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September 23rd, 2022

Welcome to the Key Wealth Matters podcast, a series of candid conversations with leading experts about how individuals and organizations can grow and protect their finances, tailored around current events and trends. Here's your host for today's podcast, Brian Pietrangelo.

Welcome to the Key Wealth Matters weekly podcast, where we casually ramble on about important topics, including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to unlock the mysteries of the markets and investing. Today is Friday, September 23, 2022. I'm Brian Pietrangelo, and welcome to the podcast. With me today, I'd like to introduce our panel of investing experts, here to provide their insights on this week's market activity, George Mateyo, Chief Investment Officer, Cindy Honcharaenko, Senior Fixed Income Portfolio Strategist, and Mike Sroda, Senior Led Equity Analyst.

As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our Wealth Institute on many different subjects, and especially our Key Questions article series, which addresses a relevant topic for investors each Wednesday. In addition, if you have any questions or need more information, please reach out to your financial advisor.

For this week's economic news, housing data was mixed as building permits and August declined from the prior month, but housing starts increased. Leading economic indicators decreased in August for the fifth consecutive month, and initial unemployment claims for the week were consistent with the recent trend, and have not yet meaningfully increased, reflecting the continued tight labor market, which is good news. The major event for the week was the much-anticipated Federal Reserve meeting and press conference on Wednesday, where the Fed raised interest rates by 75 basis points for the third consecutive meeting, to try to curb inflation. So Cindy, let's start with you for a recap of the Fed's actions, and comments from J. Powell.

Thanks, Brian. The Fed announced a unanimous 75 basis point hike, coupled with a more hawkish dot plot and a Jackson Hole like press conference, in which Chair Powell reiterated the Central Bank's commitment to restoring price stability. Powell specifically stated, "Without price stability, the economy does not work for anyone." He concluded by adamantly assuming, assuring that regardless of the exact trajectory of interest rates, the Fed is determined to do enough to restore price stability. The highlight was the updated dot plot or summary of economic projections. It showed the median Fed funds projection moving to 4.5% by the end of 2022, and peaking at a terminal rate of 4.75% next year. The 2022 median reflects more than just an aspiration.

It's strongly implying that the committee intends to hike another 75 basis points in November, followed by a 50 basis point hike in December, and ultimately another 25 basis point hike in February of 2023. This is a reflection of the limited supply of additional relevant economic data ahead of the November FOMC meeting. It's also worth noting, Powell did in the press conference, that nearly half of the committee is willing to consider less aggressive fourth quarter tightening. The 2024 and '25 median dots signaled rate cuts, but remained firmly in restrictive territory at 4% and 3% respectively. The longer run estimate of neutral funds rate was unchanged at 2.5%. Basically, very much representative of a Fed intent on not letting up too early. So they're going to keep the pedal on the gas.

We think that the Fed ultimately will not move quite so high, but persistent inflation will prevent it from pivoting rate cuts so quickly. Changes to the official meeting statement were minimal. Revised economic forecasts were more telling. The forecasts show growth further below trend, but do not imply a recession in policymakers' collective view. Powell addressed this feature in the press conference when, while he said he was not sure of the probability of recession, he saw a very high likelihood of an extended period of below-trend growth. Again, the conference was reminiscent of Jackson Hole, his message remaining that the Fed will effectively do whatever it takes to restore price stability.

While Powell said he retained hope that inflation could return to target with a terminal 4.75% Fed funds at a 4.5% unemployment rate, he allowed that if more pain was needed, that the Fed would inflict it. My advice right now for investors, there's really no way you can get ahead of the Fed. They're just tightening so fast. Basically, they're driving 75 miles an hour, and I don't think they're quite sure where the road's headed at this point. So my suggestion would be to wait until the Fed pauses on the tightening front, and then reassess there, and then look to extend duration.

Yeah. I think that's a great setup, Cindy. I think it gets down to one simple thing, which I think the Fed is now willing to take us into a recession, right? They never want to cause a recession. They're not bad people. They don't want to inflict pain unless they have to, but I think they kind of have to now. Inflation is just really burning too hot. And just to take... If we widen the lens a little bit, it's kind of curious to see countries like Norway, Indonesia, and Taiwan, Philippines, I have to write all these down. South Africa raised interest rates 75 basis points. The Swiss National Bank, which has historically been in negative territory with respect to their [inaudible 00:06:07] policy, now raised their rates by 75 basis points, United Kingdom. You've got this kind of global tightening around the world happening, and it's all because of inflation.

Now, most of our clients are US investors, so what does it mean for us? It means that things are going to slow down. The Fed's taking liquidity away, and financial conditions are restricting a little bit, so it's going to be a bumpy ride. It has been a bumpy ride already this year, but we've been advocating for kind of staying neutral towards equities. I still think equities are probably your best bet to try and overcome inflation over the long run, but at the same time, we have above average cash balances right now, and at some point, to your point, Cindy, it's probably good to deploy that cash when it really feels the worst. We're probably not at that point yet. We probably have some more things to digest. We'll talk about that in a second. We'll flip it over to Mike to talk about equities. But I just think this is going to be a really kind of choppy environment for a while. The Fed, again, is not trying to inflict pain or inflict harm, but inflation is just frankly too hot for them to kind of stand idly by.

You know, I think if you kind of think about what you talked about, Cindy, with respect to their financial projections, or I'm sorry, the economic projections, rather. They're not forecasts, but these are projections that they make every quarter. A year ago this time, they were thinking that interest rates would be around zero. They had some modest expectations that rates would have to come up a little bit, but now that game has been completely flipped, and the table has been turned over, and now they think that rates are going to be much higher. And they've done that already. The market's kind of gotten ahead of that. The market's already priced in a couple more tightenings, and have already seen bond rates come up 2 or 300 basis points or so.

But I think the other thing that they signaled, that has probably gotten the market really kind of spooked a little bit is that they took down their growth estimates for the overall economy. So rates going up and the economy slowing down, again that, in my view, kind of suggests that things are kind of getting closer to a recession, probably next year unfortunately. So the good news from, I guess again, from the market's perspective, is that the markets tend to trade ahead of that, so at some point, there'll be enough fear, perhaps, out there, and at some point, the markets will try to anticipate the recovery and eventual pause, and maybe even eventual easing of Fed tightening.

I think the key thing to watch really is two things. It's inflation, of course, and some of those things that we've been looking at suggest that inflation is coming down. Not really as much as the Fed would like, but things are starting to cool off a little bit with respect to inflation. And then related to that is, of course, the labor market, and right now, that's actually standing fairly strong right now. We've never seen the situation that we're in today, where the labor market is as strong as it is coming into a recession. So that might suggest that maybe the recession might not be as painful as otherwise, but we'll just have to see. So I think the thing to think about is, again, the labor market, and how strong, and how resilient that could be in the face of this financial tightening from the Fed and other central banks around the world.

Mike, we've seen a lot of pressure in the equity market, though. What are you looking at with respect to what's happening in the equity market these days?

Yeah, thanks George. It was a very rough week for the equity market. We're coming off of a rough week too, so we were down four-and-a-half the previous week, and now we're looking at through the close yesterday, already down 3%. Today's looking poor already. Last I checked, here at 10:15, down about a percent-and-a-half. But just for a recap of the week, we were generally quiet up until Wednesday, and then the volatility really increased on that Fed announcement, so the market got spooked by that initial new dot plot, where the Fed had brought forward those rate increases to 2022. So you've seen the market go from about 30... And this is S&P 500, go from 3880 to 3820 in a matter of minutes. And it stayed at that level for a little bit, and then Powell started talking, and you know, the market started to rally a little. It saw Powell was talking about some successes. Energy's been looking a little better, so the market had shifted back up to above 3900.

But then we got right back on track with the hawkish message from Powell, talking about housing's still unhealthy. It's expensive. It's growing too fast, and then there's a lot of work to be done, and we need to keep at it, things like that. And then the market just fell through, right through 3800. Now we continue that in through Thursday, as the market digests that news, down another 75 basis points there. Today's also looking rough, like I said earlier, down a percent-and-a-half as of right now, so...

What's really been behind this? It's still valuation. If I'm looking at the chart here, George, and you could almost overlay the S&P 500 right on this valuation, the PE ratio for the S&P 500, and you'd be pretty close. So I mean, we've had this consistent downward trend in valuation all year, and that's continuing again now, in the past couple weeks. So we started the year at about 22 times earnings, and now we're 16-and-a-half or so.

