Weathering Market Shifts and AI Advancements with Amanda Agati’s Expertise

Unlock the secrets of weathering financial storms with PNC's Chief Investment Officer, Amanda Agati, as she delivers an enlightening perspective on investment strategies for the modern market. In our enthralling conversation, Amanda dissects the complexities of post-pandemic finance, where old certainties have crumbled, and the wisdom of maintaining diversified portfolios has never been more critical. From the poetic market sentiment echoed by the Rolling Stones to the perplexing behavior of credit spreads and small caps, we're peeling back the layers of today's economic conundrums.

Tune in for a rare glimpse into the Federal Reserve's chess game with interest rates and inflation, as Amanda Agati breaks down the current state of play. She explains why the Fed might hold off on dramatic moves, despite the hovering specter of persistent inflation in the energy and service sectors. Furthermore, Amanda challenges the notion that moderate inflation is a market malaise, suggesting that it might actually fuel the fire of earnings growth and valuation expansion. We also ponder the repercussions of a slight rate reduction by the Fed and the importance of managing the market's emotional tide over time.

As we wrap up, the conversation shifts to the lopsided landscape of the stock market and the potential for a resurgence among the overlooked majority of S&P 500 companies. Amanda shares her aspiration for a more broad-based market rally and the sparks that could ignite such a shift. Finally, we turn our eyes to the horizon, where AI looms large with its promise to revolutionize productivity and economic growth. We spotlight companies like NVIDIA that are at the vanguard of this transformative wave and close with pointers on how to keep abreast of emerging trends that could redefine our financial future.

Nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. 

The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.

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Transcript

Speaker 1: 0:08

My name is Michael Gaiad, publisher of the Lead Lager port. Joining me for the hour is Amanda Gadi. Amanda, introduce yourself to the audience. Who are you, what's your background, what have you done to write your career and what are you doing currently?

Speaker 2: 0:18

All right, great. Well, I'm delighted to be with all of you. Thanks so much, michael, for having me. I am the Chief Investment Officer for PNC's Asset Management Group, and so in this role, I'm responsible for the entire investment offering for asset management business. So things that sit in my world are investment strategy, model, portfolio strategy, manager, research, responsible investing. We have a number of proprietary investment strategies around individual security selection. It takes a village to support an asset management business the size of PNC's, and so I have my hands on a lot of different things. Prior to being named as Chief Investment Officer for PNC, I was the Chief Investment Strategist, so my world is markets and it's one of my favorite things to talk about, so I'm excited to do that, certainly with all of you today. Prior to that, I was an equity research analyst, so stock picker also really near and dear to my heart, so my world has been markets for the lion's share of my career and I'm really excited to spend this time with you today.

Speaker 1: 1:25

As it been hard to think through and craft a proper investment strategy in a cycle like this where you don't really have the co movement to use to have of the past. I'm not just talking about stocks and bonds, I'm even talking about large caps versus small caps, domestic, us versus international.

Speaker 2: 1:40

Really hard. I mean, you basically have to throw out any kind of textbook or rulebook or playbook, right? Think about even just, you know, since the onset of the pandemic you know we're going on four years in total here a lot of unprecedented actions and events that have occurred, not the least of which, of course, is shutting the lights off on the global economy, and so the usual textbook rules and equation and the playbook for it certainly have gone out the window. But I actually think that's what's been, you know, really sort of fun and exciting. Not obviously the pandemic and the lasting impact of that, but I love a challenge and the markets are unpredictable.

Speaker 2: 2:20

That's the inherent kind of challenge and fun of playing in markets and trying to make, you know, high conviction calls, and so it's been a wild ride, no question, these last four years. But I think we've done pretty well. We've managed to navigate the storm running, you know, fairly well diversified multi asset portfolios. I think that's the key. That really has been the key. Not making two, you know, really concentrated bets has been the way to kind of weather this really high volatility regime and we're getting to the other side of it, which is great.

Speaker 1: 2:52

You sent me a note saying it sounds like you do a musical reference to describe markets every year, and I'm a musician myself. That's why I played actually the beginning of a song that I wrote, and music, as you know, tends to have certain repeatable patterns, right, certain progression, certain beats, which make music predictable. So let's talk about the markets this year, that unpredictable nature and what was the sort of musical reference to start?

Speaker 2: 3:17

I love that you're a musician. I didn't actually know that I'm a bass player, so that I was a bass player for about 20 years, and so that just speaks to me so much. But that is certainly at the heart of my love of music. We've been picking song references for the better part of the last 10 years or so, so this is not a new thing for us, but for me it's one of my favorite projects of the year. It sounds so cheesy for a CIO to say that, but I think it actually helps create engagement and relatability.

