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00:00:00:22 - 00:00:29:03

Oscarlyn

Hello and welcome to Truist Wealth’s, Economic and Market Insights Quarterly call. In a complex market and geopolitical environment punctuated with multiple crosscurrents, we thank you for taking the time to join this discussion. Before we go further, we want to recognize the tragic events that occurred in Israel over the past weekend. Our hearts go out to all those affected.

00:00:30:17 - 00:01:03:09

Oscarlyn

The goal for today is to provide perspective and outlook on markets as well as portfolio positioning and to highlight year end financial planning considerations. 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. Joining me is Keith Lerner, co-chief Investment officer and chief market strategist.

00:01:03:19 - 00:01:34:16

Oscarlyn

Keith and his team guide Truist advisors and clients through all market environments. They provide timely investment advice with the objective of helping clients reach 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 is Mike Skordeles, Head of U.S. Economics and Chip Hughey, Managing director of fixed income.

00:01:35:06 - 00:02:08:18

Oscarlyn

Both are seasoned investment strategist and they help guide our investment guidance. They publish and are cited very frequently in the media. And in a first, joining us today is Craig Cascio, director of wealth planning and Advice delivery. He's going to discuss year end financial planning to dos. So now let me set the stage for our conversation. The S&P 500 posted extremely strong performance through July, exceeding almost everyone's expectations coming into the year.

00:02:09:09 - 00:02:46:13

Oscarlyn

Large cap growth stocks and the market's focus on the potential of artificial intelligence have truly been the star performers of 2023. Equity markets are down slightly from July highs, with most of the pain being felt in September as Fed speakers reiterated a higher for longer mantra, which our team has been messaging since late 2022. And the ten year U.S. Treasury yield has surged considerably since May, up over 1.2% to around 4.6%, which has also put pressure on bond prices.

00:02:47:09 - 00:03:03:08

Oscarlyn

Today's discussion will provide you with our view of the markets not only near term or tactically, but also from a longer term or strategic perspective. Keith, before we get into the details, what are the key points that you want folks to take away today?

00:03:03:18 - 00:03:19:05

Keith

Well, first, great to be with you and the rest of the team back in this beautiful studio. And thank you so much for our clients for joining us. There's a lot going on. It seems like we see that every quarter, but there's a lot going on. So I think you're right. You should start off with what's the key takeaways before we get into the details?

00:03:19:23 - 00:03:38:07

Keith

I think the first most important point is to keep an open mind, right? That was one of our main key themes coming into the year that the traditional playbook is challenged. I often get asked you know, is this the seventies again? Is it the 1990s? I say, No, it's the 2020s. This is a new regime.

00:03:38:07 - 00:03:58:03

Keith

And in this post-pandemic world where we see higher economic growth, inflation we're seeing on shoring the US is now a big producer of oil like the traditional playbook again is a challenge and we have to look beyond just the the indicators that worked over the last year. So that's key number one. The second point is you know, we've had this pullback.

00:03:58:03 - 00:04:24:01

Keith

You just mentioned that after this really strong first half. And our perspective as we've pulled back, the risk reward for equities is somewhat better. Right? We still think we're in this choppy range, but at least as you pull back, you better reflect some of these uncertainties that we're all hearing about every day as well. And then the third point is this sharp rise in interest rates, which has been painful for fixed income holders, has actually restored value in fixed income.

00:04:24:01 - 00:04:31:00

Keith

I know Chip's going to talk a lot about that, but not only has a restored value in bonds, but more diversified portfolios as well.

00:04:31:05 - 00:04:56:00

Oscarlyn

Yeah. Thank you, Keith, for giving that information upfront to folks. So those are kind of the three themes people can listen for as we go throughout our time together. You talked about equity markets, and I want to kind of zoom in on the equity markets, specifically coming into the year. Right. There were a lot of negative expectations around how both equity markets as well as the economy would perform.

00:04:56:00 - 00:05:17:22

Oscarlyn

And we've seen both be more resilient than had been expected. And in fact, the S&P 500 was up so strongly in the first half of the year over 20%. We have seen some sell off, as I noted in our opening. It seems like we're kind of lining up with the tale of two halves as it relates to the stock market particularly.

00:05:18:02 - 00:05:21:06

Oscarlyn

Can you talk to us about that and explain to us what's happening?

00:05:21:07 - 00:05:42:17

Keith

Sure. Well, the first thing, when you think about the stock market, it's all about expectations. It's not whether it's good or bad. It's all how things come in relative to those expectations. If you think back in coming into this year, what were investors thinking? We had a really challenging 2022 and both equities and fixed income. And then there was a lot of discussion about a slowing economy and a potential recession.

00:05:43:08 - 00:06:04:23

Keith

So what changed? Well, the good news is we have very low starting point. So the economy has exceeded expectations. It's been more resilient. So I think that's been a big positive. And I think, you know, let's talk a little bit about the economic resiliency, which I know Mike will get into as well. But, you know, what we've seen is the economy be a lot less interest rate sensitive.