But what I would add, that's even more concerning, that the bulls have been hanging their hat on, is, oh, earnings have been pretty strong. EPS has been strong. But I'm looking at a chart of this too, and this is starting to look like a rolling top to me. You saw that peak in July, and now you're starting to see this thing roll over when earnings are coming down, evidenced by FedEx [inaudible 00:11:19] last week, and then Costco yesterday. I mean, Costco had mixed earnings, but they're seeing pressures at the margins, so Costco went up, and basically, there's going to be some pressures here in the future, I believe, so something to keep an eye on.

Moving on to sector performance for the week, hit across the board, and to hide. The biggest selling pressure came from consumer discretionary, and materials, financials, real estate. Those are all down more than 5% through the close yesterday. The only way to slightly get ahead would be in some more defensive sectors. Staples is only down about a percent, healthcare two-and-a-quarter, so not necessarily good to be down two-and-a-quarter, but better being down three with the S&P. So you could see the market's putting a little bit of a tilt towards hanging on to defensive as they start to look through towards a possible recession here [inaudible 00:12:12] And I'll turn to a technical perspective on the market. Last week, we broke through a pretty key support level at 3900, and we've been trading in a downward channel ever since then, probably since mid-August, so it's not been a positive trend for the technical part of the viewpoint here.

Now, I was watching this channel yesterday, so we have this channel from mid-August through yesterday, where you have support right about 3770. So I was kind of watching this number all day yesterday, and was kind of holding, holding, and I'm thinking, "Okay, if this 3770 number holds, maybe we get a bounce from there." But right at the close, we went right through that number, and I was expecting some issues there, and we've seen those today. So we could... those June lows to be in play now, and looking at the numbers today, we might actually be close to those June lows if the market continues on this trend today, that we're on.

On top of all this, the TRIN index, the short-term trading index, it gets flagging again, and it's just showing that there's fuel with the seller still. For those not familiar with what TRIN is, it's basically a ratio that shows advance-decline stocks, and the volume associated with those advancing and declining stocks. So basically, what TRIN is saying is there's a lot more volume on declining stops than there is on advancing stocks, which would show that the bears are still somewhat in control of this market right now, so another negative right there for the technical side.

Now, I've talked a lot about negatives here, so I wanted to introduce something positive. I was reading some articles and some reports this week, and I came across a really interesting one from Jim Paulsen, from The Leuthold Group. He had a positive viewpoint that I thought I would share here. He basically put together a study that looked at substantial periods of peak inflation. And by substantial, he defined it as 6% or higher. And then he analyzed what the S&P 500 returns were after that peak. He ended up coming up with seven periods, so he had 1942, '47, '51, '70, '74, '80, and '90. In each of these periods, the results showed there was a clear link with the market bottom and inflation rolling over from its peak.

Now, this doesn't mean there wasn't a recession after, or there wasn't some poor result. It just clearly shows the market had kind of found a bottom when inflation had peaked and rolled over. And it's not that inflation can't stay higher for longer. The study just says did inflation peak and come down. If we look at 2022, you kind of see a similar setup. When you see inflation, I think a lot of people would say inflation hits peak and come down, and it may stay higher for longer, but I think a lot of the consensus may believe that we may have seen the peak already, so that could be a good sign from the market that we've hit that bottom, and we could be ready to move forward.

And like I said, it's not that the market's going to bounce up right away. We could move sideways, such as we did in 1942 and '47, but it's just something to hang your hat on, that maybe the worst may be here now, and it's time to look forward. The market may look through this now, and say, "Hey, we know a recession's coming. We know there's going to be inflation pressure still. We know there's going to be geopolitical concerns. We know..." but they're starting to look through that, and saying, "Listen, rates are going up, but they're going to come down when inflation comes down, and then we can look for some rate cuts there," so just thought that was kind of interesting, and I would pass that along as a positive viewpoint for some optimism here.

Well, thanks Mike. And George, I'll throw the last question to you. If you combine some of those items that Mike just covered, and some of the thoughts you had earlier in the conversation, one of the things we saw from the June Federal Open Market Committee meeting until now is the market began seeing positive nature, thinking that the Fed might not raise rates, then got hammered and the market went down. Cycle repeated itself three times, so what do you think investors can take away from some of the comments Mike made and what we've seen? Does the market actually believe that they've actually heard, "Can you hear me now?" From a Powell perspective, do we think that we're going into the actual message being heard by the market?

Yeah. I think it's a good question, Brian. I think the market probably gets it down, right? I mean, we talked about this from time to time too, that the market wasn't maybe fully appreciating how severe inflation had become and how serious the Fed was taking it. So I think you're right. I think people now can say, "Yeah, we hear you." And there's a risk that things aren't maybe... Or maybe I shouldn't say a risk, but there's a chance that things aren't as bad as we make them out to be. And I say that in the sense that there's still so much uncertainty and so much noise with respect to what happened from the aftermath of COVID-19, in terms of the economy, right? We had this huge explosion of demand, a lack of supply, and we still see many, many retailers and other companies unsure as to what to order. How much inventory should they maintain for the holiday season, for example?

So there's a chance that things could actually ease off a little bit in terms of the inflation-era pressures that Mike talked about. And if that happens, then maybe the Fed has to recalibrate too. So there is a chance that things aren't as worse as they look today, and we never know what those things are ahead of time. So for that reason alone, I think it's going to feel uncomfortable for a while perhaps. I do think that volatility's going to be here to stay probably for the next several weeks, months, or so. There's a chance also, that the election could provide some support. We typically see these kind of setups coming into the elections every two years or so, where markets get a little bit testy, and then once the election is over, irrespective of who wins, usually the market trends higher after that.

So we'll keep our fingers crossed, but I think we have to be very vigilant, to Mike's point about earnings. That's the next thing we have to really pay attention to. But over the long term, again, as we go through this period of time, usually once the Fed starts to pause, the market starts to respond favorably.

Well, George, Cindy, and Mike, thanks for your insights. We appreciate it, and thanks to our listeners for joining us today. Be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app. And as always, past performance is no guarantee of future results, and we know your financial situation is personal to you, so reach out to your relationship manager, portfolio strategist, or your financial advisor for more information, and we'll catch up with you next week to see how the world and the markets have changed, and provide those keys to help you achieve your financial success.

The Key Wealth Matters podcast is produced by The Key Wealth Institute. The Key Wealth Institute is comprised of a collection of financial professionals representing Key entities, including Key Private Bank, Key Bank Institutional Advisors, Key Private Client, and Key Investment Services. Any opinions, projections, or recommendations contained herein are subject to change without notice, and are not intended as individual investment advice. This material is presented for informational purposes only, and should not be construed as individual tax or financial advice. Bank and trust products are provided by Key Bank National Association, member FDIC, and equal housing lender. Key Private Bank and Key Bank Institutional Advisors are a part of Key Bank, and investment products, brokerage, and investment advisory services are offered through Key Investment Services, LLC, or KIS, member of FINRA, SIBC, and SEC registered investment advisor. Insurance products are offered through KeyCorp Insurance Agency USA, Incorporated, or KIA. KIS and KIA are affiliated with Key Bank. Investment and insurance products are not FDIC insured, not bank guaranteed, may lose value, not a deposit, not insured by any federal or state government agency. Key Bank and its affiliates do not provide tax or legal advice. Individuals should consult their personal tax advisor before making any tax-related investment decisions. This content is copyrighted by KeyCorp, 2022.

September 16th, 2022

Welcome to the Key Wealth Matters podcast, a series of candid conversations with leading experts about how individuals and organizations can grow and protect their finances tailored around current events and trends. Here's your host for today's podcast, Brian Pietrangelo.

Welcome to the Key Wealth Matters weekly podcast, where we casually ramble on about important topics, including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to unlock the mysteries of the markets and investing.

Today is Friday, September 16th, 2022. I'm Brian Pietrangelo, and welcome to the podcast. With me today, I'd like to introduce our panel of investing experts. We have a pair of aces in the studio today, here to provide their insights on this week's market activity. George Mateyo, Chief Investment Officer and Rajeev Sharma, Head of Fixed Income. As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our Wealth Institute on many different subjects and especially our key questions, article series, addressing a relevant topic for investors each Wednesday. In addition, if you have any questions or need more information, please reach out to your financial advisor.

For this week's economic news, initial unemployment claims for the week declined reflecting the continued tight labor market. Retail sales increased unexpectedly in August after a decline in July, showing some resilience in spite of higher prices. A potential strike in the railroad industry was averted. And the major news for the week, was the consumer price index report on Tuesday showing continued signs of persistent inflation at 8.3% year-over-year. And in some other components, inflation actually increased. The reaction was negative and the stock market fell 3 to 4% in anticipation that the federal reserve will continue and even speed up their monetary policy of raising interest rates next week at their September meeting.