Speaker 2: 3:48

You know, whatever might be facing investors in the coming year as we're putting our investment in economic outlook together, I try to tie it to a song, an album, a musical genre, so we can try and make sense of some of the insanity.

Speaker 2: 4:02

So we've had a lot of fun with this over the years. Some have been a lot more accurate than others, but this year's musical reference is the 1965 classic rock anthem. I can't get no satisfaction by the Rolling Stones and I think it's just so appropriate, even though we're almost at the end of the first quarter here. Our view on it is investors have been kind of angsty and itchy and sort of you know, starting out this year, we want this market to keep forging this like aggressive path forward, but at the same time we don't really have the satisfaction to a lot of big unanswered questions that are totally going to shape the narrative and the outlook for this year, and so I think we've nailed it in terms of the song twice here, and as we get to the end of the first quarter, I have lots of thoughts on some of those unanswered questions, but I don't actually think we have perfect clarity. So I think that dissatisfaction perhaps continues a bit further into the year.

Speaker 1: 5:00

It's a let's talk about some of those unanswered questions. For me, as I look at things from an intermarket perspective, the unanswered question is and I think you can argue this is the case for most things is who is right? Right, and really what I'm talking about. There is divergences. So one thing that I note to financial advisors that I talk to on a daily basis is you have two very different opinions on what to come in terms of credit risk. In terms of default risk, you've got credit spreads at cycle lows effectively, which is saying no risk. You've got broad-based small cap averages still not at 2021 highs because they're being held back on concerns of refinancing risk around these so-called zombie companies with high leverage. One of them, I think, is going to be wrong. But what are some of the questions that make you pause?

Speaker 2: 5:50

Well, we can definitely go down a bond market and a credit rabbit hole, but I'll save that, since you're asking me. So what specifically some of the questions are? I mean, I'll just rattle them off at a high level. I'll try and give you like a quick sound bite of an answer. I mean the first one. I think we know the answer to this, but it's not perfect in terms of clarity. So is the US going to avoid one of the most highly anticipated recessions of all time? That, of course, everybody thought was a foregone conclusion last year and failed to materialize. I think our view on this is yes. We were in the camp last year that it was not a question of if, it was more a question of when, but then a factor in the tail or swift effect, a factor in the Beyonce effect, to rip off some of those musical references and others, economic data has come in a lot stronger than expected, so it's really more of a slow year roll kind of softer landing environment. That's our expectation for this year, which is great, but we haven't achieved it yet, and so I think that's an important, if not open, question, considering. Our view is really that the market is priced for near perfection. So to the extent that we get something other than kind of this soft landing, slow grind scenario, I think that creates a potential disconnect. As the Fed won the inflationary battle at the beginning of the year, I was like, well, we're gaining on it, but not quite yet. As I sit here today with you, I say no high conviction, no, they have not won the battle yet. You can see it in the choppiness of the data points that have been coming in. We think we're obviously gaining on it. We're a lot closer to target than where we were. But that last mile or that last hundred basis points is going to be tough to achieve. So still an open question, I think, for me.

Speaker 2: 7:34

I think a lot of people know me well to know that I fight the Fed often. I fight the Fed's first sport and so it's really easy for me to critique what the Fed may or may not be doing at any given time. It's just they have a target on their back, so we always have fun with that. But I think key question is is the Fed finally going to get out of the driver's seat? From a policy perspective? For the last four years it's really the only thing that's mattered, and so key question is are they going to get into the back seat this year? And I think the answer is no. The best we can hope for is passenger seat, still very much in focus here. But the fundamentals really do need to matter again, and that's really how I want to answer that question.

Speaker 2: 8:18

Will a broader earnings growth story play out? I think it's my number one wish for the market this year. Will there be a change of control in DC? I may plead the fifth, but on that one, will the US consumer? I'll give you a fun musical reference the beast a burden, the US consumers by the beast a burden for the last four years, kind of keeping the lights on the global economy. Will they hit a wall this year? We don't think so, but certainly cracks are forming, and so I could keep going on, but I'm rattling these questions off to prove my point that there's a lot of big, somewhat existential questions that, again, we have a lot of thoughts on but we don't have perfect clarity on, and so I think that sets the stage for some choppiness in the market as the year progresses.

