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OSCARLYN ELDER: Hello, and welcome to Truist Wealth's economic and market insights quarterly call. We appreciate you joining us for today's conversation. Our goal is to provide perspective on markets year-to-date, our outlook for markets and Fed policy, and offer guidance on the questions you sent us when you registered. I'm Oscarlyn Elder, co-chief investment officer for Truist Wealth.

My team's responsible for selecting and analyzing the investment solutions and strategies that your Truist advisor may use in creating your portfolio. These include mutual funds and ETFs, private equity and hedge funds, as well as our diverse asset manager solutions. Joining me is Keith Lerner, co-chief investment officer and chief market strategist.

Keith and his team guide Truist advisors and clients through all market environments. They provide timely advice with the objective of helping clients achieve their long-term wealth goals. Keith leads our portfolio and market strategy, equity, and fixed income teams. His work is frequently highlighted in financial press, and you'll often catch him on CNBC and Bloomberg TV.

For today's discussion, we're joined by Mike Skordeles, head of U.S. economics, and Chip Hughey, Managing Director of fixed income. Both are seasoned investment strategists. They publish and are cited frequently in the media, and most importantly, they help drive our investment guidance.

Let me take a moment to set the stage for our conversation. We're just past the midpoint of the year, and it's a good time to reflect on how the economy and markets are progressing relative to our expectations as well as adjustments our team has made along the way and to also highlight our outlook for the remainder of the year and into 2024. 2023 so far has posted better investment returns than 2022, and globally, markets generally have outperformed almost everyone's expectations. The S&P 500 has gained around 17% year to date, and the tech-heavy NASDAQ, driven by a lot of AI buzz, is up more than 30% in the first six months of the year.

It's the best start since 1983. The market has rallied despite continued elevated inflation, weaker manufacturing data, and the Fed continuing to raise rates. With that backdrop, Keith, let's start off with why you think the market has performed so well year to date.

KEITH LERNER: Sure, and great to be back with you, back in studio with the group. And thank you so much for our clients who've joined us today. So you're right.

It's been a very welcome year as far as strong returns across the board. A lot different than last year. One of our key themes coming into the year was to keep an open mind because we thought the traditional playbook would be somewhat challenged.

And the market has been-- the market earnings and the economy have been somewhat more resilient than even what we expected coming into the year. If you say what's behind the returns, it's what you just talked about. It's tech, tech, and tech. The S&P technology sector is up over 40%.

What's also somewhat unusual this year is market valuations were somewhat elevated coming into the year, and they actually became more expensive. And a big part of that was tech.

The other thing is that earnings have been more resilient. Corporate America, once again, is navigating this post pandemic environment very well. So I think that's the major surprises for the market.

And I also say, going back to some of the things that are unusual this year, homebuilding stocks are up over 40% this year. If I was going to tell you that mortgage rates were going to be above 7%, one of the most interest rate sensitive part of the market is homebuilders. And that has done well. So this again talks about this unusual environment that we're in.

OSCARLYN ELDER: Talk to us about how our positioning has evolved throughout the year.

KEITH LERNER: Sure, and the way we think about our positioning is we follow a way of the evidence approach. And if we go back even before this year, kind of zoom out for a second, coming out of the pandemic during the rebound, we were very positive. We stayed positive through 2021.

And in 2022, we started moving more towards a defensive position and because of concerns about the Fed being much more aggressive, inflation, the Ukraine war. And then as we moved to this year, as I talked about as far as the market and the economy proving somewhat more resilient, we went more towards a neutral position. So we actually increased equities more from a defensive to a neutral position to basically follow the way of the evidence. And that's where we stand today.

OSCARLYN ELDER: Yeah. So let's talk about that neutralized or neutral positioning. Maybe double click into that a little bit more and talk to us about the benefits of that type of positioning.

KEITH LERNER: Sure. Well, I think there's still a lot of cross currents with this overall market as far as the Fed policy, how that's going to affect the economy as well. But it's pushed out a little bit as well. So, what we mean by neutralizing is if you have an investment objective-- say it's 50/50.

Well, before this, we would have been underweight equities. Call it 45 or 45. It's going to be different for each advisor and each client. Obviously, time frames.

At this point, we're saying be more in line with your long term objectives. It's not a point to be overly aggressive or overly defensive. As I'm on the media tour, I'm using the word strongly neutral because as a strategist, there's times you really want to have a strong call.

But you have to follow the evidence. And right now, it's more mixed. But we also respect the market uptrend and the resiliency that we've seen. So we think it's time to be more neutral and be patient for opportunities to become more offensively or more defensively inclined.

OSCARLYN ELDER: So, strongly neutral is kind of the key takeaway--

KEITH LERNER: I coined that term.