So George, when we take all of this information into consideration, what do we think it means for the economy and investors?

Well, Brian, I think it was a week of bad news translated into bad news, but there's also unfortunately some good news that translated into bad news so let me walk you through kind of what I saw. I mean, I think obviously you talked about it, the story of the week, or at least the economic data point of the week seemed to be that, that consumer price report that came out midweek didn't fall as much as expected, it did come down a little bit from the prior print, but still very elevated. Some of the components were also generally high and frustratedly elevated and accelerating. So housing numbers were still up some 6% year-over-year, food prices up over 13% year-over-year, electricity up 15% year-over-year Gee, I have to keep going here, I guess one more. Gasoline prices, while gasoline prices have come down, they're still up 26% year-over-year.

Really, kind of a toxic stew of inflationary readings, really hitting the consumer pretty hard, putting a dent probably in the low end of the consumer 72, which is really unfortunate for sure. So again, that's definitely, I think the catalyst for some of the volatility this week.

We also actually had, fortunately, had some good news that was interpreted as bad news though. Actually the airline sector talked about actually more people coming through the turnstiles, that's actually a good sign for the economy, but it was kind of viewed as an inflationary impulse. Retail sales, probably not too bad. I mean, there's some kind of mixed kind of readings with that number, but people thought that was generally inflationary too, in the sense that the consumer still spending pretty good about things. Sentiment within the consumer line item is also been recognized as a positive.

And oddly enough, you mentioned jobless claims that didn't rise as much so that's actually a pretty good read through in terms of the employment situation. But again, some people thought that it might be more indicative of a future wage inflation. And then lastly, kind of good news, bad news. There's a large corporate that reported that pre-announced earnings. They talked about how volumes and activity kind of really come, some very economically sensitive information was revealed that the overall pace of the economy might be slowing. And that's kind of something that's kind through the market today where you seen that read through for major retailers or merchant. I'm sorry, major retailers and other companies that are experiencing probably some soft in demand. So definitely, unfortunately, a lot of cross currents on the good news, maybe even viewed as good news though, just to kind of put a little bit of a shinier print on this update, the producer price index actually rose as well, still very high, but didn't come in as much as expected.

And you also acknowledge that the rail strike was avoided, which I think could've been a real disaster at a really tough time. So there are a lot of puts and takes. It seems like the drum beat for the recession is getting a bit louder. Markets are responding in kind and we have a Fed meeting next week. And the Fed is probably dealt a really tough hand here. They've been dealing with a lot of volatility in the numbers, but also high inflation and there's some being, I'm sorry. There have been some people that have been calling for the Fed to back off a little bit. I've seen a few people now that suggest the Fed should just maybe slow down the tightening cycle, maybe take a break, kind of see where the economy is. There's other people that are saying, "Let's go to the max," if you will, and maybe raise rates a 100 basis points or one percentage point, which would be kind of a shock and off kind of at the moment.

So Rajeev, with that backdrop, what do you think the fed is thinking about right now? What do you think we're going to see from the next week and how do we process all these cross currents?

Thank you, George. And you're absolutely right. Those CPI numbers this week, the fixed income markets, at least they're pointing towards an even larger rate increase than we've been used to in the cycle. I mean, 75 basis points rate hike that was back on the table. As soon as that CPI number came out, that was harder than expected. And now there are talks about a 100 basis point rate hike because inflation is still not coming under control. I mean, so far the Fed has raised rates 225 basis points since March, but inflation continues to run hot and at a Fed funds rate of 2.5%, the effects of Fed tightening have still not been felt when it comes to inflation. And this is where the argument comes in, as you mentioned, George. Where do we go from here?

I mean, do we do a 100 basis points? Does the Fed become aggressive right now and try to control inflation? The argument really is that the Fed funds rate needs to be around 4%. And so in a month, where expectations were that the price pressures would cool down, the CPI print says a lot about where we are with inflation. And that is exactly why a 100 basis point rate hike is back on the table. A 100 basis point move higher in rates by the Fed would probably deliver stronger punch than 75 basis points. It would be a bold decision, it'll be something that gets us closer to a Fed funds rate that's a neutral territory.

But if you look at the treasury market, the curve continues to flatten. Traders are likely to continue selling on the rumor that the Fed will raise rates to 4.5% by March 2023 until further notice. And that's where the dot plot estimates and the Fed swap expects, they all seem to peak at that point. We have an FOMC meeting this coming Wednesday, we've got Fed speakers in a blackout period, so speculation is building on exactly what's going to happen, will it be 75 basis points? Will it be a 100 basis points? Consensus right now is 75 basis point rate hike but I really do feel that the 100 basis point is not off the table. If you look at the two-year US treasury note yield, it's risen more than 110 basis points. 1.1% in the past six weeks, it's going only one win and it's going straight up.

There's a lot of market expectations right now that the Fed's going to continue raising rates. They're going to be aggressive. What I find interesting in these markets is that the markets still believe that eventually there'll be Fed rate cuts in 2023. If you look at the fed funds future's chart, you see that the market's expecting that there'll be a 50 basis point rate cut in 2023 and Fed officials have not set anything about a rate cut right now.

So in essence, the bond market is fighting the Fed and we all know how that ends up. You never fight the Fed, a Fed that wants to fight inflation and maintain credibility is clearly going to do whatever it takes to control inflation and continue raising rates in order to do that. Bond yields are higher across the board. The two years approaching 4%, the curve is inverted. Obviously we've talked about that a lot, that the curve is inverted. We're on 45 basis points inversion right now on the 2/10s curve. So why take the risk of going further out on the curve when you're getting almost 4% in the two year? So we continue to maintain our stance of up in quality trades and shorter duration tactic in place. Thank you.

So I think the thing that really kind of zeroing on is what's really the inflation story, right? Because I think to some extent, it almost feels a little bit like the Fed is behind that inflation curve too, and not so much the fact that they haven't raised rates aggressively. But I wonder if there's an argument we could make Rajeev, that suggests that the CPI report was a [inaudible 00:09:26] indicator, right?

So some of those numbers came out through August and not to say that things have changed dramatically in the last two weeks, but I'm kind of wondering if things are starting to moderate and so maybe if there's things we could look towards where inflation is starting to slow down a little bit, certainly these talk about well recession that'll kind of eat away demand a little bit, that'll maybe take some of these pressures off. Supply chain pressures are easy at the margin, frankly, the idea of that higher prices is the cure for higher prices is starting to kind of play a little bit with energy, gasoline and things like that coming down again. They're still really high, but I'm kind of wondering if you could make the argument that sometime, maybe in the next three months.

So if the Fed does raise rates aggressively next week, but then if we fast forward two to three months from now, as I said, maybe inflation starts ease off a little bit and then the Fed might have overdone it, right? So I think the Fed has to be pretty careful here. Is there a case that we can make that you might start to see some of the inflationary pressures start to back off in the next two to three months? That's a really short term view, but I'm kind curious to get your thoughts.

No, it's a very good point, George. I really think that there is a case to be made. I mean, we saw the consensus that inflation, the CPI part was going to be lower. It had everything to do with where gasoline prices were going. We had seen a continued decline of gasoline prices and I think the estimation was that, that was going to impact the CPI numbers so strongly that we would see a minus 0.1% print month-over-month on CPI, that didn't happen. And I think that has everything to do with food prices continue to be elevated, government spending continues to be elevated so we need to see some other factors besides gasoline, that's going to impact CPI numbers. We could see a cooling down. I do think that the Fed is doing what they have to do, but we could see that early next year.

And I think the market will react accordingly. I think what's going to be the pivotal point is just by getting a strong CPI print or something that seems that inflation is cooling off. I don't see how that changes the Fed's resolve about trying to get to that 2% target rate on inflation. So the Fed's going to continue to do what has to do to get there. If the Fed decides that, "Okay, 2% is maybe too low, let's go 4%." I think the Fed loses some credibility at that point, so you're going to see a lot of movement in the inflation numbers to get us down to a level where we can actually believe that all these monetary policy moves are working.

And Rajeev, on the same line of thinking the Fed is set all the way back from July many, many times about data dependency that they're going to go month-to-month, week-to-week, so to speak. What are your thoughts on their ability to navigate that successfully?

I think that you're absolutely right, Brian. They point to data dependent monetary policy. And I think that something that they have to do, it's interesting that they're not giving it for guidance anymore. So we are at the whim of every single data point that comes out. So when we look at unemployment numbers, that's very important for us.