00:06:05:07 - 00:06:28:06

Keith

You know, if I was here, you know, a year and a half ago and Oscarlyn you told me ahead of time, right now the Fed is telling you they're going to raise rates from 0 to 1%. But no, Keith, they're going to go 5%. You said, what do you think? What's going to happen to the economy? I would say, you know, the discussion should be, you know, how long and how deep the recession is, not whether we've had a recession or not, but instead we continue to see the economy even more resilient.

00:06:28:06 - 00:06:52:19

Keith

So, again, keeping an open mind. What's changed? Well, I think we know the story in a somewhat that we've had excess savings. A lot of consumers have low mortgage payments. They're locked in below 4%. So their biggest liability, the biggest debt payment is, as you know, below 4%. Also, we think about mortgages, unlike 2000, 2007, 2008, there's a lot less adjustable mortgages.

00:06:52:20 - 00:07:19:00

Keith

I think we haven't had almost I think, Chip, it's about 40% more adjustable mortgages back in 2007. So the consumer has been somewhat at less interest rate sensitive. And then corporations, when rates were really low, they locked in those rates of really low levels. So they just haven't been the same interest rate sensitivity as well. And then as we think about just taking that a step further on the earnings side, you know, there was a big concern that earnings were going to come down a lot for the overall market.

00:07:19:00 - 00:07:48:07

Keith

And what we've seen once again is corporations adjust and we've seen corporate earnings estimates continue to move higher. And I would just say the one lesson in my career that I continue to see is corporate America adjusts to all different paradigms. The last point I'll say is you talked about in the beginning, the artificial intelligence, right? If you look at most outlook reports coming into this year, that wasn't a main theme, but that changed around February or March when we started when we got a hold of chat GPT.

00:07:48:18 - 00:08:16:23

Keith

Some people call that the iPhone moment. What's notable is this if you break down the market away from the S&P 500, right, which is up, you know, 11, 12% and say what's driving those returns? I think a lot of us know this this new acronym that Magnificent Seven. Right. And these are these big LARGE-CAP growth names. A lot of them have some exposure to AI, whether it's Apple, Amazon and Nvidia is the big one in the artificial intelligence side Meta.

00:08:17:05 - 00:08:34:21

Keith

And this year, we have a chart that we're showing that it's those seven stocks which were dubbed the Magnificent Seven are up over 50%. The rest of the market is relatively flat. So I think that's been the big surprise. We also do remember tech was hit really hard last year and has really rebounded quite a bit this year.

00:08:35:08 - 00:08:47:07

Oscarlyn

So I love you pulling out the Magnificent Seven and really showing us what's going on there. So a lot of the positive market return is really driven by those seven stocks. Outside of that, it's been fairly flat.

00:08:47:07 - 00:08:59:22

Keith

It's been more challenging. I would also say, you know, in some ways, I think some of this movement by these big stocks has been warranted because of the big earnings growth. That's where a lot of the growth is oriented. But there's also a lot of concentration just in that one part of the market right now.

00:09:00:08 - 00:09:13:23

Oscarlyn

You noted a few minutes ago that the risk reward for the market with the most recent retracement or sell off in the market was more favorable than it had been. Help us understand that.

00:09:14:02 - 00:09:37:22

Keith

So I start off by saying it's all about expectations. And we've been you know, we've been or the headlines have been dominated by what I call the carousel of concerns. And there's always new concerns that come in as we turn from one week to the other. But the UAW, interest rates moving higher, oil prices, geopolitics. So from our perspective, at least as you pull back in the market, you're better reflecting some of these uncertainties, right?

00:09:37:22 - 00:09:59:17

Keith

Because you know, the one thing is we know there's always going be uncertainty, but are you being compensated for some of that uncertainty? And even though the S&P 500 was only down six or 7% from the highs, underneath the surface, we saw the average stock down 10%, smallcaps down 15%. So from our perspective, again, within this choppy range that we think we're still in, the risk reward has become somewhat more favorable.

00:09:59:21 - 00:10:18:08

Keith

We have had a bounce, as we discussed this last week. But at the end of the day, we still think you're at least you're being better compensated. So what that means for our clients, I think, is this if if you've been, you know, really underweight equities relative to your targets, if you're holding a lot of cash, at least use them as opportunities to get back towards where your target allocation should be.

00:10:18:11 - 00:10:38:17

Oscarlyn

And so when we think about how clients portfolios are crafted, they have an investment objective, right? And that objective may be growth with income. It may be a balanced portfolio, it may be income and growth. But usually you're you see an investment objective and their target areas that we would like to see stocks be at and bonds be at.

00:10:39:00 - 00:11:00:18

Oscarlyn

And what your advice is within your investment objective, This may be an opportunity, if you're underweight equities, to get closer to what that target weight is. Is that a good way to think about it? Okay. I'd like to take a second. We've gotten questions about the markets, reaction to the tragic events that happened in Israel over the weekend.

00:11:01:04 - 00:11:11:08

Oscarlyn

I think some folks don't understand why, frankly, the market hasn't reacted more on the stock side. Can you help us understand the market's reaction?