OSCARLYN ELDER: Strongly neutral. And we understand at times, people want conviction around being risk on or risk off. But right now, when you're looking at all the information, you believe the best positioning really is neutral within your investment objective aligned to your long term objectives.

KEITH LERNER: Correct, and that's a call on itself. So, there's things that you'd like to be, but you have to give what the market gives you. And we have the cross currents. Earnings are strong, but valuations are rich.

The Fed's policies, I mentioned, still works with the lag. You're seeing the service side of the economy stronger than the manufacturing side. So there's a lot of cross currents. So we think it makes sense today, but we won't be here forever either.

OSCARLYN ELDER: Right, right. All right, let's also take a moment to talk about our positioning within asset classes.


OSCARLYN ELDER: Talk to us about that.

KEITH LERNER: And I think, going back-- just because we're neutral overall equities, bonds, and cash, we've actually had some pretty big differences within our asset allocation. So within equities, we've been big proponents of the U.S. We're with Team USA, as we like to say.

We think the U.S., if we have a global slowdown, we should continue to outperform. And if you look at the spread between the U.S. and one of the markets that we've liked less, which is emerging markets-- we've been more negative-- the U.S. has outperformed by almost 10 percentage points, also outperforming developed international as well. So even though we're neutral from an asset allocation, there's still opportunities below the market surface and how you allocated within equities and also fixed income. I'm sure Chip is going to talk about within fixed income, we've had rates at the highest level we've seen in more than a decade.

OSCARLYN ELDER: Yeah, so within that, have we seen differences within equities as to how equities are trading specifically within the U.S.?

KEITH LERNER: Within the U.S. Yeah, so we've been more focused in the U.S. on large caps relative to mid and small caps. And the U.S. have outperformed by a pretty good margin this year.

I think longer term, when we think about over the next 5 or 10 years, small caps are very cheap on a relative basis. The business cycle is working against some of these more interest rate sensitive, higher debt companies. But for a lot of our clients that have longer time frame, we think small caps will do well. But again, tactically, we're more neutral at this point today.

OSCARLYN ELDER: How about growth stocks? Like, you touched on it a little bit. Let's talk a little bit about growth stocks and what's happening.

KEITH LERNER: Yeah, and we mentioned before, the tech sector is up 40%. Now, that's after the tech sector was down 35% last year. So--

OSCARLYN ELDER: Right, context is important.

KEITH LERNER: Our view is we became more positive on tech in March as we started to see a big change, which is earnings. And then Nvidia's CEO talked about ChatGPT as the iPhone moment, and that kind of changed the game. And what we've seen is that investors are willing to pay more of a premium for technology stocks. But what's also important is the earnings trends for tech are now stronger than the overall market.

And that's why you buy tech is because you're getting that earnings growth. So our view on tech is positive. They've had a big run.

So I think a natural resting period is what we're seeing now. But we still think it's going to be leadership for one of the simple reasons is even if the economy slows down as we expect, we think companies will have to continue to invest in technology. Otherwise, fear of being left behind because things are moving so quickly.

OSCARLYN ELDER: Yeah, absolutely. How about outside of technology? Where do we see opportunities?

KEITH LERNER: So, when we made a change, as S&P 500 broke above 4,200, that's when we changed our view. Around 4,500 today. But at that point, after tech had a big run, where we saw it is we saw the average stock, something called the S&P equity index, trailed the market cap index, right?

So the average stock trailed by the most we've seen in about 30 years on a three month basis. So in June, we kind of highlighted this equity index, saying the rubber band got stretched too far. And we still think that has further to go, a bit more juice in it. So I think going outside of just the S&P, there's some opportunity there.

And then more from a sector standpoint, an area that we still like a lot is the industrial sector. It's actually almost back to an all-time high because all we're hearing about as far as onshoring, the infrastructure bill, defense spending, so those are areas we still like. And then again, we're still positive on technology. We just think it's going through a rest, but we think that's going to be longer term leadership, especially if the economy slows down later this year.

OSCARLYN ELDER: Are there parts of the market, the stock market, that we're avoiding or that we're less favorable on right now?

KEITH LERNER: Yeah, I would say we still have more of a negative view on things like emerging markets where China is the biggest component. Now, granted, they're oversold. They're probably due for a bounce.

We're starting to see that right now. But again, in the economic backdrop that we see, we think the U.S. should hold up better. And we still have some concerns about, like, for instance, in China, the less focus on corporate profitability as an example. And then developed international markets, we became a little bit more positive after the pullback, but we still have lower exposure relative to the U.S. because those markets tend to be more economically sensitive as well.

