November 2024
Here are some key takeaways from their conversation:
Watch previous episodes here:
Ep. 109 Boomers vs. Millennials: How Generations Shape Financial Decisions
Ep. 108 Investor Symposium Spotlight: Key Moments with Our CEO Jeff Sarti
Hello everyone. We're here for a special edition of THE FINANCIAL COMMUTE and CEO Jeff Sarti. I'm joined by Megan Pinchuk, our Chief Investment Officer.
The reason for this special edition is the morning after the election when we're recording this, to some degree, there was a surprise. We thought there would be a lot of uncertainty and maybe not a clear result, but now it looks like there is a clear result.
And Trump did win the election.
We don't know yet who's going to win the House, but it's even potentially tilted in the direction of the Republicans having a sweep and winning the House as well.
And so we wake up this morning and stocks are up. Stocks are up about two 2.5%. And so the question is it just a relief rally? And I think there's some of that.
And what I mean by that is there was so much uncertainty and concern going in that the election results, they wouldn't be known at this point in time. So then theoretically the markets would be choppy along the way. But because that's not the case, there's a relief rally. So is it that or is there different news built into the stock market that the stock market is now optimistic about certain policy, so that the Trump administration will implement?
I think there is definitely a lot of concern going in that it would be a long, drawn out process or that there would even be, violence or a lot of unrest as there was last time. So the fact that it's a little bit clearer at this point is in some ways, the market like certainty. So it likes it likes to add that knowledge that things are going to move forward.
I think there's also a lot of talk that Trump and a Republican sweep will be a positive for business.
Like in what ways?
So the fact that potentially taxes or lower both personal work or corporate taxes, being lower, I think could be could be a big positive. There's talk about.
And just real quick on that, because the likely scenario is the 2017 tax cuts that came into place. Potentially those will now just be extended instead of expiring in 2025.
Right. Correct. And so yeah, it's less I guess additional taxes at this point. It's more just do the tax cuts continue out as opposed to being allowed to expire as as was projected to happen in the case of a Democratic victory. Right. Another big ones regulation. So so the idea that there will be less regulation going forward. And that's particularly positive for certain sectors like energy or financials, that potentially is this a good thing for the stock market going forward?
Potentially some pro-business aspects. Yes. So should we lean in and invest more in stocks?
Well there are a lot of potential negatives as well or things that have been talked about.
A big one that's gotten a lot of headlines recently are tariffs. And just the idea that that that will be actually very negative for the economy broadly.
And I think also the idea of that is very inflationary, something worth exploring and talking more about. And then ultimately with valuations where they are now, there's still a lot of challenges to pair with that, but some of the potential positives that came out of it.
A simple example of a tariff, in essence, think of it like a tax on an imported good. So let's say you were buying a widget or let's say it's a sneaker from China, and there's a 20% tariff on that $100 steel sneaker. Instead of paying $100, you pay $120.
Trump has been even throwing around the idea of 60% tariffs on certain Chinese goods.
I mean, we're talking really potentially massive tariffs. And the rationale around that is it will reinforce or bring back manufacturing domestically, right. Because theoretically we'll have advantages in terms of pricing power here domestically versus, paying a higher price for an...
Export, right. The thing that was more expensive here, that in China suddenly becomes cheaper here because artificially, because of that tariff.
So the potential negative results, and we think there's potentially some real long term negative results of these policies are first and foremost inflation. Yes. Obviously it's higher price goods now that you're purchasing from those countries that are importing goods from the second aspect is retaliation. Very natural and commonplace when you have high tariff environments, is the other country will retaliate, right.
And they'll place higher taxes on the goods that we are exporting to them.
Right. So now our companies that are exporting are potentially challenged. I do think there's an element here, at least some that's being talked about, national security. So you mentioned sneakers and that was a good based example. There are other more essential things we need to manufacture. We need to manufacture, you know, weapons and things that protect us potentially, or even just core infrastructure to be able to survive in environments like Covid and so that's been a lot of the talk to what do these tariffs do for us.
Yes, it pushes up costs, but is that just a higher priority, bringing some of those things onshore than inflation to a large degree. Are they going to pick one over the other?
All right. So let's talk now more about inflation. Inflation has been a concern of ours for a while. It's been picking up in recent years. It's come down in the last year or so but it's still somewhat sticky. But again some of these policies are potentially higher in the way of inflation as opposed to lower. So what are your thoughts around that specifically?
I think the tariffs in particular being, inflationary, that I don't think anyone argues that point that that pushes up prices. The other big one from a policy standpoint, with, with Trump getting elected is, immigration. So the idea of he's going to really limit, immigration, even he's talking about, you know, deportations. And so when you have a cheaper labor force, it's coming in that immigrants tend to be a cheaper labor force, that keeps costs low.
So now are we, are we pushing up labor costs and is that adding to inflation? So with all of this, though, if there are these inflationary forces in theory that should result in higher interest rates to help control the inflationary forces, which is historically not good for stocks, that can actually be very challenging.
And real quick, just, you know, we've even seen that in the data in the last month or two, interest rates have gone up even even though the fed lowered interest rates by 5% about a month or so ago, most other long term interest rates have gone up potentially. That's because the market that was the market predicting a Trump win.