00:11:11:22 - 00:11:30:16

Keith

First, I also want to acknowledge that it is a tragedy. And if you look at the headlines, I was watching the news. It's tough to watch. The market, though, and probably a little bit of the disconnect is the market tends to look at what is the impact to the global economy. So far, it seems somewhat minimal, even though the human tragedy is large.

00:11:31:00 - 00:11:56:19

Keith

And the other thing when something happens in the Middle East is it's about oil prices and how does this manifest in oil prices? Oil prices did move up three or 4% after this, but it's actually below the at the highs from the prior week. So so far, the market has looked through this. And the other thing that I think Chip also will discuss is, we've seen interest rates come back down as has been kind of this flight to safety, interest rates have come down and interest rates have been one of the biggest challenges for the market itself.

00:11:56:19 - 00:12:03:22

Keith

So putting those all together, the market's response over the last week has probably been different and stronger than most people would anticipate by looking at the headlines.

00:12:04:04 - 00:12:27:17

Oscarlyn

Thank you for sharing that perspective and helping us understand. Mike, I'd like to turn to you next and turn from markets to to the economy. What would you add about the current state of the economy? And let me also say, I know what word you've been using frequently this year, crosscurrents. What are the major crosscurrents that you're paying attention to?

00:12:28:01 - 00:13:11:10

Mike

Yeah. So first, just from a setting the stage standpoint, there has been this step down in growth. Certainly we saw outside growth, outsized growth in 2021, it stepped down in 2022. We've seen the further step down here in 2023. We expect that to continue as we move into 2024. So regardless of whether the recession and we still think there's a kind of more probable chance that we see a recession, but there's some kind of again, back to this crosscurrents concept that I've been talking about for the better part of a year is that even within different indicators, there's good pieces and bad pieces, things that have good implications not just for the economy but also

00:13:11:10 - 00:13:36:16

Mike

for markets. And the same thing on the downside. So there's this seemingly somewhat balanced risk just where things might end up from an economic standpoint. But I'll just highlight two, just an inflation standpoint. So a lot of people talking about wage inflation and those sorts of things, but that wage inflation, while that is a driver for companies, that those wages, that's income for people.

00:13:36:16 - 00:14:00:13

Mike

And so when they have that income they're using it to spending. So that's bolstered things like consumer spending generally and has kept the economy much more resilient, as Keith pointed out. The other one that I would kind of mention as far as across current is another one that Keith touched on, which is crude oil. So certainly paying more, more money at the pump is a negative for people.

00:14:00:13 - 00:14:35:19

Mike

They're spending it on gasoline rather than on something else. So that takes away from consumer spending generally. That said, the U.S. is the largest producer of crude oil and most of our production comes domestically. So unlike those prior periods like Keith was talking about, certainly the seventies where we imported most of our crude oil, most of our production today comes from the U.S. So those dollars, they recycle back through our economy and we're seeing a dramatic increase in investment in some of the areas within energy.

00:14:35:19 - 00:14:49:08

Mike

So again, there's these crosscurrents where you can't simply look at one thing and say, oh, that's a good or a bad thing. There may be one side of the sword that's good and another side of the sword that's bad. So these crosscurrents are continuing to move through.

00:14:49:17 - 00:15:01:10

Oscarlyn

What about the labor market? So you've touched on inflation. I think the other, you know, part of the economy that we have a lot of conversation around is the labor market. How are you assessing the labor market right now?

00:15:01:10 - 00:15:26:22

Mike

Labor market has definitely been the most resilient part of the overall economy, which is helping again drive things like consumer spending. Again, just to boil it down very quickly for people is that when we look at things like weekly jobless claims, this is when someone loses their job and they go get unemployment benefits. Is that those claims for new weekly jobless claims continue to be very low historic lows.

00:15:26:22 - 00:15:47:01

Mike

They're bumping along a 50 year low. And so that's very supportive for the overall economy. And when you spin that forward as if someone's losing their job, but they're skipping the unemployment line because they can quickly find another job, that means they're able to maintain their spending level, pay their mortgage, pay their credit cards, pay their auto loans, etc..

00:15:47:07 - 00:15:54:13

Mike

So that has really been the underpinning of where the economy's maintained, this resilience.

00:15:54:21 - 00:16:23:23

Oscarlyn

And Mike, when we look at all the puts and the takes overall, I think it's important for us to make sure folks are understanding we're expecting this the step down in growth to occur from 23 into 24. We are expecting a step down. And when you think about the crosscurrents again, the positives and the negatives and kind of all the information that we know as of today, it seems like this higher for longer, which we've been talking about since late 22.

00:16:23:23 - 00:16:41:00

Oscarlyn

I know Chip, Keith, everybody like you all have been talking about it. It seems like the data is continuing to confirm. And certainly Fed speakers have continued to confirm that there is another pivot to lower interest rates in sight. Is that correct?