OSCARLYN ELDER: OK, great. And a question that we got from a number of clients as they registered today-- is this the start of a new bull market?

KEITH LERNER: Yeah, you know, we always want to label these things. And the traditional label is, if you're up 20%, it's a bull market. If it's down 20%, it's a bear market.

We've been moving up since last October. We're up about 27%. So I think you can characterize it as a bull market. I don't know if that helps you out as an investor much to put a label on it.


KEITH LERNER: But I will say we don't see this as a runaway big bull market like coming out of the 2009 low or the pandemic low. The difference is back then, valuations were very cheap, and then you also had a ton of liquidity coming from the fiscal side and the monetary side. Today, you have higher starting points of valuations, and you have more constraints around monetary policy, which is still becoming more restrictive.

And with the debt that we have, we don't think fiscal policy is going to become more supportive. Sentiment got overly depressed. So that's one thing that did match things.

So I think we have to respect the underlying trend that's still somewhat higher. But again, we're trading around the 19 PE on the S&P. To us, that's not the starting point to see a big breakaway bull market.

OSCARLYN ELDER: OK, so, no breakaway bull market at this point is kind of the call. All right, so we're going to take a minute and move over to Mike on the U.S. economy, but we're going to come back.

KEITH LERNER: OK, I look forward to it.

OSCARLYN ELDER: All right, so we're going to move over to Mike on the U.S. economy. And coming into this year, we had really two primary economic themes, and that was fading growth and easing inflation or those two themes were-- fading growth and easing inflation. And mostly, those trends have been playing out. And it seems as if the economy has been incredibly resilient so far. So with all of that, what's our outlook for the U.S. economy for the remainder of the year and into next year?

MIKE SKORDELES: Yeah, so, spoiler alert-- let me be right up front. Our base case still looks for a recession. The difference between the last time we talked to folks last quarter and even if we said what were we thinking about during our annual outlook, we expected a whole lot more headwinds.

But some of the headwinds, whether they were policy as far as the Federal Reserve-- so they've kind of backed off of that aggressive increasing of interest rates that happened in 2022. But we also saw things like the debt ceiling get resolved, that some of those headwinds dissipated, if you will. So the economy has been more resilient. That said, as Keith was mentioning, we've had a whole lot less of that support that we had during 2020, 2021, and midway through 2022, that those programs, fiscal support and what have you, they're all gone. So we're kind of floating on our own.

That said, the dramatic increase in rates was the biggest headwind. It tightened financial conditions. So for real people, we're talking about mortgage rates. For a new mortgage, that has a 7 handle on the front of it among other things.

The same thing with buying cars and what have you. If you're buying a used car, it probably has a 15% or 16% number on the front of it. But overall growth, our expectation was that growth was going to step down. And sure enough, we've seen that here in 2023.

We're also-- some of these crosscurrents are going to stick around for a while. So our outlook, as we move into 2024, isn't very bright. So, back to Keith's point that he was saying about not having a runaway bull market. We're also not looking at some sort of V-shaped re-acceleration in growth.


MIKE SKORDELES: So, that's not a thing as well. The real big key, though, last point-- we have wide outcomes. But the real critical piece is jobs. The jobs picture-- jobs growth has been much stronger.

But also, job losses have been fewer than people expected, including ourselves. So, that's informing where our view is as we move forward. And I'll just put the last pieces.

Maybe on some level, we should apologize to Jay Powell and folks at the Fed that everyone gave him a hard time roughly a year ago when he started saying we may have a soft-ish landing. And he was essentially laughed out of the proverbial room. Well, now it's kind of seeming like that's still possible.

OSCARLYN ELDER: It's possible.

MIKE SKORDELES: Now, again, our base case is still that we continue to slow down. If you look at all the leading indicators, they are pointing towards a slower second half. And then from that, the real fine point is we do have the restarting of student loan debt repayment.

That's a big deal. That's going to hit in the fourth quarter. So we think it's going to be kind of a tough quarter there in the fourth quarter.

OSCARLYN ELDER: So to summarize, our base case is we're expecting growth to step down.


OSCARLYN ELDER: Certainly '22, '23, '24.


OSCARLYN ELDER: The outcomes have again widened in some way. And we've gone through, really, just based upon the data, where maybe the outcomes would come in and look more certain. And then they kind of-- the data comes back in, and you're like, OK, well, now it's actually possible that we have that soft landing. But regardless of whether we call it a soft landing, a middle landing, or a hard landing, the step down in growth, we believe, is going to be very real.

MIKE SKORDELES: Yeah, and it's already materialized.

OSCARLYN ELDER: It's happening.