Speaker 1: 9:39

Is there something to the idea that the Fed, in thinking that it won the inflation battle, actually reignited inflation? And I go back to November, December, with the Treasury, the Yonza, Sixth Save and Powell getting to the market to think that there were six cuts coming. I mean the effect of that was tremendous liquidity that caused some of these enormous moves. I think there was some stat that showed that it was one of the fastest times in history where the number of small caps that were 52-week lows flipping to 52-week highs was the fastest we've seen in a long time. And there's this wealth effect dynamic that happened with market cap weighted averages, which most people are in from a passive perspective, which you can argue, create maybe a pickup in inflation. How much of this year around a second wave is because the Fed called it too early.

Speaker 2: 10:29

I don't know that it's necessarily about the Fed calling it too early. I mean, this is forward guidance on full display as an effective policy tool in the toolkit. I'll just say that much about it, my view again, just because I'm going to fight the Fed for sport and it's easy. I think they were a bit premature in creating that kind of a signaling effect. We needed some more data points to really, I think, start talking about a policy pivot. And the challenge with that is the market.

Speaker 2: 10:59

I always describe the market like my younger daughter. She'll hate this someday, but she's only eight right now, but someday she'll look back and be like how dare you? But whenever we take her to a candy store, and my other daughter too, they're craving, of course, the sugar high Markets craving the sugar high from policy accommodation. Markets going to throw a tantrum. That's effectively what we saw that torrid market rally. As soon as the Fed started signaling a pivot coming, we went from an updated dot plot of three rate cuts to the market expecting seven. That's the market throwing a tantrum over the forward guidance and demanding this policy accommodation. It was just too early, it was just too soon and of course the market, like a kid in the candy store overreacts. I've also said at times that these sugar high tantrums end in tears. I'm not sure that the market rally is necessarily ending in tears, but it's certainly ending in some dissatisfaction.

Speaker 2: 11:58

To go back to our musical reference for the year, we're just not going to get that kind of rapid pivot and policy accommodation that the market is demanding. But we don't need it. We're not standing at the edge of a recession, as of accommodations suggests that something much bigger has broken down in the backdrop. We're just not seeing that here. So I think again, time is on our side for those Rolling Stones fans out there as it relates to the Fed. I think they do need to take a few steps to cut policy here. But it's certainly not March We've never been in that camp and it's likely not May either. That has not been our base case. We think the first step is potentially in June. So hopefully that helps frame a bit of how we're thinking about the Fed here.

Speaker 1: 12:44

I do get that. There seems to be this belief that you can't have markets on hard or have some kind of a tail event unless you have a recession, which is just not true historically. You can be in expansion and still have a market that can look really scary for a moment in time, which would not necessarily need the Fed to cut anything. It might get you closer to that last mile that you mentioned taking place, but let's focus on this last thing. I think this applies to a lot of different things. It's not just inflation but AI and sort of where the incremental real value comes in from new technologies.

Speaker 1: 13:16

On that point about last mile for getting to that 2% target, I myself have argued that I don't think we can get there, and it sounds like you may agree with Fed policy alone. You may need something that's exogenous or maybe something of a disinflation or deflationary shock to really kind of bring it there. And I always go back to this point that you know people forget the math of this. Right, if you're going to go back to an average 2%, that means you have to go past 2% right To get to some kind of average, which means you need some kind of disinflation or outright deflation for a brief moment in time. What could help the Fed out? What do you think?

Speaker 2: 13:50

Well, I think that the challenge at the moment as it relates to the inflationary backdrop, from our perspective are one energy right that was on display in sort of the more recent data, really that has some upward pressure to it. You can control that degree, but certainly an exogenous shock can help with that, particularly with OPEC still sitting in the driver seat around their production cuts or lack thereof. So there's some manipulation there, certainly from OPEC, in terms of supply and demand around energy prices, and so I think that's just going to continue. You know, absent some sort of shock, as you said, I think that's just going to continue to apply a bit of upward pressure on inflation. Of course we're going to enter here yeah, it doesn't feel like it today where I am in Philadelphia, it feels like the depths of the winter, but we're going to enter the summer driving season, so demand is going to pick up and so I just think we're going to be in a period where it's not spiking but it's elevated energy prices as a function of, you know, supply and demand dynamics. That's a hard one for Fed policy tools to get under control. I think the other big one and it's also been very much on full display is happening on the services side of the equation. For all of Fed policy action that they have taken to tighten financial conditions and put us in a more restrictive place, it's had almost no bearing on the services side of the equation. Yes, consumers are starting to feel a bit stretched, but what we're seeing is a behavioral shift from buying stuff and things those are technical terms for you to experiences, and that's showing up like wildfire on the services side of the equation. So even you know, given all of what the Fed has done, it seemingly hasn't had much impact on the services side and I think that will just continue to be a really important story here. So certainly the Fed has, you know, attacked it and, you know, made a lot of headway here. I just think that last hundred basis points is going to be particularly sticky and choppy to get to.