00:16:41:01 - 00:17:04:07

Mike

Yeah, definitely. And this resilience that they talked about also is a challenge for the Federal Reserve. So the resilience, yes, it's good for us that the economy is doing better, but from an inflation standpoint, it's just not letting inflation cool to certainly prior levels. And we think that inflation is probably going to be somewhat above prior pre-pandemic levels.

00:17:04:15 - 00:17:19:21

Mike

But again, this is a challenge, an ongoing headwind that's going to be right in the Fed's face as we move forward from 23 to 24. And it is not going to allow that pivot that some people are expecting. We think it's just way too early for that.

00:17:20:06 - 00:17:39:03

Keith

Mike, if I might add, one thing we've said for a while is the Fed has scar tissue, right? I mean, they haven't had to deal with inflation for many decades. So now that they've seen inflation, they're going to go slower to cut rates. So, again, talking about a different environment, we're in a different environment because of partly because of inflation.

00:17:40:05 - 00:17:58:22

Oscarlyn

Thank you all for really emphasizing that. I think it's just really important that people hear that our view is higher for longer because we have folks who are running businesses, right, who are trying to determine how they're going to approach credit, you know, if they're going to expand or not. And it's important to have a sense of where we think interest rates are going to go.

00:17:59:04 - 00:18:23:06

Oscarlyn

Mike, I'd like to take a second and ask. And, you know, I think Keith and Chip, you all jump in because we talk about this quite a bit. Right? And you brought it up. Keith The Fed has gone from, in essence, zero to above 5%. It's been a very aggressive tightening cycle, and yet we haven't felt it as strongly as we anticipated throughout the economy.

00:18:23:14 - 00:18:41:00

Oscarlyn

Can we break down why more specifically for folks like which which parts of the economy, economy have been more resilient and why? KEITH And you touched on some of those, but I'd like to just kind of double click into it again a little bit more. Now, why don't you start us off, Mike? Sure. Tell us about businesses specifically.

00:18:41:00 - 00:18:45:08

Oscarlyn

Why why haven't we seen businesses under more stress?

00:18:45:09 - 00:19:07:12

Mike

Well, Keith, stole my line, which is they locked in those lower rates over the prior decade plus, but certainly over the last five years when the Federal Reserve., but prevailing rates generally were stapled to the floor. We had very low growth during that prior decade. Companies did the right thing and locked in low rates. Keith also mentioned about mortgages.

00:19:07:19 - 00:19:30:05

Mike

That's another thing. The biggest expense that consumers have on a monthly basis is paying for their housing, for their mortgage. Well, 61% of Americans that have a mortgage have a mortgage rate that's below 4%. So most of them have a three or a two handle on it.

00:19:30:14 - 00:20:01:23

Mike

Well, that means that they're going to not be as impacted because most mortgages in the US are 30 year fixed mortgages. So that's not a headwind for those folks Additionally for prime borrowers. But very similarly, they don't carry big credit card balances, so they're not being impacted by some of those things. That said, folks that are the median income and below those folks are really being impacted by these higher rates, particularly things like credit card rates that are have jumped dramatically.

00:20:01:23 - 00:20:04:19

Mike

So plus 22% plus cards.

00:20:04:23 - 00:20:13:12

Oscarlyn

Talk a little bit about car loans, because I was just stunned when you shared what the typical used car loan cost right now.

00:20:13:13 - 00:20:34:21

Mike

Yeah. So, again, for somebody with good credit, a used car loan is likely to be more than 17% on an annual basis. Wow. That's a that's a big number as opposed to a new car buyer. And again, new car buyers tend to be prime borrowers. So, again, people that have better credit, that's likely to have a seven on the front of it.

00:20:34:21 - 00:20:55:20

Mike

And if you're really good credit, you might even get something that's from, let's just say, a Toyota motor credit or Ford Motor Credit or what have you, and have a 3.99 sort of interest rate. That's not the experience that most people And remember, it's almost 3 to 1, how many used cars get bought and financed compared to new car.

00:20:55:20 - 00:21:28:09

Mike

So many more used car loans out there and at dramatically higher rates certainly over the last year. But if we're higher for longer, this is going to continue going further. So that's one it's going to build and it's definitely going to be a continuing headwind for many consumers, along with things like student loan debts, among other things. That said, you know, this underlying strength that comes from more people having jobs and higher wages, there is a path through this.

00:21:28:09 - 00:21:42:12

Mike

So we'll see how that plays out. Again, the weight of the evidence today still points towards it's going to be a challenge. But whether we actually see job losses is going to be this linchpin, whether we can see an actual recession or not.

00:21:43:20 - 00:21:58:12

Oscarlyn

I'd like to move to Chip for a few minutes. Let's talk about fixed income, Chip and specifically the ten year treasury. Right. We've seen this dramatic move since, I believe may the May timeframe. What are the key drivers in that move?

00:21:58:12 - 00:22:21:08

Chip

Yeah, over the past month, I think that sharp move higher really kind of boils down to two main things. One would be go back to September 20th at the Fed meeting. And at that meeting, the Fed really doubled down on this idea of higher for longer, that they were going to continue to combat inflation and keep policy rates at these levels for some time until inflation carves this this path lower.

