00:00 Speaker A
James, I want to start with you in terms of the labor market data this morning showing perhaps a slowing but not a slow labor market. How concerned are you then about the inflation picture going forward?
00:18 James
Well, the jobs thanks. First of all, thanks for having me here. The jobs data is telling you that this economy is prepared to take a licking and just keep on ticking. Uh, we think businesses have learned from past business cycles that if they let people go or they pull back on investment when the economy softens that those people are scatter to the winds, those investment opportunities are gone and then when the economy recovers, it’s really impossible to bring it all back. You’ve given up market share permanently to make this tactical choice. So, businesses have been gritting their teeth through the tariff uncertainty and holding onto their people, which sets us up really well for the resolution of that uncertainty in the coming months and a continuing economic expansion. This is the one of the risks, the nonlinear risks the Fed have been worried about was a recession. The other risk the Fed have been worried about was the entrenchment of high inflation into the economy and making inflation persistent. And the jury’s still out on that. We probably won’t learn much about how much inflation we’re going to get or how sticky it’s going to be until the late summer. Um, which is what the Fed has been telling us today through through a Wall Street Journal, a source Wall Street Journal article suggesting that they’re on hold potentially past the September meeting. Yeah. And that lines up with the idea that they’re going to take their time, focus on which of these two risks is dominant and then make the right choice from that.
02:51 Speaker A
And James, I also want to bring you into the conversation. How does that impact your framework for thinking about US stocks over the course of the second half of this year if the Fed is going to hold for longer?
03:10 James
Thanks, Maddie. And James, I would agree with you. I think, you know, this thing is much more resilient than anyone thought with all the headwinds of tariffs and less fiscal spending. We’ve got this really tight labor market and we would suggest that the economy’s got to decelerate at some point given these headwinds. And as a stock investor, well, make sure you’re really sector selective. What kind of industries and sectors would do well, maybe in a little bit of a softer environment? I think the AI trade still works because that’s a theme that sort of transcends any of this tariff or headwinds of fiscal lack of spending. Uh, but we think markets can churn higher, particularly you can see today, good news is good news today and markets are up.
04:37 Speaker A
Is there a second best when it comes to tech? Obviously, tech is the best and has continued to be the best for the past couple of decades here, but what sectors are you looking at that are maybe a little bit more defensive for folks who are worried about that risk?
04:58 James
Yeah, I think there’s a lot of value in select health care companies like McKesson or Intuitive Surgical, the robotic device. I think Consumer Staples Costco had fabulous numbers. Walmart had fabulous numbers. So, sort of stay in those more defensive areas. I also think investors should look overseas where you have the opposite economics. There you have fiscal stimulus and easy money, easy monetary policy. And that’s why those markets are up a lot more than they are in the US. So, different economic climate there.
05:49 Speaker A
Yeah, but following on your exact point on how the fiscal policy and the monetary policy both play into the macro picture, I’m curious how you are thinking about the totality of policy coming in from the Trump administration. We obviously have tariff policy continuing to unfold and then we have the potential upcoming tax bill getting through. Uh, how are you thinking about the macroeconomic impact of that legislation?
06:19 Speaker B
So we’re expecting that the tax bill to get through later in the summer and we think that provides broad continuity to the economy. It’s not, it’s a continuation largely of current policy. It’s a continuation of the current high level of the deficit. So from a macroeconomic perspective, it’s sort of neutral news. Where I think some of the worries are among some investors is about the high level of the deficit and the lack of a long-term plan to resolve it. Um, this combined with a lot of the other policy uncertainty you noted has made people a little bit worried about the long-term credibility of fiscal policy, of monetary policy in the US more generally. And that’s why we’ve seen the dollar stay at a relatively weak level despite the recovery in risk assets and why the 30-year treasury yield has risen so much and why it remains high. Yeah. So that’s, I think we’re seeing some emerging signs of worry about credibility over the long term and that’s one of the reasons why we think the Fed stays on hold. Is the Fed is one of the anchors that maintains credibility in the US and they’re going to guard that credibility very carefully.
08:04 Speaker A
Are we at a point then where the deficit is driving the tape more than tariff policy at the moment in your view?
08:17 Speaker B
We think tariff policy matters more. And we think that the resolution of that uncertainty as the administration has has backed down a bit from brinkmanship and has shown more interest in making deals that has been very supportive of risk markets in general.
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