Speaker 2: 15:57

And to your point about, you know, overshooting or undershooting, from my view not that the Fed cares at all what I have to say I don't think we actually get to 2% for the market to find solid footing and forge a path higher. We've done a lot of work on this. I'm sure many have as well. Like, this isn't an overly complex analysis, but in the 2% to 3% kind of CPI range, earnings growth is positively correlated to and valuation multiples can expand in that environment. Bad outcome in that 2% to 3% range, 9% is a bad outcome, right, but 2% to 3% is not particularly problematic.

Speaker 2: 16:36

And I think the other thing I would say, you know, for the better part of the 10 or 15 years leading up to the onset of the pandemic, we undershot inflation. Throughout that period, right, we were failing to achieve trend line growth and also trend line inflation. And so, as you said, I think the pendulum can swing and you know, perhaps we are in a period here, a little bit more extended period longer for longer is a way to describe it of a bit more elevated inflation than what we've seen previously. I don't think it's the worst thing in the world. I think the worst thing in the world as it relates to inflation is for the Fed to take aggressive action too soon, and we see, you know, inflation spike up fairly dramatically and they have to reverse course. Markets hate that and so I think that would create a world of hurt if not as the Fed cuts and then has to reverse course. So again I go back to this musical reference time is on our side as it relates to Fed policy action and the inflationary battle.

Speaker 1: 17:39

Go to some of the audience. If you're there, good.

Speaker 2: 17:42

Thank you for your question. I actually think one 25 basis point cut means almost nothing. It's all about sentiment and dicks, I don't think. I don't think where the rubber meets the road it makes any difference at all in terms of the inflationary backdrop. I am not saying that there isn't a reason for the Fed to do it. I mean, your real yields are moving too. If they don't start to dial back interest rates and at least to some degree still be in this tightening mode Like I don't think we need to be in additional tightening mode, making it tighter than where we already are the Fed should be kind of just recalibrating relative to where real yields are. But I just don't think, you know, one or even two rate cuts means all that much in terms of what you're articulating. I mean, I think further down the road, you know, perhaps it bails out the credit markets from some sort of, you know, unforced default cycle, but only for the very lowest of low credit rating tranches have we really started to see anything meaningful there at all? There has not been a material default cycle that has started, and so I don't think it's something that is necessarily keeping me up tonight, but I do think. One art to see 18 to 20 playouts, we might be in a different place.

Speaker 2: 19:03

I don't think one or two rate cuts has that much impact necessarily on the residential housing or the consumer. I think you're absolutely right on that part that we had this unprecedented refinancing wave. I think it matters, for people have to move. We've priced a lot of people out of the market. Just given where prices are, where we're really net short housing stock in this country and you layer on top of it how expensive or how high mortgage rates are, I think that confluence of things has certainly limited first time home buyers and people that have to move. But on balance I'm not sure that matters all that much for the average consumer because I think they've done a good job of refinancing and locking in these really low, if not all-time low mortgage rates and that has been a critically important balance to keep the consumer and consumer households in good shape for how late in the inning cycle we are. I hope that helps answer your great question. I think it might very well be aiding to speculation, as I said.

Speaker 2: 20:11

I don't want to rehash it too much but, as I said, I think one cut or two necessarily matters as it relates to credit and I'm actually not sure that, as it relates to the services section side of the equation either. We're going to keep spending on concert tickets and tickets and so on, seemingly unabated, so I'm not sure it has that much influence there either. Not a short run, but again, if we zoom out a bit it could potentially have an a bit longer term. It is ridiculous. All of them have been Madonna, beyonce, put all those ladies in a room. That's the inflationary fire right there. But I'll say hashtag worth it, just amazing performance. But definitely consumers are it, and it's not just those folks, it applies across the board. But that's just. That's the world we're living in. But I think it's fascinating how much consumers are valuing those experiences over things. It's been a sea change in terms of a shift in behavior.