00:22:21:08 - 00:22:24:01

Chip

And really the market had not really bought into that fully.

00:22:24:10 - 00:22:25:12

Oscarlyn

We had bought into. We had

00:22:25:12 - 00:22:26:16

Chip

We guess the

00:22:26:16 - 00:22:29:18

Oscarlyn

Market was behind us. We had not. The market had not.

00:22:30:01 - 00:22:50:01

Chip

That's right. It was the scar tissue discussion. Right. And we said that it was going to be slower than the market was anticipating. The market then listened to that stronger language, said, okay, this the Fed, it sounds a bit more serious. And so the market did recalibrate for that and yields move higher. And then we kind of saw the second leg higher where focus really turned to the fiscal side of the house.

00:22:50:08 - 00:23:14:12

Chip

A lot of coverage around the budget deficits that are that are taking place right now. The disagreement, dysfunction that we're seeing in D.C., how would this be addressed. Until those are addressed, it's expected that the government will continue to issue debt, new debt at an accelerated pace to help kind of backfill that gap. And so as a result of that, the question became will, okay, it's been digested pretty well right now if this pace continues.

00:23:14:17 - 00:23:30:13

Chip

Can we continue to digest in the markets this amount of supply through the end of this year and into next, so that also put upward pressure in yields. So it was really those two over the past month that have been kind of the primary forces. I will say that this week we have seen yields fall away from those cycle highs right.

00:23:30:13 - 00:23:46:21

Chip

The highest that they had been in about 16 years. And that was because of the conflict that we're seeing in the Middle East, a flight to quality there and the uncertainty that that is creating. And also a little bit more cautious tone from the Fed actually over the course the past three or four days, we've heard a little bit more.

00:23:47:04 - 00:23:57:09

Chip

Yeah, a little bit more cautious about continue to raise rates, too high, you know, maybe reassessing, go slow, wait and see. Some things like that kind of came out and have helped kind of bring yields back down a little bit.

00:23:58:00 - 00:24:09:00

Keith

Just a real quick comment. That's part of the reason why the equity market has been so strong, seen the sharp move up in interest rates. They've come down this last week and offset some of the geopolitical uncertainty and stocks have rallied.

00:24:09:01 - 00:24:11:01

Chip

Yes. Yeah.

00:24:11:01 - 00:24:24:13

Oscarlyn

Chip, your point of view is that given where yields are, there's a lot of value in the fixed income markets right now, especially in the context. I think, of a balanced portfolio. Can you explain why you have that perspective?

00:24:24:13 - 00:24:48:18

Chip

For sure, yeah, I think the two main takeaways here are let's not get too distracted by the volatility. It is volatile right now. The swings, you know, day to day are big, but that can be a distraction because I think the second point is that starting points really matter. And so when you look at where the ten year has gone, that has really lifted yields across all high quality fixed income, you've seen yields move significantly higher.

00:24:48:18 - 00:25:10:23

Chip

So if we use the US aggregate bond index as a proxy, that is simply a large index of all investment grade US bonds, right? We're talking about, you know, about US treasuries, we're talking about investor grade corporates, mortgage backed securities, kind of the big investor grade universe. It's a very large index. Right now that index is yielding five and a half percent, and that's the highest we've seen there since about 2008.

00:25:11:10 - 00:25:33:19

Chip

And we know that the income in these indices for fixed income, it's really closely tied to the amount of income that's being generated. Right. And so now that we're at these lofty levels, it has really improved that risk reward dynamic, that entry point, because going forward, after going through a decade of really, really low, low yields. Right, we're in a much more favorable outlook.

00:25:33:19 - 00:25:55:09

Chip

So if you go back through time and you say, okay, if we're yielding five and a half percent historically, what does that kind of look like for returns on an annualized basis over the next five years on average, the total return there is in the 5 to 6% range. That is that is a significant improvement as we look forward kind of over the longer term, especially for longer term investors, that dynamic has really improved.

00:25:55:12 - 00:26:07:16

Oscarlyn

Yeah, so dynamic has improved the higher yields to the bonds, helped generate more income into the portfolio and that helps to offset some of the price decreases that we've seen over the long term.

00:26:07:16 - 00:26:08:02

Chip

That's right.

00:26:08:06 - 00:26:15:01

Oscarlyn

Yeah, right. Very powerful. Help us understand how you think a fixed income allocation should be approached right now.

00:26:15:01 - 00:26:33:04

Chip

Right. At the risk of being boring, you know, keep it simple. I think that it's kind of like don't overthink it. Right? We have really productive, high quality yields out there right now. Right. We're seeing some of the highest yields in investment grade fixed income that we've seen in 15, 16, 17 years, kind of depending on where we're looking.

00:26:33:04 - 00:26:52:21

Chip

And that's you know, that's really good news. Where we would be more patient is in the riskier corners of fixed income. To keep it simple, the yields there, in our opinion, are simply not compensating investors sufficiently for the risks that we are seeing right now. We have seen in the lower rated spaces of fixed income defaults have started to pick up a little bit.