As you know, if we see an uptake in unemployment, I think the market perceives that, "Oh, the Fed's going to cool down now, they're not going to do anything." If you see a CPI print we saw this week, you're like, "The Fed is going to continue doing what they have to do." So I think it causes more volatility in the market, but at least we could point to concrete data. I mean, we are all data-driven people anyway and I think that the Fed is that way as well. They continue to look at data, they continue to make that their point. They continue to say that we have a dual mandate, but really if you look at the market, even though it's a dual mandate for the Fed, you know that they're focused completely on [inaudible 00:13:21].

But George, what do you think this means in terms of portfolio construction then, as we think about what's happening in the stock and bond markets relative to other opportunities in the investing world?

Well, Brian, I think in the short term and Steve's on holiday, so I'm sure he'd be quick to point out the fact that volatility has started. Finally, [inaudible 00:13:43] head a little bit. We've been talking for quite some time that volatility's been somewhat muted in the face of this economic [inaudible 00:13:50] that we've been experiencing for the past couple of months. And volatility is measured by this thing called the VIX index. And the ticker is fixed, if you want to look it up is trading right now around 28, which suggests that there's some unease now that's starting to get priced in the market. And typically 6, 12 months, hence or so, once you start to see these readings pop up, equity markets are generally positive that it's not a straight line, but the history is pretty decent. And again, it's always the time to probably lean into something when things feel the worst.

We'd probably want to see it a little bit more volatility, frankly before getting really aggressive on equities again. But I do think that's one thing that you can kind of point to in the near term that maybe volatility's gotten a little bit elevated. Longer term running, I think that there's a case we've been trying to make that, in this environment where both unfortunately stocks and bonds have been under pressure, it's important to look at other things and maybe new tools being used in your portfolio. So real assets have been some provided some refuge there, some apps or return vehicles have also been somewhat additive. Unfortunately, it's been kind of a pretty broad selloff that's really hit most risk assets. So we're trying to find things that are somewhat uncorrelated as much as possible. Those things are hard to find, but having pockets of opportunities that are available to certain clients that might be of interest with inside the realm of new tools, and those have provided some benefit of notification.

But I'll say the one big thing that kind of got my attention this week to close out the podcast, maybe deserves a bit of mention is the fact that there really still are a lot of good things happening in the world today.

I was actually down in the southern part of Ohio this week and talking to a large community foundation, they'd actually communicated that there's just a record level of contributions coming to their fund, which really was, I think, a testament to the record level, I guess the overall feeling of good that actually takes place in the world. And I think you could kind of back it up further by news of a company called Patagonia, which my family teams seems to support with buying a lot of t-shirts from them. But all joking aside, it's just remarkable to see what they're doing with their company and kind of having a really philanthropic bent, kind of expressed in a really meaningful way. So despite the fact that we have a lot of negative headlines, a lot of economic uncertainty right now, there's still a lot of good that's being done in the world. And I think that needs to, gets more acknowledgement so that we'll wrap up the call and thanks everybody for listening, have a great week and we'll talk soon.

George and Rajeev, thanks for your insights, we appreciate it. And thanks to our listeners for joining us today, be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app. As always, past performance is no guarantee of future results and we know your financial situation as personal to you, so reach out to your relationship manager, portfolio, strategist, or financial advisor for more information, and we'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you achieve your financial success.

The Key Wealth Matters podcast is produced by the Key Wealth Institute. The Key Wealth Institute is comprised of a collection of financial professionals representing key entities, including Key Private Bank, KeyBank Institutional Advisors, Key private client and Key Investment Services. Any opinions, projections, or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.

This material is presented for informational purposes only and should not be construed as individual tax or financial advice. Bank and trust products are provided by KeyBank National Association, member FDIC and Equal Housing Lender. Key Private Bank and KeyBank Institutional Advisors are part of KeyBank. Investment products, brokerage and investment advisory services are offered through Key Investment Services, LLC or KIS, member of FINRA, SIPC and SCC registered investment advisor. Insurance products are offered through KeyCorp Insurance Agency USA Inc, or KIA. KIS and KIA are affiliated with KeyBank. Investment in insurance products are not FDIC insured, not bank guaranteed, may lose value, not a deposit, not insured by any Federal or state government agency.

KeyBank and its affiliates do not provide tax or legal advice. Individuals should consult their personal tax advisor before making any tax-related investment decisions. This content is copyright by KeyCorp 2022.

September 9th, 2022

Welcome to the Key Wealth Matters podcast, a series of candid conversations with leading experts about how individuals and organizations can grow and protect their, finances tailored around current events and trends. Here's your host for today's podcast, Brian Pietrangelo.

Welcome to the Key Wealth Matters weekly podcast, where we casually ramble on about important topics, including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to unlock the mysteries of the markets and investing. Today is Friday, September 9th, 2022. I'm Brian Pietrangelo, and welcome to the podcast. As we head into the weekend, I'd like to pause for a moment to remember, 21 years ago, the anniversary of 9/11 and honor the families, victims, and all the brave individuals that offered their lives and their efforts in order to help. So joining me today, I'd like to introduce our panel of investing experts here to provide their insights on this week's market activity. Steve Hoedt, head of equities, Rajeev Sharma, head of fixed income and Ather Bajwa, director of fixed income research. As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our wealth Institute on many different subjects and especially our key questions article series, addressing a relevant topic for investors each Wednesday.

In addition, if you have questions or need information, please contact your financial advisor. For this week's market and economic data, we had a short week due to the labor day holiday on Monday, but the rest of the week was fairly quiet and also interesting at the same time. On Tuesday, we had some services PMI information come out to talk about a little bit of a weaker demand and a drop in the overall index from July into August, seeing new orders in contraction territory, and also seeing moderating hiring activity. Then on Wednesday, the federal reserve came out with their beige book and talked about roughly half the districts across the nation were seeing slight to moderate growth and the other half were seeing slight to moderate declines.

And then on Thursday we had the unemployment claims, again good news from this perspective. 222,000 initial unemployment claims were down 6,000 from last week, continuing to show at least strength at this present time in the employment market from an unemployment perspective. And then also we had a little bit of a market rally midweek for two days. So that was good news. And finally, we had some fed speak with both Jay Powell and his comments and also Leo Brainer. So we'll dig into that as part of our overall conversation. So Steve let's pitch the first question to you. We've had a little bit of a rally during the week. What do you think's behind it? What do you think it means for investors?

Brian, we definitely have seen stocks balance this week. And quite frankly, when I take a look at where the S and P 500 sits, really, we start to get concerned when the S and P 500 or really any major index goes below significant moving averages. So in this instance, it was the 50 day. And when that rally, or when that sharp move fails to bounce back and recover above that moving average, we tend to think about that in terms of being a warning sign for trend change. So this week, our last week, we obviously cut below the 50 day, really sharply on this pullback as the market digested, maybe a slightly more hawkish fed than what had been anticipated earlier in July and August. And this week we've recovered to that 50 day. So I think when we've talked over the last month or two, about there being signs of momentum in this market, signs of potential trend change that think we're looking better, and that we should be looking on the more optimistic side that here we are. We knifed below the 50 day, and now we've recovered back above it.

And what to me that means is that it's a signal that I think we really do need to take seriously the idea that this is a positive trend change in the market that we've seen over the last month and a half. Now there's a lot of skeptics out there about this. It's very hard to find bulls, and I totally understand it. It runs completely counter to the market narrative that we hear on an ongoing basis where we've got the drum beats of fed tightening this, terrible European situation that, recession coming in 2023 this, politics and all kinds of other problems that, and bull markets climb a wall of worry. Goodness knows that we got plenty of things to worry about right now. So I see the market price action this week as being something that's actually really very favorable. When I look at earnings, earnings continue to do fairly well.

I mean, they've been better than what people have expected market ... That we've seen expectations marked down. I think less than what people had thought for next year. And it provides us with a pretty decent bullish setup as we head through this weakest seasonal period of the year over the next three plus weeks or so. And once we get past that, I mean, you're into the Santa Claus rally type of season again, as we head into the deeper fall and into December. And I think we see the potential here for equity investors to start chasing this market if we start to get a significant move higher from here.

And thinking about that from the terms that we have a fed meeting this month, Rajeev, what do you think that correlates to what we're seeing from the fed speak this week and what's going on with yields?