MIKE SKORDELES: Yeah, but it comes back to another point Keith mentioned that we stressed during that annual outlook piece, which was you got to remain flexible. So we're not getting married to our, oh, it's going to be a recession and pound the table. Some of our competitors were very strong and even just recently still remaining very strong, and we're saying, hey, the possibility of maybe missing a recession, it's possible. That said, big picture view is we expected a slowdown in growth, and that actually has materialized.

KEITH LERNER: If I can just add one point, it's interesting because we raised rates the most aggressive in history. And I tell our clients, if I was sitting down with you a year ago, and you said we raised rates by 5 percentage points, we probably wouldn't be arguing whether we were in a recession. It's how deep.


KEITH LERNER: So the economy has been, in some ways, more resilient. And again, the traditional playbook is a bit challenged today.

OSCARLYN ELDER: Yeah, absolutely. And Mike, you've already gone in the direction that I was going to take you with the next question, but maybe I'm going to press you for more clarity or just more information. And that's-- and we've all touched on it.

So the Fed's raised rates. Historic tightening cycle. Three more rate raises this year to date.

There may be a fourth coming in the next few weeks. We now have Fed policy, Fed funds rate, above 5%. When do we expect those rate increases to start taking a bite out of growth because of the lagged effect? So we know there's this lagged effect, and we're expecting growth to step down. When do we start to feel that?

MIKE SKORDELES: Yeah, so it's a bit of a moving target.


MIKE SKORDELES: Traditionally, we talk about in economics about a long and variable lag. That's code for it should take somewhere around a year.


MIKE SKORDELES: Well, they've been raising rates for much longer than a year. Arguably, we've already seen that bite already starting to happen as we move through the first half of the year. So there's that.

But the more important piece is that this time is different piece has been the consumers and really businesses have been somewhat less interest rate-sensitive. So, this big push up in rates, we would have expected it to take a little bit bigger bite. But showing you a couple of slides here, one is the household debt service.

So, this is total debt that people pay relative to their incomes. And it remains quite low, and we're barely back to the pre-pandemic levels. But we're well below the average going back since 2000. And most of that is driven by the right side, which is effective mortgage rates, essentially the weighted average of what people pay for mortgages.

And that's because, yes, there's a 7% rate if you're getting a mortgage today or a 6 on it. But most people have had their mortgage, a 20 or 30 year mortgage, that has probably a 2 or a 3 on the front of it. So when you factor in all the people that have 2% or 3% mortgages to the new ones being at 7%, that effective rate is at roughly 3.5%.

Well, that affords people a lot more, if you will, breathing room on their personal balance sheet and what they should be worried about. So they're able to continue to spend, among other things. So, that part has definitely changed.

Another dramatic change since prior cycles has been what percentage of mortgages are Adjustable Rate Mortgages, or ARMs. Today, it's less than 10%. It's about 8%.

If you go back to before the great financial crisis, that was about 40%. So, a very big difference between then and now, and people have maintained that low mortgage. And they're going to continue to do that unless they have to move or refinance.

But it's unlikely they're going to refinance if they have a 2% or 3% mortgage to something that has a 7 handle on the front of it. So this is likely to continue for a while. Similarly, we've seen something-- and this is in Chip's lane-- is companies have done the same thing. So, not only are consumers less interest rate sensitive this time around because of this locking in long-term debt, but it appears that companies are doing the same thing.

OSCARLYN ELDER: Right. If you will, just take a moment because I know we talk a lot about crosscurrents specifically. And Keith mentioned how housing stocks were performing. You just mentioned mortgages, and you also talked about the LEI, which is the Leading Economic Indicator, right, that's very manufacturing focused in some ways. Maybe talk about the cross current that you think is most important within the economy that you would like to call out, and I think that's going to be housing versus manufacturing.

MIKE SKORDELES: You stole my line.

OSCARLYN ELDER: I'm stealing your thunder.

MIKE SKORDELES: Yeah. a little bit.

OSCARLYN ELDER: But you can double click into that for us.

MIKE SKORDELES: Yeah, so the biggest thing is in that initial increase in mortgage rates, the housing market, whether we're talking about new activity or existing home sales, it was crushed. But that was a 2022 story, not a 2023 story. And we didn't have enough housing inventory, depending on what part of the country you're in.

But particularly in the south and southeast, we don't have enough housing supply. And we've had continued not just population growth but inward migration from other parts of the country. It's still a very attractive part of the U.S. And so that increased population in various cities around the southeast means you have to continue building, and we hadn't been doing that.

And it certainly was exacerbated by the pandemic. Now, flash forward to 2023, we're seeing those housing numbers, particularly the new housing numbers, are ticking higher, and we just simply, from a supply and demand standpoint, there's plenty of demand even at higher interest rates with those mortgages that housing is coming back. On the other hand, things like manufacturing, depending on the index that you look at, are down seven or eight consecutive months. So all of 20--

OSCARLYN ELDER: So year to date.