00:26:53:03 - 00:27:16:19

Chip

And we're watching that. And so it's early, they’re default rates probably in the third to half of what we saw back in 2020, But they're clearly ticking higher. So we're patient there. And I think that there will be opportunities in riskier fixed income after those yields really more aligned with our expectations with that outlook. But in the interim, we're just taking advantage of areas like US Treasuries, investor grade municipals.

00:27:17:06 - 00:27:31:21

Chip

For those looking for inflation protection, TIPS offer an interesting alternative for an overall allocation for protection against against potentially hotter inflation if it stays sticky. So we're focused in areas like this and again, staying patient on the on the higher yielding areas.

00:27:32:00 - 00:27:45:21

Oscarlyn

So stay with quality. That's our message. Stay with quality right now. And if that market if the bond markets begin to display more stress as it relates to credit, then you may see us become more aggressive, but we're just not there yet.

00:27:45:22 - 00:27:46:14

Chip

That's exactly right.

00:27:46:20 - 00:28:05:11

Oscarlyn

Stay with quality. So, Keith, it sounds like from what Mike has relayed and you've relayed and Chip, you've added in these crosscurrents are probably going to be with us for a while. We've got this very complex environment, at least over the intermediate term. How are you and the team thinking about portfolio positioning?

00:28:06:01 - 00:28:27:00

Keith

Well, to your point, we have a lot of crosscurrents and our point of view is not to be on defensive or offense, but more in line with kind of the long term allocation targets from equities, fixed and cash so being aligned. It's funny, I do as you know, I do a lot of media and I often get the question, you know, is it time to buy, is it time to sell?

00:28:27:00 - 00:28:45:14

Keith

And I said, we're strongly neutral. And I always get a laugh. And they say, well, is that an opinion? I say, Yes, it is an opinion, because right now, because of the crosscurrents, you don't have a great setup to go too far either way in extremes. We've been there coming out of the pandemic, we were on the first people early on to be very bullish on this market.

00:28:45:20 - 00:29:07:18

Keith

And right at this point right now, we're seeing across those equity, fixed income and cash be more aligned. And as Chip mentioned, be patient for opportunities. We think they're going to come to either become more defensively or offensively inclined where we're seeing some of the big opportunities are within those asset classes. Chip just talked about fixed income on the equity side.

00:29:07:18 - 00:29:41:20

Keith

You know, for some time we've been Team USA. Yes. And you know, we have a people come in and say this is a time for international and there will be a time, but it's not yet our most favorable asset class this year coming into the year was U.S. large caps. Those are up double digits. Our least favorable asset class was emerging markets they’re flat for the year that's about a ten 11% spread the other point so we would stick with that even though I think you know, you could argue that some of these markets are getting beat up and may maybe some reversion, we think in a more challenging economic environment.

00:29:41:20 - 00:30:09:12

Keith

You want these big cap companies that can navigate and have more levers to pull, right? Small cap companies, they're cheap. They're one of the cheap at some of the cheapest levels as far as valuations, because they've underperformed so much that we've seen in many years. And we think longer term there's there's upside. But the one thing you have to know is as as we've seen these interest rates move up a lot, these smaller cap companies are much more dependent on on interest rates and they have what's called floating rate debt.

00:30:09:12 - 00:30:31:12

Keith

So they get impacted almost right away. They didn't lock in all those you said stapled to the floor rate. So they get impacted almost immediately by these high rates. So we would again, large caps over small caps and we still like the US over international during a global slowdown or even when we have more geopolitical risk, we tend to see more of a flight to the US.

00:30:31:12 - 00:30:51:23

Keith

We think that continues. You know, we often get the question is, is China, which is over 30% of emerging markets, is it an investable? We can debate that. But I would say, you know, when you don't know the rules of the game and rules can change and then our focus on profitability, I think that's a challenge. So if you were a business owner, would you want to invest in this?

00:30:51:23 - 00:31:09:14

Keith

So that's the way we think about it. Again, there will be opportunities. It's been up, but it's an area structurally that we are more negative on. And then I don't know if you noticed, Chip is very happy right now because you've seen rates up. And you know, as we discuss the markets, the last decade it's been such a challenge for fixed income earnings, zero or 1%.

00:31:09:14 - 00:31:31:09

Keith

So now it's been a painful process to get here. But, you know, we're excited about keeping things simple, that rates have restored value. And as Chip mentioned, we're focused on high quality government type of bonds and we see more risk in some of these other areas like high, high yield and leveraged loans, which are just more sensitive to the economic environment as well.

00:31:31:09 - 00:31:33:22

Keith

So again, keep it simple there as well.

00:31:34:13 - 00:32:04:18

Oscarlyn

And Keith you're talking about that, tactical or intermediate short to intermediate term positioning. I also want to add that when we start thinking about the long term or strategic kind of another element for our portfolio, for clients who are qualified and if they have the long term horizon and the ability from a liquidity perspective is to also think about both private capital and hedge and what role they play in a portfolio from an investment class perspective.