Speaker 1: 21:08

And only people like Ray Dalio can apparently afford the go to Taylor Swift. For those who have seen that, that selfie of him there Just to reach out to remember to please make sure you follow Amanda Gotti on X and if you want to come up and ask questions, click that bottom left micro quest button. And, as always, this will be a podcast under lead lag, live on all of your favorite platforms. What is going to break services experiential and what's going to take a really great idea that I will pay anything to go see John Mayer at Mads Square Garden? I pretty much did. I'll pay anything to go see Taylor Swift. I mean, is the simplest answer the right one? You just need to have unemployment rising or you need to have credit card rates go to 40, 50%. I mean, what's the words that change in that?

Speaker 2: 21:48

Well, I think again, if we want to count this later innings, right, it's not a recession, we're not calling for recession, but it starts slowing expansion. So to me it's still very much later innings of the cycle. I think, relative to late innings of past cycles, the consumer is in really good shape Now again, I said before certainly there are some for me We've seen behavioral shifts. We've seen, as you said, credit card balancing, leverages moving up. Retail sales data is still coming in okay, but the strength, that trajectory, the trend line, is not quite as strong as it was. We've seen confidence kind of start to take some steps back. So the consumer is starting to signal maybe a little bit of tiredness, not full on exhaustion and certainly not hitting a wall, but I think, given all of that, we still have how she's in really good shape. I just talked about the Resi housing market and how that is just a really strong fundamental of support, the biggest asset or potentially liability on most consumer balance. The prices that we've seen over the last four years have just been unbelievable and so that's keeping the lights on the consumer for sure. We're also in a really tight labor market. As long as consumers feel pretty confident about stability of their job or their ability to shift and get another job that might work for them better for one reason or another. I think that's enough fundamental support, those two things right there, to keep the spending going. I think natural tendency to kind of slow down all time will start to come to fruition.

Speaker 2: 23:34

I have said a number of years now and I can use this phrase in a lot of different ways, and I said it once already but we're in this sort of longer for longer dynamic. It originally applied to the Fed, but I think it sort of trends to a lot of other things. The business cycle beyond longer than what anybody really thought. Interest rates are going to stay elevated. Longer the market is going to be more narrow and more constant, for longer the consumer is hanging in there, for longer. Everything about this just seems to be more extended and protracted, and so I think it will start to hit a wall here, but it doesn't feel like we're going to hit a wall with the consumer in 2024. And then if we get a little bit of a tail end from the Fed starting to loosen financial conditions, I think that is the further buoy for the consumer. So there are a lot of things that may keep me up at night, but the consumer really isn't one right now.

Speaker 2: 24:33

Now, obviously, I'm talking about the consumer in general. I don't want you all think that I don't care about the low end consumer. We know the low end consumer is under a ton of pressure. Yes, we're gaining on it in terms of this inflationary battle, but if price has not gone down, it's just the rate of change has slowed a lot. So we view that as progress, but for the low end consumer there's a pressure there. The challenge is just that when you look at the US consumer in general, that's not where the lion share of spending happens. Of course, it's more to the middle and higher end, and so, on balance, when we look at the US consumer in general, hanging in there, and so I think that helps to further extend for longer.

Speaker 1: 25:14

It's a darker concentration, it would also stay for a long.

Speaker 1: 25:17

You mentioned before the idea of things that keep you up at night. This is something that I know for a fact, keeps a lot of financial vibe night at least that I talked to and makes me nervous when I think about the investment landscape separate from strategies that I run, the concentration dynamic. I think you could argue me that if it were to continue at the pace it's been continuing, it puts it to question the idea that these large cap market averages are averages, in other words, that they're no longer a diversified representation of and quote to the market and increasingly it's less beta and it's really more idiosyncratic risk because of the signal or socks having outsized attribution to the trend a joke before. It's like we're now getting to the point where if you're going to ask to give up being a fiduciary to beat the S&P, it's just given the way that this momentum has been so concentrated. Is that a concern that is legitimate, as I had? Yeah, that becomes maybe a real problem for asset allocators at some point.

Speaker 2: 26:17

Totally legitimate and a concern for us. I'll go so far as to say like an extreme frustration for us, because we really believe in the power of both active and passive management in asset classes and combining things to get the right exposure. I think the challenge when you have seven stocks which was basically the story last year and an even more narrow set of leaders this year three, four, whatever the number is you cannot own enough of them without, as you said, throwing your fiduciary hat into the trap very difficult to manage against that of very narrow but heavyweight kind of consonant. I think the challenge is where do we go from here? I mean my number one wish. So at the end of every year, right around Christmas time I was right a patient that's called like all I want for Christmas is it's sort of cheesy but we have fun with it and that we put at the top of our wish list for Santa what we think is the single most important catalyst for the market in the coming year. I don't expect to get my gift on Christmas morning, but I expect it to be delivered over the course of the year. This year's wish was basically a resurgence of the bottom 493 stocks in the S&P 500. We just cannot and should not hang our hat on seven stocks to continue to drive this market environment. It's been narrow in terms of price performance. It's also been very narrow in terms of earnings growth and the underlying fundamentals.