MIKE SKORDELES: Year-to-date they've been negative, and they look like they're going to continue to trend negative. But here's where I was talking about the rest of the year is we're kind of getting to where you might see a bottom in some of these industries, including here very recently in automotive, which is a big chunk of manufacturing, that production numbers are starting to tick higher. So in their case, it was supply chain issues.

Those have been resolved. Some of them are global, some of them were U.S. But nonetheless, those things have been resolved.

So even some of those things are causing crosscurrents within the same industry or the same sector. But definitely, those are two big pieces that I think are pulling at people's view of where things are going. We can say, well, housing looks a whole lot stronger than it should, and manufacturing is looking a whole lot weaker than it should. So again, those are things that we have to balance as far as those crosscurrents.

OSCARLYN ELDER: Let's take a moment to talk about inflation, and I have to say that in looking at the questions, our last webcast, we had a lot of questions about inflation. This time, we only had two, which I thought was kind of eye opening that we only had two this time.

But inflation has remained elevated. Certainly has been in the news this week because we've had at least two major inflation data points come out. But how do you see the path of inflation progressing?

MIKE SKORDELES: Well, they're behaving, and I think that's why, folks our clients aren't asking. And when I'm out doing presentations with not just individuals but also businesses and other leaders, it's less of a focus because they've been behaving. And so we've seen, particularly on the wholesale side, that prices really have collapsed as we've moved through 2023.

That said, on the consumer side, things like rents, and I just mentioned about home prices, those are ticking back higher. That's going to have some lift on overall prices. So-- what we call core prices, so outside of food and energy.

Overall, we anticipate that it is going to continue to move down. Inflation is going to continue to move down. But because of higher wages, among other things, and higher home prices and housing costs-- so, rents and other things-- that it's likely not going back down to pre-pandemic levels.

OSCARLYN ELDER: Yeah, yeah. Thank you. All right, Chip. I'm going to turn to you next. So we're finally to you.

Sorry. It's taking us a little while to get to you. We had a lot of questions, unsurprisingly, about the path of interest rates. And I just noted-- we've talked about we expect the Fed will raise again here in a few weeks. Are we almost done?

CHIP HUGHLEY: Yeah, we get that question a lot. I think the short answer is we think, yes, that we are almost done. We do expect the Fed to move forward with a 25 basis point hike on July 26, and we have seen some really encouraging signs from inflation.

This week alone with CPI and BPI cooling off, that's exactly the kind of data that the Fed needs to validate at least slowing down if not stopping. But beyond the July meeting that we're going to need to see that-- those trends to continue. I think the thing that's perhaps underappreciated-- Mike touched on one-- is that we are still waiting on that variable lag.

The Fed has done a lot still within that window. And if we say that the Fed impact arrives 12 to 18 months, we still have a cumulative effect that's really kind of building still. So we're very mindful of that.

I think also that where we have seen the market really kind of come around to, what we've been talking about this year, is there are going to be-- we think the Fed is going to be higher for longer. So we know that the Fed is in restrictive mode right now. We think we stay there until inflation really starts to cooperate and that the bar to start cutting rates is a little bit higher, maybe, than the market is currently expecting.

So, that is what we're looking at. The good news for that is, though, sort of a side effect of that, is that really short, high quality yields like U.S. Treasury, T-bill yields in the front end of the yield curve, are as high as they've been in 16 years or so. And that's a really productive, nice, high quality spot that has benefited from these rate hikes. Now, granted, it has been a long road to get here, but that portion of the yield curve is very attractive.

OSCARLYN ELDER: Yeah. All right, so let's double click again into interest rates. Look, the 10 year Treasury has kind of been all over the place this year, you know?

I think we maybe dipped down to 3.2. We got very close to 4. I think today, we're under 3.8%. So it's been a lot of movement, a lot of volatility. What's going on there?

CHIP HUGHLEY: so from a volatility standpoint, I would say it's twofold, right? It's the inflation uncertainty and how the Fed will react. That has driven a lot of the volatility we've seen. And then really, if you look at the underlying fundamentals of the market, the liquidity, liquidity is pretty challenged right now.

And a lot of that, I think, is attributable to the fact that the Fed is still reducing its balance sheet at full speed ahead. So that was a mechanism that really smoothed the ride out for quite some time, for a very long time, that is actually doing the opposite-- having the opposite effect now. So, the day to day swings or even in the middle of the day intraday swings that we're seeing in interest rates, they look large relative to history. So these moves, if they feel larger, it's because they are larger.