00:32:05:00 - 00:32:15:17

Oscarlyn

And we believe that they added into the portfolio under the right circumstances may enhance portfolio outcomes over the long term. So I just want to add in that long term note.

00:32:15:18 - 00:32:31:22

Keith

Yeah, not only strategically, but also take advantage of some of the volatility, the two way market that we're seeing potential dislocations as well. And I'm glad you brought up the the long term. I know you know a lot of what I do day to day. We're focused on the tactical kind of a sexy what's happening in the markets day to day.

00:32:32:10 - 00:32:54:08

Keith

But I just want to remind folks, you know, we also have to let the market work for us. And if you look at the graph, we've brought up here is if you look at a traditional like plain vanilla, 60% stocks, 40% bonds portfolio, what you see is as your time horizon expands, the probability of success for our investors increases.

00:32:54:08 - 00:32:59:01

Keith

And what you're looking at is we look back in history since 1955 as a long ways back.

00:32:59:01 - 00:33:00:02

Oscarlyn

A long ways back.

00:33:00:03 - 00:33:26:03

Keith

And we've said over any one year period, how often is this 60/40 portfolio positive on a one year basis? It's positive over 80% of the time. As you extend that time horizon, especially after ten years, that moves up to 100%. So again, since 1955, on a ten year basis, that portfolio has been up 100% of the time. Now that means I'm probably jinxing that perfect track record, right?

00:33:26:16 - 00:33:33:09

Keith

But it is I just think it's important that, you know, the concerns, the carousel of concerns that I talk about that never goes away.

00:33:33:09 - 00:33:35:05

Oscarlyn

There's always, always something.

00:33:35:05 - 00:33:50:11

Keith

Joining the carousel of concerns and something coming off yeah and it just I think the way we think about portfolios is to have that strategic balance, have that anchor. And part of our job is to smooth out the ride by taking advantage of extremes on either side of the coin.

00:33:51:00 - 00:34:14:17

Oscarlyn

Keith I love that because really keeping the long term view is foundational to the advice that we give clients. So I love wrapping up our market discussion and economic discussion with that long term perspective. I'm going to turn now to Craig because I want to talk about financial planning. And Craig, we're sitting here in October. The end of the year is pretty firmly in sight at this point.

00:34:16:05 - 00:34:25:04

Oscarlyn

I suspect everybody has a checklist of all the things they need to do from a financial perspective by end of year. Where do you suggest clients start?

00:34:25:17 - 00:34:55:12

Craig

Well, thank you. The fourth quarter is a wonderful time to be thinking about taxes, but I want to make it very clear that it's it's really important that we're tax aware on these decisions, that we're not letting taxes drive our our decisions on investments or any other financial decisions. So in the fourth quarter, our clients should have the ability to look at how much capital gains have they recognized so far in 2023 and be aware of that and look for opportunities to recognize losses as well to balance that out in their portfolio.

00:34:55:14 - 00:35:02:20

Craig

So as as our clients look at opportunities for rebalancing along with their advisors, it's really important to understand what the what the tax impacts of that are.

00:35:03:07 - 00:35:16:14

Oscarlyn

And we like to call out wash sale rules just to make sure this is an investment call. And your advisor, I'm sure, is looking at all of this. That's part of the value advisors bring. But highlight for us what the wash sale rule is.

00:35:16:14 - 00:35:27:00

Craig

If you sell the security for a loss, you can not purchase that security either., the same security there 30 days before, all the way to 30 days after that, or else you will not be able to recognize the loss.

00:35:27:04 - 00:35:37:06

Oscarlyn

So we want folks to have that awareness as they're going into year end. What else should we have on our minds as we get closer to that end of year calendar date?

00:35:37:15 - 00:36:02:03

Craig

One of the things a lot of our clients are thinking about is charitable contributions and gifts to charities that they care a lot about. So a few things I'd highlight their number one is to know whether or not you're going to take advantage of the standard deduction or if you'll be able to itemize in 2023. So an individual, the standard deduction is $13,850 or $27,700 for a married couple filing jointly.

00:36:02:16 - 00:36:21:02

Craig

If you're not going to be above that number, you won't get the advantage of the tax advantages of a charitable gift. So we like to talk to clients about considering bunching multiple years worth of gifts if they're smaller to get you over that line And one of the great vehicles to utilize for something like that is a donor advised fund.

00:36:21:03 - 00:36:42:01

Craig

So you can make a decision today, recognize the tax benefits of it, but defer those decisions on gifting until future. Until future years. Yeah. Another thing to really think about is what do you give giving cash is one of the least effective things to do from a tax perspective. You want to consider looking at highly appreciated securities as an opportunity for gifting.

00:36:42:06 - 00:37:08:02

Craig

That way you can avoid the capital gains that would be associated with selling those. Yet the charity gets the full benefit of the value of the securities that you donate. And then a third thing on the charitable front that I think is really important to think about is something called a qualified charitable distribution. So if you're over seventy and a half, you can transfer directly from your IRA to a qualified charity up to $100,000 in 2023.