Well, Brian, the fed chair Powell had another opportunity really to reiterate his and the fed's stance on doing whatever it takes to combat inflation. His latest public Q and A, it was a little longer than seven minutes that we saw at the Jackson Hole meeting August 26th. But what he said was the same story. I mean, it's the fed is committed to reduce inflation, even if unemployment increases. And this puts the FMC on a path to raise interest rates again by 75 basis points for this September 21st policy meeting. Basically keep at it till the job is done, and that's the message that points to a fed that's been aggressive. They've been raising rates at the fastest clip that they have been doing since the 1980s. We've seen the benchmark federal funds rate from near zero in March to a range around two and a quarter, two and half percent in July.

And really it bodes two main questions heading into this September 20, 21st F1C meeting. One is how much higher does the fed expect to raise rates in the coming months? And two, what steps do they take to get there? Several fed officials have signaled that they would expect the fed funds rate closer to 4% by year end. That's about 1.5 percentage points higher than where we are right now. That could be accomplished by a various level of rate increases over the next remaining three fed meetings this year. So if we look at it in simplistic terms, we could do 75 basis points this coming September meeting and then smaller increases for the next two meetings. But I mean, I think the messaging has had been very clear by fed chair Powell this week really wants to get the message home that the fed's not done yet.

They'll do whatever it takes to combat inflation. And that means raising rates. I think the fed was a little spooked at the market. The way it reacted after the last CPI report came out, we saw rally in the markets. We saw treasure yields go down. That's not really what the fed likes to see, the fed's on a mission right now. They want that message to be clear. They came out as we all know, with the Jackson Hole meeting with the statement, the seven minute statement that we're not done yet, we're going to keep on raising rates. The market didn't like that. We saw rates climb back up. I think that's going to happen again because we do have a CPI report coming on on September 13th. And then again, we could see maybe we beat expectations. Let's see what happens, but we could see another rally in the markets.

And then here we go, fed meeting comes up and fed reiterates the message again. The US labor markets remain strong this year. And I think fed chair Powell highlighted that in his Q and A this week. We had other fed officials that try to convey the same message that rates need to move higher for longer. Fed reserve vice chair Brainer said that the fed will have to raise rates from these restrictive levels and keep them higher for some time, basically in it for the long haul to get inflation down. If we see another 75 base point rate hike on the September 21st meeting, this will be the third 75 base point rate hike in a row. Brainer did say that some point the tightening cycle may add a risk to the market that this could become a two-sided risk, but it's important to avoid pausing rate hikes too soon.

And based on all these comments, fixed income markets have reacted that way. Rates have moved higher. This has been the case since the end of August. If you look at corporate bond issuance, we did see many issuers come to market this week. And I would anticipate that this will continue until we get close to that September 13th CPI release. Another cue to take from the market is the ECB. The ECB, they raised rates this week, 75 basis points. It was an increase, again, something that the market had anticipated, but if you look behind this, the 75 base point increased by the ECB. Again, the theme is common, an attempt to battle inflation and a very bleak economic outlook for the Eurozone.

And so the move wasn't a surprise, but it's still historic nonetheless. After all the ECB has been accused for a very long time moving very slowly. So they did do the 75 [inaudible 00:10:15] increase and they also slashed their forecast of economic expansion in 2023. So a lot of moving parts here, but I think story remains the same, do whatever it takes to combat inflation. That means 75 basis points is the consensus right now. It's almost 90% of the consensus right now for 75 basis point.

So one last question for you, Rajeev, as the calendar falls, this particular month, CPI print comes out and then the F1C meeting is the following week. So what is the quiet period? And when do you expect to hear any last comments from any fed speak before the F1C meeting?

The quiet period is a week before the fed meeting. So you could still see some speakers come into play next week, but after that's the quiet period, it's a blackout period. And it's a very interesting point. When there's a blackout period, right before the fed meeting, and generally a week before the fed meeting, that blackout period, a lot of things happen. One, the market starts to anticipate things because they're not hearing anything of the fed. The other thing is you see corporate issuers come to market because there's not going to be this noise of fed speakers coming out. So it's going to be interesting to see if that continues. I had mentioned corporate issuance. September is generally a very busy month for corporate issuance. This month may not be as busy. And I think it's because we have these big numbers coming up. We have the big dates coming out. September 13th is a big date. September 21st is a big date, but anytime there's a mute by fed speakers, I think corporate issuers try to get involved in that

Crazy thing is though Brian really, there is no quiet period anymore because we've got unquote federal reserve spokesman, Tim Ross from the Wall Street Journal, who seems to be a very close confidant of some of those fed heads. And it seems like news seems to get into the market, whether it's a quiet period or not.

Steve is absolutely right, because last time we saw it also. I mean, Wall Street Journal put an article out and your expectations of 50 base point hike goes to 75 within like a few minutes after that article comes out.

Yep. Great point. So with our final opportunity, we're going to talk to Ather Bajwa. High yield environment seems to be a little bit different than it has been in the past, and we're also talking a little bit about the value of tips. So Ather, what do you think what think's going on there?

Hey, thanks Brian. So the high yield market has actually behaved quite in line with what you would expect in a very strong market. We've seen spreads and high yield prices stay relatively tame during this whole market turmoil over the past several months. So any selloff has been pretty consistent with a slowdown in economic terms. Earnings might be slowing down. Certainly the growth trend seems to be turning negative, but nothing like a recession. So they have been very well behaved in a very volatile market. So even today as we stand high yield spreads are roughly about 500 basis points. That's a fairly normal. It's in the 50th or 60th percent. If you were heading towards a recession or some sort of major market [inaudible 00:13:19] you would expect high yield spread to be north of 1,000 basis points. So all of those things sort of tend to say that the market is in pretty good shape overall.

We've seen modest issuance this year compared to last year. We're seeing people really setting up the balance sheet for the long term. And most importantly, we are seeing shrinkage in the market. So the market is actually showing less debt than it has before. So just this year, the high yield market has shrunk by about 8%. And the cash on balance sheet is the highest in recorded history of the index at 140 billion, which is quite remarkable. So overall, the picture in high yield sort of is saying, or he's telling us that it's a stable market condition. We don't see other than sort of normal economic or market related downturn, nothing sort of substantial. Similarly from the default side, the picture remains pretty steadfast. We haven't seen distress tests, distress debt exacerbate the problem. It's been pretty steady at roughly about 20% of the market for the past several months. That's fairly typical for the market conditions that we're in right now.

That's a great summary. The other topic that we've heard a lot about interest in relative to the fact that inflation is high as tips. So can you give us an overview of your comments on tips either?

So tips are treasury security. So these are issued by the US Treasury, backed by full faith and credit of the US government, but they're slightly different from typical treasury bonds in that both their principle and their coupon is actually related to the CPI, the consumer price index, versus most other treasuries are issued with a fixed coupon and sort of behave in the market based on what the market expects interest rates are going to do, what inflation is going to do, what economic conditions sort of we are seeing, both in the US and globally. So tips are much more in tune with what's going on inflation and we've seen pretty dramatic changes within what the market expects over the short term and long term inflation is going to do. So if you look at just the tips pricing in March, tips were pricing in inflation expectations north of 6%.

So the one year inflation rate that the market was telling us inflation will average out to be is about 6%. Today that number has come down to about 1.71% as of this morning. So overall market sort of certainly is in line with this expectation that inflation is largely, the scare of inflation is behind us, and that we should expect significant moderation in inflation expectations and realize inflation going forward. So the tips market is behaved accordingly. This is a very good idea for investors who are concerned about inflationary risk, that they can buy and target inflation to their specific needs. So if you're worried about inflation in the short term, you can buy short term like one, two, three year tips bonds as compared to something like treasury. But if you have a longer term investment horizon, you can buy and hedge out almost your portfolio inflation risk by incorporating some of these inflation and tip sort of related security. So for 10 years, 20 years, very deep, very liquid market. But overall, the market is telling us that they expect inflation to moderate in the coming, literally months and year.

A great discussion today. So Steve, Rajeev, and Ather. Thanks for your insights. We appreciate it. And thanks to our listeners for joining us today, be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app. And, as always, past performance is no guarantee of future results. And we know your financial situation is personal to you. So reach out to your relationship manager, portfolio strategist, or financial advisor for more information, and we'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you achieve your financial success.

The Key Wealth Matters podcast is produced by The Key Wealth Institute. The Key Wealth Institute is comprised of a collection of financial professionals representing Key entities including Key Private Bank, Key Bank Institutional Advisors, Key Private Client, and Key Investment Services. Any opinions, projections, or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.