We get the question a lot. You say, where do we go from here. So, we saw the 10 year go to about 4 and 1/4, 4.25% last October.

And in that range we started to see a really compelling, attractive risk reward balance there, which we wrote about we upgraded in house views how we felt about duration. And that was after coming a long way from saying, we think interest rates are going to rise. We want to be very careful. And as that played out, we started to see more opportunity there and moved into that position.

We've seen-- because we think that the cumulative effect of what the Fed has done is still building, we think to get back up to that area is going to be a little bit more difficult. And it'll be hard to sustain a move from a lot higher from here. So we just published a piece this week when the 10 year touched 4% again.

Now, given the evolution of the economic dynamics, we thought that looked compelling, and we feel that way. So if we see the 10 year move-- and again, it is volatile. If we see it kind of moving up above where we are now up into that 4% range, we think that's a pretty attractive entry point because all that goes to say is that we do think that overall, over the next year, the trend from where we are now is to lower yields, which is higher bond prices, which would be positive performance. But that's where we think that we're headed.

OSCARLYN ELDER: OK. When we look at the bond universe altogether, right-- fixed income, the bond universe-- where do we see opportunity?

CHIP HUGHLEY: A lot of places. I think that bonds have become much more attractive component of a portfolio overall for a lot of reasons. But specific to your question, I mentioned T-bill yields, for instance, as a place to find a productive high quality outlet for income, especially kind of passive income generation.

We've seen increased value in longer dated bonds as we've progressed through this year. What I would say is we would keep it high quality. We would still emphasize high quality at this point, areas like U.S. treasuries.

If there are concerns about inflation still out there, TIPS, which perform a lot like treasuries but offer a little inflation protection, investment grade municipals. That is a high quality place that actually tends to be a little smoother ride than treasuries, especially in environments like this, are attractive. Where we'd be more cautious it is still towards the riskier corners of fixed income.

OSCARLYN ELDER: All right, so we are asking towards quality--

CHIP HUGHLEY: Absolutely.

OSCARLYN ELDER: --in essence. So, treasuries, investment grade, staying away from high yield, making a more risk on statement there we're kind of staying away from high yield. There's been a significant development in the bond market year-to-date compared to '22.

So, in '22-- and I'm going to connect this back to the 60-40 portfolio, which is 60% equities, 40% bonds. There was a lot written in 2022 about the death of the 60-40 portfolio because both stocks and bonds went down in value, right? It was a very difficult year for both. However, we've seen some movement, if you will, in how stocks and bonds are behaving this year. Will you take a moment and just talk to me about what has happened relative to that?

CHIP HUGHLEY: Yeah, it's a very positive development. There were a lot of the 60-40 portfolio is dead headlines out there. It doesn't work. And we were very, very much in the camp that was not true-- that yes, the environment was challenged for it.

But we have seen that those dynamics really improve greatly. So if you go back to 2022, where the Fed is on an extremely aggressive rate hike campaign, that pushed yields higher, which meant bond prices were falling. There's concerns about that tightening in risk and in equities and in virtually everywhere, right? It felt like there was almost nowhere to hide from what the Fed had to do to address inflation. But what that meant was everything was moving in the same direction.

OSCARLYN ELDER: Right, so both stocks and bonds went down--

CHIP HUGHLEY: In price, exactly.

OSCARLYN ELDER: --which is a positive correlation, right, when you see it written about. That means they're moving together.

CHIP HUGHLEY: Right. That's exactly right. They're moving together.

So the correlation is positive. What we've seen now-- and a lot of this is a function of-- the fact that the Fed sort of-- they paused in June. I think that at least signaled they are actively looking for an off-ramp, right?

They don't want this to continue forever. So, by doing that, some more organic correlations came back in. The Fed was releasing a little bit of its grip, you know, giving some forward guidance that we're getting towards the end. And so that's a very positive thing because what you've seen now is stocks and bonds. If you look at core fixed income versus the S&P 500, they're not moving together anymore.

OSCARLYN ELDER: Yeah, they're behaving differently. The correlation has gone back to a negative one since-- you've done some great work on this-- since the end of February--

CHIP HUGHLEY: That's exactly right.

OSCARLYN ELDER: --the correlation, the historic correlation, has been restored.

CHIP HUGHLEY: It's exactly right.

OSCARLYN ELDER: Which basically means your 60% equity, 40% bond portfolio has behaved very well this year, to go back to behaved.

CHIP HUGHLEY: That's right

OSCARLYN ELDER: Someone mentioned behaved as I think of children and how they're behaving. That portfolio is behaving really well this year. It's on average up about 9% for a 60%-40% type portfolio.