00:37:08:12 - 00:37:24:09

Craig

And the benefit of that is, number one, you avoid having any increase your income, which has other tax consequences. And you also can take care of some of the required minimum distributions that you might have so that up to $100,000 contribution would also count against that RMD. Yeah.

00:37:25:04 - 00:37:38:19

Oscarlyn

So that's a lot And it's part of why like folks definitely have this to do list because there are a number of items that they need to think about. What else? Is there anything else that you'd have us focus on as we move to end of year?

00:37:38:19 - 00:38:04:10

Craig

Absolutely. As we move into the holidays, very often we're looking at giving gifts. So a lot of our clients will provide gifts to folks in their family, other friends, relatives, and each individual give on an annual basis $17,000 to anyone. So any one individual can get $17,000. A couple can come together and give a combined $34,000 to any individual, and they can do that to multiple individuals.

00:38:04:21 - 00:38:22:14

Craig

There's no gift tax consequences for that. So it's something that, you know, it's a, use it or lose it every year. We need to think about that as we come to year end. And the other thing to really start thinking about now, it sounds like a long way away or two years out, but at the end of 2025, the estate tax exemption sunsets.

00:38:22:14 - 00:38:53:14

Craig

So back in 2017, there was a large change to the estate tax exemption. And so right now, just under $13 million is what an individual could gift during life or sorry or death. And the total for a couple is just under $26 million that that they can give that's going to if nothing else happens. So if Congress does not act, that will drop back to somewhere around $7 million for an individual and $14 million for a couple.

00:38:53:14 - 00:39:22:06

Craig

So it's really important not to rush to make decisions, but to start having dialog with your advisor, having a dialog with legal counsel about it. Is gifting something that's important to you? What is the impact of that change on your estate and on your beneficiaries? And be really thoughtful about planning for that and deciding is there something that I want to do in light of that potential sunset and really think about how that lines up with your with your personal and your family's purpose?

00:39:22:17 - 00:39:28:07

Craig

Because it's not just about the tax savings. It's also about understanding the impact of some of those gifts on your family.

00:39:28:22 - 00:39:48:21

Oscarlyn

So that's great information everyone needs to know. We want folks to not be surprised by the sunset. Absolutely right. Because without congressional and executive action, it is going to happen. So if it impacts you, it's better to start thinking about that in 24 and preparing for what you may do in 25. Correct, is what I'm hearing from you.

00:39:48:21 - 00:40:07:21

Oscarlyn

And I want to say to folks, we heard in your questions from the folks who are on the line today, we heard from them that they actually wanted it, that they wanted to talk about financial planning, end of year planning. And it's a real honor to have you here, Craig. It's kind of our first attempt to do this together.

00:40:08:01 - 00:40:30:10

Oscarlyn

So I'm sure over, you know, over the few quarters, we're going to continue the shared dialog. We hope this information is really helpful for our clients and prospects. And we also want to note it's really important and I need to mention that any comments or references to taxes are informational only and Truist and it's representatives do not provide tax or legal advice.

00:40:30:17 - 00:40:54:03

Oscarlyn

You should consult your individual tax or legal professional before taking any action that may have tax or legal consequences. And I also want let you know that Episode ten of Truist Wealth’s podcast I've been meaning to do that is available this week. And all of the areas that Craig talked to us about are broken down in greater detail on that podcast.

00:40:54:03 - 00:41:19:20

Oscarlyn

So it's just a great reminder of things that you need to do at the end of the year. We also talk about techniques that you can use to behavioral techniques and environmental techniques you can use to help you tackle that to do list so you can access all of the episodes at truist.com/dothat or at Apple Podcasts, Spotify or Google Play.

00:41:19:20 - 00:42:01:04

Oscarlyn

In closing, if you want to view the charts that we shared or explore other market and economic visuals. Truist Wealth Monthly publication that Keith and his team work on called The Market Navigator is available through your advisor or through Truist.com/wealth/Insights. Our latest edition was published on October 3rd. We also want to share that our 2024 annual Market outlook should be available in early December. In an environment where the traditional playbook remains challenged and crosscurrents are plentiful, our message continues to be to remain open minded.

00:42:01:15 - 00:42:29:19

Oscarlyn

We believe in leaning into the benefits of a diversified portfolio built on a long term view of market 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 and they're going to seek to understand your goals. They can help you put all of this complex market environment as well as the opportunities into a long term context.

00:42:30:07 - 00:42:55:21

Oscarlyn

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 a request just like I do every webcast. Our aim is to create a meaningful experience for you. So in a few seconds a survey is going to appear in your WebEx screen.

00:42:56:03 - 00:43:11:22

Oscarlyn

Please take the time to complete it and give us your feedback. We look at every feedback item that comes in to us. Your opinions will help shape future events. Thank you again for joining us. We look forward to talking with you in January.

Timely Economic & Market Insights

Special Commentary

October 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.