This material is presented for informational purposes only and should not be construed as individual tax or financial advice. Bank and trust products are provided by Key Bank National Association, Member FDIC and Equal Housing Lender. Key Private Bank and Key Bank Institutional Advisors are part of Key Bank. Investment products, brokerage and investment advisory services are offered through Key Investment Services LLC KIS, member FINRA/SIPC and SEC registered investment advisor. Insurance products are offered through KeyCorp Insurance Agency USA, Inc., or KIA. KIS and KIA are affiliated with Key Bank. Investment and insurance products are not FDIC insured, not bank guaranteed, may lose value, not a deposit, not insured by any federal or state agency. Key Bank and its affiliates do not provide tax or legal advice. Individuals should consult their personal tax advisor before making any tax-related investment decisions. This content is copywrited by KeyCorp, 2022.

September 2nd, 2022

Welcome to the Key Wealth Matters podcast, a series of candid conversations with leading experts about how individuals and organizations can grow and protect their finances, tailored around current events and trends. Here's your host for today's podcast, Brian Pietrangelo.

Welcome to the Key Wealth Matters weekly podcast where we casually ramble on about important topics, including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to unlock the mysteries of the markets and investing. Today is Friday, September 2nd, 2022, I'm Brian Pietrangelo and welcome to the podcast.

So with me today, I'd like to introduce our panel of investing experts here to provide their insights on this week's market activity. George Mateyo, chief investment officer, Steve Hoedt, head of equities, and Rajeev Sharma, head of fixed income. As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our wealth institute on many different subjects and especially our key questions article series, addressing a relevant topic for investors each Wednesday.

So for this week's economic data, we had a number of reports, but most of them centered around employment which is interestingly enough as we head into the Labor Day weekend. So first we had JOLTS report, which is the Job Openings and Labor Turnover Survey, which indicates that job opening stayed consistent with around 11.2 million job openings in the economy. And then this morning we had a number of reports relative to the employment situation. First 315,000 non-farm payrolls were added to the economy, that was right in line with expectations at about 300,000. In addition, the overall unemployment rate ticked up a bit to about 3.7%.

So George, as we think about these indicators, and a number of others that we've looked at, how does it affect the economy, maybe Fed policy, and anything else that we're watching on behalf of investors?

So I think Brian, overall, the employment report was better than expected so we're talking to you just on the cusp of Labor Day and I think most laborers should feel pretty good about things based on what we saw in June. I'm sorry, July rather. Numbers were revised down a little bit from the prior months, but overall the employment report was a pretty solid one coming in about 315,000 jobs added. Private sector payrolls were quite robust at about 260,000 and that's a good bit of HUD of where we've been prior to the pandemic. I think the Fed will also probably do this as business as usual and they'll probably continue to think about raising rates pretty aggressively. Wages didn't rise more than expected, they were still up about three tenths of 1%, I think, month over month and that puts us at about 5.2% year over year, which is still pretty robust.

The employment rate itself actually did rise a little bit because actually there were more people coming back to the workforce, so you might see some of those numbers that suggest that employment is actually starting to go up again and it's true, but some of the numbers under the hood suggest that actually the labor market is pretty strong.

We also got this reading, Brian, earlier this week called JOLTS, which is probably less followed, and it stands for Job Openings and Labor Turnover Survey, kind of a mouthful there. But I think it's an interesting read because it also has some interesting statistics beyond the numbers that get reported on Friday morning here, the first Friday of the month. And what we saw in that report is that the labor market is really... I guess it's a very tight labor market basically, at the end of the day. There are still about 11.2 million jobs that are open right now and that's actually almost two jobs for those that are unemployed. So that ratio of two to one is probably too hot for the Fed's comfort level, that's something that I think J Powell has talked about from time to time. So I guess I think it feels like it's still a pretty robust labor market and with that the Fed is probably going to be pretty aggressive going forward, I would think. Rajeev, what is the market expectations now for the Fed as we start thinking about their next meeting here in September?

Great question, George. We did see the unemployment rate take up to 3.7%, that's the highest level we've seen since February, but it was for good reasons. More people joined the labor force, they're looking for work. I think the labor force participation rate is what I was focusing on, which jumped from 62.4% in August from 62.1% July. So with that, I think the Federal Reserve will most likely be happy with this report, it shows a cooling in wage gains in the month, and also from a year ago. This shows that the Fed's aggressive monetary policy is really starting to ease wage pressures. What's there not to like for the Fed, really? To be honest with you, it's like payrolls a little over forecast, unemployment rate is higher, and the average hourly earnings are just a bit weaker, strong job gains.

Immediately we saw the move in the two year, which was up almost five ticks to 3.42% and our two tenths curve inversion that we've talked a lot about is a little less inverted today. We saw this two tenths curve, both steep and right after the number came out, traders are really pairing back bets on the Fed hiking. Before the number we saw a two tenths curve around 26 basis points, now we see it around 20 basis points, and I feel all eyes are really going to be on the September 13th CPI data.

Wages are climbing faster than policy makers would like, but it's difficult to see this report taking 75 basis points off the table for September 21st. Are we going to have a CPI number that's going to be up September 13th? And that's going to be the next big number that we're going to look at. And that's really going to dictate whether we have 50 basis points on September 21st or we have 75. I feel like this number right now, it keeps 75 basis points on the table, and I think that's pretty much the aggressive stance that the Fed will continue to take. We've had several Fed speakers talk about the benchmark interest rate could go above 4% and stay there, at the current level it's too restrictive. Now I think that this number really bodes well for that 75 basis point hike, I think the Fed remains aggressive.

Do you think, Rajeev, that the Fed is watching any one particular indicator of inflation? I mean, I guess going back in time they were really focused on this thing called PCE, the Personal Consumption Expenditures index, which is one way to calculate inflation. But the CPI report that we now seem to focus more on contains a lot of things that Fed can't control, with respect to energy and food and so forth, so is that the new benchmark? And maybe what you said just a minute ago I think resonates too, where the employment situation is fine and so it just gives the Fed the green light to go forward and there's almost nothing to see here, move on. But as you mentioned, inflation is starting to become more of a focal point and so is it CPI the right thing that we should be watching?

That's interesting because the Fed has always talked about the PC, that's their benchmark, that's what they look at. But if you look at how the market reaction was the last time we saw a CPI report, that was a little below the expected high that we saw in the market. We saw the market rally as if the Fed's going to stop raising rates. The Fed came out and [inaudible 00:07:14] came out and Jackson Hole made it very clear that there are no way they're stopping right now, we have a lot of wood to chop. And I think they continue to look at the PCE report, the CPI report really is something the market's really looking at a lot. And I could envision that, say we have a cooler print on September 13th and the market does exactly what it did two weeks ago where you start seeing a rally in rates and then all of a sudden the Fed comes out on the 21st and says, "No, 75 basis points, we have a lot of wood to chop, we still have to get inflation down."

So on the inflation side of things, Steve, I guess one thing that's caught my attention lately is what's happening in the energy market, in particular the price of crude. I've seen some relief at the pump which is welcome news for sure but at the same time, there is maybe some signal there with respect to what's happening in the broader economy. I mean it wasn't, I think, more than just three months ago that the price of crude was at $120 a barrel, this morning it looks like it's around 88 or so, so it's not in a complete free fall but it's really come down quite a bit. And of course there's a lot of headlines and a lot of, I guess, volatility around what's happening in Europe and Russia in particular. So what are you seeing in the energy market that we should probably think about with respect to inflation and maybe broader market signals?

Well, I'll tell you George, I mean for me, I think that the key here has been that I think the oil price likely should be even lower than where it is today if we were thinking that there was a normalization in where crude oil prices were being. I mean, if we think about the recessionary impulse that had coursed its way through the markets, that's really what caused the price of oil to come down. I mean, if we think about it our economy on a global basis really is dependent on energy to go. And when economic activity comes off, demand for energy comes off the margin and prices are set at the margin. So we would've expected, if we were really heading recessionary, to seek crude oil prices materially lower. I mean the last time we had a move like this, and let's get the minus $35 price at the COVID lows out of the question, but typical recessionary prices for crude oil, let's say it was between 30 and 40 bucks and we saw price come down to around 85, but not go any lower.

Now that tells me that the market is really tight for crude on a global basis and maybe if the economy were a little bit weaker, we might see prices move back towards 60 or 65 bucks. But I think that 60 to 65 bucks feels to me like the new 30 to 40 bucks. So that's something to think about because if we get into a scenario where the economy starts to improve again, crude oil prices are going to act as a governor on that because prices are going to move higher very fast. So I think it's something to keep an eye on to be sure, but clearly the price at the pump has been a tailwind for a consumer sentiment here as we've moved through the summer, because really we haven't seen prices move higher for retail gasoline since the 5th of June, so it's been quite a while.