Speaker 2: 27:51

There's a huge disconnect between when you include seven stocks and when you exclude. I hate to do that because I know you can slice and dice the index to tell whatever story you want to tell, but I think what doesn't get a lot of appreciation from the headline, particularly like what happened last year. We're talking about NASDAQ up 45% last year, s&p up 26%. The median stock return was only up about nine. Now nine is not a bad number, but it's nowhere near 26 or 45, and it's certainly not anywhere near 90 plus, which is what we saw with the Magnificent 7. There were 150 large cap stocks that had negative returns last year. There are 175 this year just year to date that are sitting in negative return territory.

Speaker 2: 28:40

There's a huge distinction between winners and losers. I guess maybe you could argue that to some degree this is a stock picker's dream in terms of distinction between winners, but I think makes it very difficult to add a value in such a concentrated, if not distorted market environment. When you look at earnings growth, it's disconnect. I think we were hoping that Q4 earnings results would give us that first glimmer at getting broader-based participation and that our gift was going to be delivered over the course of this year. We didn't get it. We finished and this is just S&P 500, just to keep it really simple but we finished at about 4% earnings growth for Q4. Not a bad result, but if you take out the Magnificent 7, the growth rate is back down close to negative 6%. It's just a massive differential.

Speaker 2: 29:35

Corporate America has been, and continues to be, largely in an earnings recession and I think that's somewhat underappreciated. We talked about very briefly market price for perfection, but we're four quarters or more in a row of an earnings recession. While we're not seeing the economic recession materialize and expecting it to not come to fruition, earnings recession very much alive and well. I think the fundamentals are going to have to matter again. I'm not sure exactly what the catalyst is. The Fed starting to loosen Financial conditions can help breathe some signs of life back into the bottom 493, but I think it puts us in a bit of a precarious place not a bearish place, but a precarious place as it relates to this market rally. I just don't see how we continue to forge this aggressive path forward without seeing broader-based participation. It's a unique hallmark, as many cycles always have unique characteristics. This is a doozy and I'm not sure really what reverses course on those seven, maybe in the driver's seat for quite some time. It's not a blip, I guess.

Speaker 1: 31:18

Yeah, but you're hitting on why I myself have been skeptical really since the regional bank dynamic. I mean, last start of the year I thought it would be a melt year but there was a risk of a credit event towards the end. I was saying that because you can clearly see small caps and some of the dynamics you're mentioning as far as the number of stocks beneath the surface having that earnings recession, by the way. That's happening while every day that goes by you're closing to that refinancing wave you mentioned. It is a very odd environment.

Speaker 1: 31:44

I've called this a concentration bubble in quotes bubble, just meaning it's either going to resolve with broadening in terms of everything else catching up or the large caps up in catching down and largely a bear market in everything else, because last I checked, 20,000, 3,000 index something like 7% plus of the stocks, and there are also 3,000 are still below their 2021 respective peaks. It's a very odd, which is why the word distorted is valid. To your point about slights hand dicing, yeah, I can make an argument that both bulls and bearers have, oddly enough, maybe been right in this.

Speaker 2: 32:17

Yeah, it's sort of a choose your own adventure kind of market environment where you can take I mean, this is what happens in the late innings of cycles the data comes in, market performance comes in mix. There's always sort of unique characteristics. And so I have joked that it's sort of a choose your own adventure kind of market environment because you can combine any number of stats or data points to kind of tell a high conviction story. And that's what makes kind of navigating this environment, particularly late innings and bad inflection points and cycles really challenging. And I think that's kind of where we are right now.