So, when folks ask us what do you think about diversification, our view has been over the long term, diversification continues to work. It's really essential to investing into portfolios, and we came out really strong that we believed in the 60-40 last year. And I would just add in addition to thinking about the stocks and the bonds, which we focus a lot on, a lot of our clients who are accredited investors or qualified investors, their portfolios also often include hedge funds and private capital, which are kind of another elements to building out a portfolio that over time can also improve risk adjusted returns and ultimately add to the impact of that diversification.

So, folks wanted to know, what do we think about diversification? It's essential to modern portfolio management. We continue to believe in it. And certainly, we're happy and relieved to see the restoration of that correlation this year.



KEITH LERNER: If I can, I'd like to add a point on that. So, going back to our overall position about being neutral--


KEITH LERNER: --for a long time, we think, over the last decade, yields were sub 2%. There was only one game in town, right? That's why the whole TINA acronym came out.

OSCARLYN ELDER: And what does that mean?

KEITH LERNER: There Is No other Alternative.


KEITH LERNER: So now that you have competition for stocks with bonds and cash, having that balanced portfolio where you don't have to take so much risk in just one asset class, I think that's a real positive story as a whole. So when you think about being neutral, that's a lot different than when bond yields were 2% and equities, like I said, were returning much more--

OSCARLYN ELDER: The rates have been reset.

KEITH LERNER: That's right.

OSCARLYN ELDER: We've gone through most of the rate reset, and that diversification power really works. So, with that, Keith, and you started to go down this road--


OSCARLYN ELDER: --and let's summarize for everyone what our tactical views are.

KEITH LERNER: Yeah, so we went through a lot of material, a lot of economics, fixed income, equities. So, big picture-- first, I wanted to start with longer term, we're very optimistic on the U.S. economy. We're optimistic on the markets.

We are very optimistic about how companies adapt over time. So I want to keep that clear. More tactically, I think in the next 6 to 12 months, as I mentioned, we're strongly--



KEITH LERNER: --strongly neutral. We're strongly neutral. But within that, we're waiting for an opportunity to either become more on offense or defense. But within that, we still have a preference for larger cap companies that can maneuver through this cycle.

We still like Team USA on a relative basis. And then, as Chip just talked about, we're seeing really attractive yields and high quality yields. So that's kind of the game plan today. And as always, we'll continue to follow the evidence and wait for those tactical opportunities.

OSCARLYN ELDER: So, I'm going to ask a follow on to that, and what would it take for our team to make a call going from strongly neutral to risk on? What would have to align for you to feel comfortable doing that?

KEITH LERNER: I think the bar is somewhat higher to go on offense relative to defense--


KEITH LERNER: --because again, your starting point for the overall market is around a 19 PE. If you take away the pandemic overshoot, where valuations have been really high, that's the highest level in the last 20 or 30 years. And then as Mike alluded to, whether we call it a recession or not, we expect a slowdown as well. So I think to go on offense, what we'd like to probably have to see is more of a pullback or earnings that are just much stronger than we all think. And maybe that valuation isn't as high.

On the other side also, if things pull back more, I think that would be an opportunity to maybe become more offensively-oriented. And conversely, this market's had a really nice run. I'm not going to say a specific level. But at some point, if you start getting too stretched on the other way, that could lead us to be more defensive, especially if we start seeing some cracks in the employment side, which so far has been relatively strong.

OSCARLYN ELDER: Yeah, and one last question. Folks who have a lot of cash on the sidelines or let's say a business owner who's had a major monetization event and now has lots of liquidity and is trying to build out the portfolio that's going to sustain the family for the rest, you know, of the owner's life and into future generations, how should they approach building out that portfolio from a timing perspective?

KEITH LERNER: You want me to start off, Chip, or--

CHIP HUGHLEY: Go ahead. Yeah.

KEITH LERNER: OK. I'll take the--

CHIP HUGHLEY: Go for it.

KEITH LERNER: Well, listen. I think-- we talked about cross currents. We talked about inflation, interest rates, evaluations, earnings. There's a lot moving on.

So I would say the first thing is to figure out what's that right asset allocation. That's where our advisors really come in handy. There's not a one size fits all. You mentioned alternatives and private capital as well.

So I would say cash yields are attractive today, right? So people really want to clinch that high. And I think cash is more attractive than a while, but cash is not without a risk, right?