Yeah. Also, this week was a pretty risk report from consumer confidence. That was one thing that we were signaling a couple weeks ago that was looking pretty dire in the sense that most consumers felt pretty grim about things, but it seemed like the numbers turned around maybe again in reflection to what we've seen at the pump as well. And because, as you said before, that is kind of a tax cut when you start to see that level of, I guess, easing, if you will, of pressures from that level of inflation. But the other thing, I guess, Europe is still dealing with these things in a really acute way and the prices of energy over there are just skyrocketing and the situation doesn't seem to be getting much better. If anything, it looks like it's going to get worse before it gets better. Have you seen any follow through or lead through from what we might see in Europe to other parts of the world, just back to energy, Steve? Or are we just more independent now as a consumer of our own energy relative to where we were say in the seventies?

Yeah. Look, I think that it's very clear that the US is in a much better strategic position from an energy production perspective than we've been really in our memory. And the fact that we're tooling up to potentially export more natural gas to Europe to help their situation is part and parcel of that. At the end of the day though, I think that what we will see, we will eventually see a little bit of upward pressure on natural gas prices here in the US because one of the things about dealing in global commodities, natural gas has been stranded here in the US, it's part of the reason why our natural gas prices are so much lower than the European markets. And if we actually start to export significant volumes of gas to Europe, that'll start to pull our prices upward toward the global price or the global liquid natural gas price for shipment elsewhere, so it's something to keep an eye on.

And what's the Delta there? What's the difference between, as you said, our price of natural gas versus the rest of the global price, if you will? I think you said it. Yeah, go ahead.

Yeah, normally it's probably three or four times. Right now, it's much higher than that. Much, much higher.

Three or four times though?

Yeah, correct. Because it costs a lot of money to turn natural gas to liquid and then to load it on a container or a tanker and then to have that tanker travel halfway around the world and then to reliquefy or deliquefy upon arrival, or what they call regasification. So it is an industrial process and that adds a ton to the price. So yeah, you see global shipments of LNG are significantly higher in price. And quite honestly, that's why the infrastructure in Europe is set up the way that it is. Gas from Russia that comes in via a pipeline is way more economic than to build liquified natural gas terminals all over Europe and ship it in from everywhere else. The problem is though that that makes the ability of potentially bad actors to hold you hostage in a different scenario for geopolitics. But if we were just talking about what's the most efficient thing, oh, it's clearly to take gas by pipeline and not by tanker.

Well, certainly a lot to pay attention to this fall. Of course, we've got midterm elections starting to heat up here in the States and that's always a difficult thing to forecast. I'm sure there'll be a lot of odds around that, but I think we'll probably find a way to get through that as well because those things are usually short term in nature, even though there's going to be a lot of rhetoric as we get towards the fall. But meantime, as we said before, I think we're not in a recession right now. Economy still seems to doing relatively well here in the United States, particularly on the labor market situation, but we've got a pretty active Fed as Rajeev talked about as well. So stay tuned, I think it's going to be a pretty interesting fall and we'll make sure we keep everybody abreast of our current thinking as we go forward.

Well, George, Stephen, Rajeev, as always thanks for your insights. We appreciate it and we certainly hope that everyone has a safe and enjoyable Labor Day weekend. Thanks to our listeners for joining us today and be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app. And as always, past performance is no guarantee of future results and we know your financial situation is personal to you. So reach out to your relationship manager, portfolio strategist, or financial advisor for more information and we'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you achieve your financial success.

The Key Wealth Matters podcast is produced by the Key Wealth Institute. The Key Wealth Institute is comprised of a collection of financial professionals representing key entities, including key private bank, key bank institutional advisors, key private client, and key investment services. Any opinions, projections, or recommendations contained here in are subject to change without notice and are not intended as individual investment advice. This material is presented for informational purposes only and should not be construed as individual tax or financial advice.

Bank and trust products are provided by KeyBank national association, member FDIC and Equal Housing Lender. Key Private Bank and KeyBank Institutional Advisors are part of KeyBank. Investment products brokerage and investment advisory services are offered through Key Investment Services LLC or KIS, member of FINRA, SIPC and SEC registered investment advisor. Insurance products are offered through Keycorp Insurance Agency USA Inc., or KIA. KIS and KIA are affiliated with KeyBank. Investment and insurance products are not FDIC insured, not bank guaranteed, may lose value, not a deposit, not insured by any Federal or state government agency. KeyBank and its affiliates do not provide tax or legal advice. Individuals should consult their personal tax advisor before making any tax related investment decisions. This content is copyrighted by KeyCorp, 2022.

August 26th, 2022

Welcome to the Key Wealth Matters Podcast, a series of candid conversations with leading experts about how individuals and organizations can grow and protect their finances tailored around current events and trends. Here's your host for today's podcast, Brian Pietrangelo.

Welcome to the Key Wealth Matters Weekly Podcast, where we casually ramble on about important topics, including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to unlock the mysteries of the markets and investing. Today is Friday, August 26, 2022. I'm Brian Pietrangelo. And welcome to the podcast. With me today, I'd like to introduce our dynamic duo of investing experts, here to provide their insights on this week's market activity. We've got Steve Hoedt head of equities, and Rajeev Sharma, head of fixed income. As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our Wealth Institute, on many different subjects, and especially our Key Questions Article Series, addressing a relevant topic for investors each Wednesday.

For this week's economic data, we had a few major reports centered around GDP, consumer spending and inflation. So data released last month as the first estimate for real GDP for the second quarter of 2022 showed a decline of 0.9%. And yesterday the second estimate was revised upward to a decline of only 0.6%. Consumer spending data out this morning showed some mild slowing versus last month and the core personal consumption's expenditures index, otherwise known as PCE inflation, which excludes food and energy. And as the preferred measure of inflation for The Fed showed month over a month increase in July of only 0.1% versus 0.6% in June. And then the year over year increase of 4.6% in July, which was lower than the 4.8% in June. Both numbers indicating signs that inflation may be peaking.

Initial unemployment claims for the prior week, came in at a 243,000, which has been at a consistent level for many weeks now, which is favorable in that we're not seeing incremental increases in unemployment claims yet. And finally, as we speak today, Kansas City Fed is hosting their annual economic policy symposium in Jackson Hole, Wyoming, with Chairman Powell providing his comments. So Rajeev let's kick off the conversation with some of your observations and insights with regard to the economic data as it relates to Fed policy and what The Fed might do as far as interest rates.

Right, Brian, I mean, I think that we were anticipating this speech by The Fed Chair Powell. We have seen economic data over the last few weeks, which kind of made the market anticipate that maybe The Fed is going to slow down. Maybe they'll have more of a dovish message. Maybe they're going to be ready to pause sometime next year. I think Fed Chair Powell had to come into this speech today at Jackson Hole Symposium and come out there pretty strong with a hawkish statement. And that's exactly what he did. He came out there and he made his speech and he reiterated where The Fed stands in their rate-hiking cycle. As expected The Fed Chair, restated the resolve for tightening monetary policy to fight inflation. And the tone was hawkish. And there are a couple of very important points from his speech that I thought really are dictating where the market's going this morning.

First, you said the size of the September rate hike, it really hinges on data. Totally on data. So again, reiterating the fact that The Fed is looking at being data dependent, and they're going to continue to do that regardless of what that last CPI print was. Even though those lower the next market expectations, The Fed still has their resolve... that we're nowhere near that 2% inflation rate that they're looking at their target for. So, they'll continue to raise rates until they get there. They also reiterated that restrictive policy is going to be there for some time. So again, this is very important because the market is really anticipating, maybe in September, 50 basis points. I think this puts 75 right back on the table, again. They stated, he stated, in his speech today that there might have to be another outsized rate hike for the next meeting. So again, 75 is back on the table again.

And he also reiterated that history cautions against prematurely loosening policy. So again, it takes away some of that argument that we've been seeing that, okay, The Fed's going to pause, and there's going to be a slow down, and maybe they'll start cutting rates sometime next year. I think we've talked about this before on the calls also, that The Fed has never stated that in any of their commentary in the past, neither have any of The Fed Governors stated that. They're really trying to get the message out there, that they need to continue to raise rates. They need to bring down inflation. Even if the economy suffers in the process, they will continually do that.