Speaker 2: 32:54

For sure, I think, on the market correcting part, we're backing records for not seeing hero corrections, whether it's like a 5% move, a 10% move, whatever it is. You know what I mean. Well, we kind of look back at it normal, healthy market functioning and be used to see corrections for whatever reason. I mean it could be sentiment driven, it could be something material, but sometimes they just happen. And so for me I always get nervous. It seems intuitive or contrarian, that like when I don't see a lot of corrections, I get nervous, I get worried about that because I'm like what's happening in the backdrop? That's sort of manipulating. That sounds nefarious. I don't mean it to be, but like what's happening in the backdrop, that's not letting the market behave in sort of a natural functioning market behavior type of way, and I think the only thing I've really come up with is just the unprecedented policy accommodation that came in at the onset of the pandemic, whether it's fiscal or monetary or otherwise. A lot of that policy accommodation is still sloshing around, even some of the inflation reduction act, and even though that one has been slow for capital to start to creep in, there's still a decent amount of policy accommodation and liquidity sloshing around out there. And so I do worry a little bit that when are we going to get to this market standing on its own two legs again? When are we going to finally kind of normalize as it relates to policy, I think, to the extent that we start to see a bit more choppiness and or a correction here or there.

Speaker 2: 34:35

To me that would feel like maybe we're starting to get to a place of normalcy. I don't think we're there yet. Certainly on the eve here of a potential pollivate. There is influence there again. Maybe there always is, but I think it's really notable again that we're back in this mode of not so much volatility at all.

Speaker 2: 34:58

I like volatility because it always gives us a shot to reach in portfolios or dig into some potential opportunities. So it's a tough one out there, there's no question. That's why I said in the very beginning we're throughout the rulebook and we're taking it as it comes here. It's a great question and I wish my crystal ball was shined up so I have a very precise answer out, but I'll just give you some thoughts as it relates to it. There's no question it's been a tough slog If you're a fixed income investor, with all of Fed policy intervention bonds effectively under water this year.

Speaker 2: 35:35

Nobody likes that. Everybody wants their bond portfolio to be the ballast and the insurance policy and portfolios. That being said, though, we're not shying away from fixed income exposure. We're actually at a tide of a lot of volatility on the fixed income side and not so much on the equity side. It's really given us a chance to reposition portfolios in fixed income.

Speaker 2: 36:00

So for the 10 plus years leading up to the onset of the pandemic, we had a lot of really significant credit oriented exposure in portfolios, and when I say credit, I mean I yield loans, emerging market debt, those types of asset class exposures, we were in such a low yield environment Investors were really sort of clamoring for basis points worth of yield and so pretty far out the risk curve to pick up yield, and that worked well for investors. I think where we stand today, where credit spreads have moved to where yields are in general, you don't have to take on that kind of risk or, said differently, we don't think investors are getting paid to take on that risk. Now, by the way, as a caveat, those asset classes have continued to perform well more recently, but we have started to dial back our exposure there, saying we're much more comfortable focusing on actively managed investment, great fixed income. In this environment we're putting cash to work. So even though money market yields look really attractive here in the five plus percent range, it's fleeting and you got to put that money to work and so I can't see you whether that cash should necessarily go to equities or fixed income. It really depends on the goal or the objective you're trying to achieve.

Speaker 2: 37:18

But I think just to zoom out and maybe you can take me in a different direction if you want, but just to zoom out on this the demographics in this country and the aging of the population suggests that a lot of flows are going to continue to go into fixed income market, so I think the demand there is going to continue to rise.

Speaker 2: 37:39

I don't think it's currently priced in to the market. Does it really do a lot of damage to equities From equities to fixed? I don't know that it necessarily shows up as a meaningful headwind as it relates to equity market performance and behavior. But I do know that there's going to be a ton of movement into fixed income markets and so I do think that sets the stage, as we talked about previously, for some unique hallmarks of this next or these next two cycles. But that demographic force is really significant and I think fixed income investors should be really mindful of that as we track through these next few years or so. I hope that answers to some degree that you're asking, but I try to elaborate more if you want me to go in a different direction.

Speaker 1: 38:28

Can I push on this a little bit because I think I know you have seen your posts Mayor, a believer in AI, and everybody knows that Nvidia is my favorite stock in the world, given some of my comments and obviously being very wrong with the price performance. But there is something that's nagging at me around the AI narrative, which is technology is inherently disinflationary. It shifts average yields and if AI is as exponential as it's made out to be, I would think that's a tremendous argument to own bonds, because you would. I would think maybe I'm wrong that the disinflationary impacts of AI combined graphic argument you mentioned really creates collapsing yields. Am I off in that thinking? I mean, that's been something that's been sort of the disconnective narrative of AI versus parts of the marketplace that should be let's call them stakeholders to it.