But we're even seeing it this morning that interest rates are higher by a decent amount after the Trump victory.
And it is counterintuitive because people think about the fed. What is the fed going to do as it relates to rates? The fed only controls short term rates. So they get to set the short term rate. But the market dictates what long term rates are. So to your point, even though the fed has brought rates down and even talked about bringing rates down further with all of these inflationary pressures that are out there in the market, the market naturally, we're seeing interest rates rise as a response to those.
So we talk about tariffs, potentially negatively affecting stocks. We talk about inflation and or interest rates. Also do you want to just quickly mention valuations. We still are in an expensive market right.
We're the highest we've been from a valuation standpoint since 1999. And the reality is again that that with all of these challenges out there, when you when you add that on top of it, right, it's sort of the cherry on the cake where you're already at expensive levels and you have all of these challenges and uncertainty. Does that create just a more volatile environment for stocks potentially?
Potentially. So there are potentially some pros. Again, as you mentioned, pro-business related outcomes lower at lower regulation maybe again lower taxes. But there are potential some offsets in the to the tune of inflation interest rates and tariffs. Yes.
And another big one is I mean worth talking about is the uncertainty around some of the potential policies coming out and some of them being the potential be fairly extreme as well.
Yes. So Trump leading up to this election, was talking about a number of initiatives that he's going to potentially try to push forward. And who knows if these will come to play.
I know in election cycles, obviously there's a lot of big, bold statements made. So which of these come to fruition?
Like one extreme example, for instance, as he's talking about tariffs, he's talking about offsetting that with the elimination of income taxes as an example. Now realistically, is that going to happen? I would say very unlikely. That being said, again, maybe even movements in those directions, at least partially, especially if they do win the House, they've already won the Senate.
You don't know what policies can drastically change from an income tax point of view.
You mentioned the border. Border is a big issue, right? We talked about potential massive deportation of illegal aliens. Geopolitics always a wildcard. So much now on the geopolitical front in the Middle East, Ukraine, Russia, China then the unknowns are pretty extreme. So given all of that now heightened uncertainty, we're now talking more from a longer term point of view as opposed to the short term.
What are your thoughts on that around constructing portfolios?
Well, I think that there's... we need to be prepared for that, right. For the uncertainty. We need to create resilient portfolios, which we're we've been pretty consistent about talking about. Because on top of all of this, also, there is the fact that the debt is going to keep increasing. And so that's something though, that, to be honest, wasn't really impacted that much by yesterday's results because...
Well, regardless of whether Harris or Trump won, I think that the consensus was that the debt levels would be going up. So we're going to keep spending as a country. We're not going to be cutting back on what we spend. So the reality is that will keep increasing. And that's also an overhang on, you know, an asset.
So what do you do in this environment? Again, it's the same thing we've been doing which is you lean more heavily into real assets. So into real estate into gold, private lending in particular where you can make currently I think what we feel are very attractive yields and you're getting paid very well. Yeah. Almost equity like returns for more bond like risk.
And so those kinds of things where you can stay ahead of inflation, having layers of those in the portfolio on top of look stocks, stocks could continue to run. It could be very positive for stocks in certain ways. So you need to have that that true diversification, that mix of different kinds of things that could behave differently and in various environments.
And one potential benefit of our related to our private lending strategies. You mentioned interest rates. If interest rates coupled with inflation do move higher, that could be a net benefit to our private lending strategies as well.
And that's the question. Do you have things in the portfolio? There's stuff in the portfolio, things like stocks where potentially high interest rates are negative for those assets. But there's others where if you have floating rate bonds or loans or very short term loans, as we're more positioned that way, it actually could be an advantage if interest rates go up.
So it needs to be where interest rates going up isn't as just one example of a potential event doesn't take down everything in the portfolio. So that's why, again, traditional diversification where I work I'm going to have my stocks. I'm going to have my bonds. It doesn't quite it doesn't work the same way it used to where where the bonds would be a balance.
Now interest rates go up, bonds go down. And that could be bad for stocks also. So you have to have other things in there that are going to really drive returns.
And again, to repeat what you said around the debt issue, this is an issue we've been talking about now for a number of years. It's something that's very top of mind, and so much of what the media at large is going to be focused on are short term issues. Things around regulation, taxes, the border, etc. and those things are very important.
I don't want to imply that they're not. But the large overhang that we're facing around debt levels is extreme. It's something we talk about for a very long time. And the challenge with the Trump presidency is he's not a classic conservative in terms of austerity and reducing spending and that. But that showed itself that displayed itself in his first chart.
Right. Deficits were really high. Even pre-COVID. He was spending a lot of money. Yes. Deficits and debt levels were increasing. So because of that reason, it's something we're continuing to be focus on and focus on real assets, private lending, gold, etc. to combat those forces.
Yeah, I don't think there was any question in terms of either party having the political will to take on something like the deficit. So at this point, again, it's it's less about will, will that come down? Right. What will ultimately happen?
We know the direction that is headed. So with that information, how do you how do you protect yourself in that environment.
So I think we've got some good tools and some good options.
Interesting times. Listen, we're obviously going to be spending a lot of time thinking about this, adjusting portfolios as policies change. But for the time being, we think we have really resilient portfolios and we're in a good place. So I enjoyed the conversation Meghan. Thanks.
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