on the state and local tax or salt deduction at $10,000 per person and the limitations on mortgage interest and home equity interest deductions. Then also the doubling of the federal lifetime estate and gift tax exemption. Now the sunset of the Federal Tax... I'm sorry, estate tax exemption is getting a lot of attention right now just because of the size of the potential impact on families. We have a chart to illustrate here. We expect that in 2025, the exemption for a married couple would be about $28 million.

But then the following year that would drop to about $14.4 million. The difference, or 13.6 million, would be taxed at a rate of 40%, which comes out to about five... I'm sorry, five and a half million dollars for a married couple.

Oscarlyn

So that's a significant impact. So if there is... if the sunset happens, which we have to assume, I think base case as we assume it does happen. Right. If it happens, the impact to individuals, couples who have over this asset level will be pretty significant. And so we want to make folks aware of that. Let me ask this question at, how about for individuals who have... don't have over 14 million, do they need to be concerned?

Do couples, individuals and couples below that level, do they need to pay attention?

Jacqueline

Yes, absolutely. As I mentioned at the start, there are a number of income tax provisions that are sunsetting and those have the likely potential impact for everyone's financial plans.

Oscarlyn

So everybody needs to be paying attention, (Jacqueline: Yes.) basically. What steps should folks take relative to the sunset? And... before you answer, I just I need to say, I need to give a friendly disclosure that Truist and it's representatives do not provide tax or legal advice. This is informational only. And really we work with clients, typically with their tax advisors, with their legal advisors, and we would advise that clients work with those advisors before taking any action that could have tax or legal consequence.

So get that disclosure. And so with that, what steps do you think folks should be taking now?

Jacqueline

Absolutely. Your points are really well taken. So to know what the impact could be for you or for your family, you really do need individual guidance. The solution that's correct for your neighbor isn't necessarily the right solution for you. And so what we recommend is that everyone should be reaching out to their Truist team to begin the process of understanding what that impact is.

The team is going to help you with gathering information, things like your balance sheet, your sources of income and expenses, your estate planning documents, and also have a conversation with you around your goals and your priorities. From there, they'll take that information and create a comprehensive financial plan. It helps you to understand exactly what the impact of the sunset would be to your family.

We'll discuss with you potential strategies that you may want to deploy to enhance the results for that financial plan. And then if you want to proceed, we would engage with your other advisors, like your attorney, your accountant, to help implement those strategies and report the transactions. Now, it's important to note that many of the strategies we discussed with clients are going to make good financial sense irrespective of the sunset. But the sunset is a good catalyst to start the discussion.

Oscarlyn

When should people start taking action?

Jacqueline

I would say do not delay. The time is now. The last time we saw a similar sunset in the tax laws. That was back in 2010, the year of no estate tax. And as we got closer to the date of the sunset, we found that other advisors, like attorneys and accountants, did see increased client demand in some cases where they needed to turn away new clients or they were charging a premium for their services.

So our recommendation to everyone is to start the conversation now, begin gathering the information so that you can make an informed decision and have time to implement the strategies.

Oscarlyn

So don't delay, get your team together, start working on this, just get going. Hopefully the information we're providing today will help people move to action so that they don't get caught, you know, unprepared. We want people to be prepared, (Jacqueline: That’s right.) right, as we move forward. Jacqueline, thank you so much for being here today. We really appreciate your expertise and your helping guide our clients.

We're going to continue to update our clients on any sunset developments of a course if they occur. So this will be a theme, I'm sure, that we're going to revisit over the next couple of years to make sure that you're prepared. And again, I need to mention one more time that comments or references to taxes are informational only Truist and its representatives do not provide tax or legal advice.

You should consult your individual tax or legal professional before taking any action that may have tax or legal consequence. Before we close, I want to thank everyone who submitted a question during registration. We reviewed every question multiple times to help guide our discussion today. And while we could not directly address each question that came through, what I noticed there were a few questions about retirement that really caught my attention.

And so I can tell that some of you are contemplating retirement in the next 2 to 3 years and you're concerned about your asset allocation. And what I would like to offer is that this is a situation where an advisor who really understands your unique situation can offer perspective. We encourage you to reach out to your advisor to have this critical conversation.

And let me also note that asset allocation doesn't ensure a profit or guarantee against loss. And I'll also want to point out that in episode five of Truist Wealth’s podcast, I've Been Meaning To Do That, we offer suggestions regarding approaching retirement. One suggestion is to build your cash liquidity cushion in front of retirement. Our experience is often that expenses during those initial years of retirement are higher than anticipated, and so this extra larger liquidity cushion may give you greater flexibility in allowing your investments to work for you, totally, hopefully undisturbed by unforeseen spending needs

in the early years of your retirement. So you can check that out on episode five of I've Been Meaning To Do That. And then also episode 13, which we just launched this week on Tuesday, is a great conversation about budgeting. You can access I've Been Meaning To Do That through any... through the major platform providers of podcasts. So Apple play, Spotify... sorry, Apple Podcasts, Spotify and Google Play.

In closing, if you want to view the charts that we shared and explore other market and economic visuals Truist Wealth’s monthly publication, which we've talked about, the Market Navigator, is available through your advisor or through Truist. com/Wealth/Insights and the address hopefully the web address is at the bottom of the screen. Our latest edition was published on January 4th, 2024.

We continue to believe that 2024 will be a year where you should not leave your investment strategy on autopilot. Our message continues to be to remain open minded. We believe in leaning into the benefits of a diversified portfolio built on long term views of the market and also with an understanding of your unique financial planning situation and goals.

A Truist advisor can support you on your investment journey. They will listen to you, seek to understand your goals. They can help put complex market environment as well as potential opportunities into a long term context and together you can make prudent adjustments to your investment strategy while really keeping those long term wealth objectives in mind. Thank you for trusting the Truist team to be part of your financial journey.

And lastly, I have one more request like I always do. Our aim with this live stream series is to create a really meaningful experience for you. In a few seconds, a survey is going to appear in your WebEx screen. Please take the time to give us your feedback. We really value your opinions and we take that information and we use it to shape changes that we make every episode, every livestream.

So thank you again. We look forward to talking with you in April.

Timely Economic & Market Insights

Special Commentary

January 11, 2024

Our IAG experts deliver up-to-the-minute analysis and perspectives on the economy and capital markets. 

 

Please access our most recent Market Navigator for more details.