Inflation, reinvestment risk-- if the economy weakens faster than even we anticipate, those yields could come down. So I would just say that we would be going into the market across stocks, equities, cash, and some of these alternatives where it makes sense but not just be-- some people, if you just in cash only, people think they're being safe. But there's risk there too. Like I said, opportunity cost as well. What would you--

CHIP HUGHLEY: Yeah, I think that's exactly right. I mean, we think that it's very productive even in very simple short dated type fixed income instruments. One thing that I would just mention too-- maybe it's almost a hybrid, right-- is kind of a barbelled approach. Exposure into those really high yields, right? 5 and 1/4, 5 and 1/2 type percent in the front end of the curve but then also, as we've become more favorable on duration, mixing in a little bit there as well as appropriate because what you would likely see is if we do see the economy slow, right, and we get into periods of risk off, you should see total returns turn positive in the longer duration and outperform even the shortest portions of the curve.

So there are ways to sort of calibrate that. And so I would mention that as a potential.

KEITH LERNER: Yeah, makes sense.

OSCARLYN ELDER: Great. Thank you all so much. It's been great to be with you today, and I know our clients really appreciate the guidance, the expertise that you bring. And so thank you.

KEITH LERNER: So before we close up, I'd like to turn the table on you again. I did this last time. You guys remember this.


KEITH LERNER: So, you have a new podcast. It's not so new anymore when--

OSCARLYN ELDER: That's right. Truist Wealth has a new podcast.

KEITH LERNER: Truist Wealth has a--

OSCARLYN ELDER: Truist Wealth has a new podcast starting in January of '23. I've been meaning to do that launched, and we now have seven episodes. We launch a new episode the second Tuesday of every month. So it has been just a great experience and one that we hope-- you know, what we're looking to do is to provide insight and guidance to our clients, to engage folks in a very different way.

Episode seven, which launched this week, is about preparing teens for adulting life, basically. So, preparing teens for the future, preparing teens for life after high school, really. And within that, we have three sections that we go into. The first one is really about financial education tips for 14 to 17-year-olds.

And so we've got approaches and tips so that as your teen is in those years, hopefully, you're continuing the financial education journey. The second part of this episode focuses on different approaches to college funding. And I'll tell you. A lot of it is about communication especially with your teen around what the options are.

It's a big piece of what we talk about there. And then the third element is a focus for parents who have children who are turning 18. What are the four documents that they need to know about?

What are the four documents that every 18-year-old should have? And you've got to listen to the podcast to get the list, but it's a great episode. In addition to seven, I'm just going to-- I'll foreshadow.

Episode eight is going to be about financial planning and how you work unforeseen events into your financial planning cadence, if you will. And then in September, I definitely want to highlight. We're going to have two of our Truist experts, Lee McCrary and David Herritt, on to talk about business transitions. So, really important.

We're seeing a lot of business owners. I heard a statistic I think yesterday which was something like family businesses turn over-- like, 42% to 50% of family businesses turn over every five years. You may not be expecting it, but it may happen to you.

So we're going to have a conversation with Lee and David about that. So, what I would ask and ask all of you-- if you're interested in the podcast, You can find it wherever your favorite podcast platform is found. So it's on Apple, Spotify, Google Play.

It's also available on So, excited. Encourage people to go out and subscribe.

KEITH LERNER: Yeah, I'll just add a point. We're in the markets day to day, but what's really neat about what you're doing is you're bringing out the conversation.


KEITH LERNER: And there's-- we all have different situations. I have a 5 and 9-year-old. I'm not quite to that 18-year-old. I think you're closer to me.


KEITH LERNER: But you know, what we try to do and our advisors are doing is a whole financial picture, just not the day to day stuff.

OSCARLYN ELDER: That's right.

KEITH LERNER: So, all of these things are so important. So I think it's a great addition to what we've been doing.

OSCARLYN ELDER: Thank you. Thank you. All right.

Well, in closing, if you want to view the charts we shared and explore other market and economic visuals, Truist Wealth's monthly publication called Market Navigator is available through your advisor or through We last published our most recent edition back on July 5.

In an environment where markets have exhibited positive performance year-to-date while crosscurrents like we've talked about are intense and really plentiful, our message is to remain open-minded and guarded against complacency. Our advice is to continue to adopt a long-term view of markets and lean into a diversified investment portfolio with an asset allocation and investment selection that's based upon a thorough understanding of your unique financial planning situation and goals. A Truist advisor can support you on your investment journey.

They will listen to you, and they're going to seek to understand your goals. They can help you put really complex market events as well as all the opportunities into that long term context. And together, you can make prudent adjustments to your investment strategy while keeping your 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 webcast series is to create an exceptional virtual experience for you, our clients.

In a few seconds, a survey will appear in your Webex screen. Please take 30 seconds to complete it and give us your feedback. Your opinions will help us shape future events. Thank you again. We look forward to talking with you in October. 

Timely Economic & Market Insights

Special Commentary

July 13, 2023

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.