Speaker 2: 39:18

I think you're actually right. I mean, again, I don't have a very scientific answer for you, but I think my reaction to what you're saying is agreement, in that I do think there's a lot of pressure on longer term rates. And the way it shows up, at least from our perspective, is in the current shape of the yield curve. And I don't know if I want to go down a yield curve rabbit hole with all of you. But if you just kind of look at maturities from like 10 years to 30 years, it's not normally shaped, it's not inverted, but it's really flat, like unusually flat. Again, I think this is sort of a distortion, a hallmark, a uniqueness of kind of the environment we're in, and so I think it may very well be a reflection of what you're suggesting or what the bond market is sort of envisioning longer term investors just really aren't getting paid a lot more to lock in a lot longer rates because that 10 to 30 year portion is so exceedingly flat. And I do think you're absolutely right technology and technical innovation is inherently deflationary or disinflationary, so I think that very well could be putting pressure on it. I think maybe the counterpoint, which is unrelated to bonds, from my perspective, would just be. My hope is this is less about depressing the next cycle or two and more accelerating the cycle through productivity enhancements. We've already seen a step function change in productivity enhancements at the onset of the pandemic. That I think actually even though I joke about the Taylor Swift effect and the Beyonce effect that actually is hidden in there as a really strong catalyst for economic growth being much further ahead of expectations than what people thought. But that productivity step function change doesn't incorporate AI. We're at the very first or earliest innings of use cases, new business models, implementation. We're all just kind of figuring this out. So I think my counterpoint, my inner optimism in relation to the back view shared, is that it's going to actually drive more meaningful productivity enhancement. So we actually end up getting a lot further, even if the growth trajectory of the next couple of cycles is a bit more subdued than what we have seen in the past. We get more bang for our buck because we're able to leverage technological innovation even more. It's sort of like that next wave. It feels sort of I don't want to overstate it, but it feels a little bit like an iPhone kind of moment right. That was a very significant change in terms of innovation and the trajectory for productivity and all host of things.

Speaker 2: 42:05

This is probably going to be that, and so, even though I'm also enamored with NVIDIA, I like to talk about NVIDIA all day long. It's one company to talk about right in this moment, but it really isn't one company, one industry, one stock. It's so much bigger than that. It's just so early innings that NVIDIA is really the only clear thing that we have to point to, but I think the runway is just unbelievably strong in terms of the sort of secular theme, so we're definitely big believers for sure.

Speaker 2: 42:35

That's a doozy of a question. That's like the billion dollar question to end on. I mean, I think the answer is yes, I think it is very transparent, but how do I give you a precise sort of like an answer? I think the power of this one is to let the foundations that have come before it, and so I think, even though we might not have seen those booms either in productivity or technological advancement, out of all of the things that have come before, they were essential to where we are today and sort of the step function change of what is coming next, and I think the AI story permeates throughout corporate America and it will permeate throughout our daily lives in a way that is truly transformative.

Speaker 2: 43:21

And I think if I just talk about corporate America I don't want to get into personal lives too much and the dynamics there, but as it relates to corporate America it actually has a potential to level the playing field a lot between even large caps and mid and smaller caps, the ability to kind of figure out how to incorporate and move a lot faster to existing processes. There's a tremendous cost saving component that could come new use cases as it relates to AI. I think the profitability dynamic can change pretty quickly if we figure out how to harness this in the right way. So kind of long winded, rambling answer to where I started. But I do think it is very powerful and very transformative and things are going to look a lot different in the next, even just five years or 10 years, relative to where we are today, and that has really important implications for the market's path forward.

Speaker 1: 44:18

Amanda, for those who want to track more your thoughts, more your commentary content, where would you point them to?

Speaker 2: 44:23

You can follow me on X. I'm at Amanda Agonzi. We also try and post some thoughts, although not quite as extensive, on LinkedIn as well, so I'm out there, you can find me, I'm at Amanda Agonzi.

Speaker 1: 44:35

Please make sure you follow Amanda Agonzi. Do you have any albums that you published? I'm curious, can we hear you playing bass?

Speaker 2: 44:40

He cannot hear me and I don't think you would want to hear me. No, I don't have any original music, but maybe that's a goal down the road. We'll see.

Speaker 1: 44:49

I think you can get AI to do that fast.

Speaker 2: 44:51

That's Gary Way. But yes, that's true.

Speaker 1: 44:53

Everybody. I appreciate those that are joined here. I believe this is my last space for the week. A little bit of light on the schedule, but this is a podcast under Lead Lag Live in a couple of days. Thank you, Amanda, Appreciate it, Thank you all. And I'll see you all next.