The market impact of this was very interesting. The five year yield jumped three basis points to 3.2%. It led The Treasury Market Sell-off as he was speaking. It indicates that we're going to stay higher for longer. And now I think when looking at traders, they're anticipating 1.33% of additional tightening that's being priced for the rest of the year, if you look at the December OIS contract. So that's up from 1.29%, before Powell hit the tape today. So it's going to be really interesting to see where we end up as far as what happens in September. But I think this speech was anticipated to be hawkish. Up to the speech, we've seen rates move higher in that anticipation. So it should not be a surprise of what he said in about seven to eight minutes, but I think it does put a reality check back into the market.

So-

Steve, what do you think that means? Yeah, go ahead, Steve.

Yeah, I was just going to say, definitely seems to me that the Chair did a very good job of threading the needle vis-a-vis market expectations, because coming into the speech today, it's hard to say this, but almost anything that he was going to say, had the potential to be viewed as being too dovish, because the market expected him to be pretty hawkish. So if he came in and was just less hawkish than the market expected, we had the potential to see the market read it as a dovish commentary. And if you look at the market reaction right now today, we're not seeing that. So I think that Chair Powell did a pretty good job of, I would say, exceeding the expectations for what was necessary in order to get the message across. So we don't have the equity markets ripping today, because we have the idea of some big dovish pivot coming, or that there's some kind of a large cutting cycle coming next year.

I thought it was very interesting if you go through and you read the text, or if you happen to listen to the speech, it's pretty clear that they're willing to put the economy into a mild recession in order to meet the goal of taming inflation. When you look at batteries of indicators, about how far away is the economy from recession, quite frankly, we're pretty far, while the GDP numbers have come in on negative. Anytime you look at more broad based economic activity indices, you do not see them indicating recessionary conditions. And it's the same thing when you look at the employment reports, the job situation, you don't see anything indicating recessionary conditions. And I think really what is so difficult for the market this time and The Fed, is because of the pandemic recovery and the impact that we've seen and the changes that that has generated economy wide... work from home, what's returned to office, like all this kind of stuff. The puts-and-takes really have made this economic cycle different than any cycle that we've ever seen.

And I think that that has created problems for not only policymakers, such as The Fed, it's created problems for market participants to try to figure out exactly what the heck is going on. And I think we're finally getting to the point where we're starting to get a pretty good grasp on this. And that is, that The Fed can tighten, The Fed can keep rates tight for a while, but it doesn't necessarily mean the same thing that it maybe meant before for equity markets that equity markets have to tumble for this. But it also means I think that we're likely not going to get the Roman candle scenario, which is The Fed cutting rates aggressively to stave off a recession, in the face of weaker economic activity, which, if you take the other side of that trade, you could see equity markets just take off. I don't think that's in the cards whatsoever right now. And when you look at the market today, we closed last week at 4228, we're right now at roughly 4190, so all of this back and forth over the course of the week has resulted in a grand total of about 35 S&P, 500 points to the downside. So it tells me that market has done a pretty good job of digesting this already, Brian.

And Steve and Rajeev, one of the things that both of you look at for those signs of whether we're headed toward a recession sooner, rather than later or not, is the status of credit. What are your thoughts in that area?

That's a great question, Brian. I think credit has been very well behaved, especially in the month of July. We saw credit rally, high yield, investment grade, they both rallied. We have talked about it before for investment grade. When you see yields in investment grade at 4%, investors do get excited about that. I do think investors came in and bought paper at that point. I do think that we're going to see some widening in credit spreads as we move forward, starting September. And I think that's going to happen because September typically is a big month for new issuance. That's going to be a technical factor that's going to move spreads wider. But I must say that credit spreads have been very well behaved during the year. I mean, we're talking investment grade spreads nowhere near the peaks that we saw in 2020. We're seeing investment grade spreads, maybe around 70 basis points wider on the year, which is not that bad extra for investment grade.

High yield is obviously much wider, but still they've been very well behaved. And I think a lot of this has to do with the well capitalized nature of issuers. They did all the right things during the pandemic, rates went very low. They refinanced it. Any M&A transactions that you hear about, are generally being done through cash on hand, which I think is very good for the rating agencies. Default rates are very low for high yield. It's like 0.5%. So I really do think spreads have the potential of moving wider into the end of the year, unless we see it slow down in new issuance, but it's very, very well behaved in this market.

It's been really interesting, Brian, this credit, because credit has been the true tell for equity market investors over the last 10 plus years, really ever since we came out of the global financial crisis. If you had one indicator to watch, to tell you whether you should be bullish or bearish on the equity market, it's been credit. We like to watch the Double-'B'-Minus, Triple B spread, as a indication of risk appetite for equity investors. And what's really been interesting, is the behavior over that spread over the last couple months. So we peaked at roughly 2.37% in early July, and that was having risen sharply from the lows in June of roughly 140. And then from July through mid August, we plummeted to new cycle loads. I mean, we were at 133 as of August 11, which is below the level seen prior to the pandemic.

Now over the last two plus weeks, we've backed up back to 164. So we are a little bit higher. So credit is a little bit tighter than we have been off of these lows. But let me tell you, we are not showing any signs of systemic stress whatsoever right now. And quite honestly, I think Rajeev would agree with me, the backup that we've seen over the last couple weeks, doesn't have really anything to do with credit itself per se, but it has everything to do with the fact that we're in the middle of the doldrums of August and there's very low liquidity trading conditions. And if somebody wanted to exit any position right now, basically you're being put in a very hard place by your broker dealer, partner, trying... partner in quotation marks, trying to help you out of the position that you're in. So it's much more about liquidity than it is about anything that the market is saying about how things are in terms of the economy right now.

So one last question for you, Stephen... Rajeev, you can comment certainly if you want to, as well, but I know you follow housing, Steve, and a lot of the home builders and everything else, and we know inflation is a lagging indicator. So today's print on PCE, showed year- over-year and month-over-month declines, meaning that the inflation rate increases have come off the boil a little bit. And a lot of the inflation is related to housing and owner's equivalent rent. Steve, what are you seeing in that particular sector in market to give us some indicators.

Yeah. The thing that people have to keep in mind is that the way this owner's equivalent rent survey works is, it also works with a lag. So even though we have seen home prices come off the boil, and while I would say that the market has started the process of normalizing, we are not seeing prices decline anywhere near like what we did in 2008, 2009. So we have seen prices come off at the margin. When you look at the way that this owner's equivalent rent number is calculated, it's pretty much baked in the cake that you're going to continue to see it accelerate through year end.

So when people look for these inflation numbers to decline materially, you're really not going to see the inflation numbers decline materially until we get into next year, if that. Because these price increases that we've seen in the past 12 months for home prices, even though you've got moderation going on now, you don't have collapse. So you're going to see those numbers flow through to higher OER numbers. So I think that you're likely going to see some of these numbers exit the year, still, roughly at 6% on the inflation rate and irrespective of what The Fed does. So this inflation problem's going to be with us for a long time. And I think that's what Chair Powell was alluding to directly today. There's much more wood to chop.

Rajeev, I'll give you the last baton. Any closing remarks?

I think that we've stated it here on the call. And I think that Fed Chair Powell did his job today of reiterating The Fed's messaging. I think I agree with Steve completely, that there is a lot more wood to chop. And I think until we get there, The Fed is in play. And if we can continue to see rate hikes, we should be prepared for that. And I think, one thing we've been advocating for is upping quality trades and remaining shorter in duration. I think that messaging continues from our side.

Rajeev, one quick question for you. Does this change your perception of where the Terminal Fed Funds Rate is? And that's the peak of the rate hiking cycle?

That's a great question. I think that right now I stay with my 3.25. I think that's where we're going to end up. I don't think that changes the needle on this messaging today, but I did hear a lot of Fed Governors talk this week about the neutral rate and where that should be. And I think there's a lot of disconnect between different members. There was a time when they were saying 275, a few months ago, and now you're seeing over 3%.

So Steve and Rajeev, thanks for your insights. We appreciate it. And thanks for our listeners for joining us today. Be sure to subscribe to the Key Wealth Matters Podcast, through your favorite podcast app. As always, past performance is no guarantee of future results. And we know your financial situation is personal to you. So reach out to your relationship manager, portfolio strategist, or financial advisor for more information, and we'll catch up within next week, to see how the world and the markets have changed, and provide those keys to help you achieve your financial success.

The Key Wealth Matters Podcast is produced by the Key Wealth Institute. The Key Wealth Institute is comprised of a collection of financial professionals representing key entities, including Key Private Bank, KeyBank Institutional Advisors, Key Private Client, and Key Investment Services. Any opinions, projections, or recommendations contained herein, are subject to change without notice, and are not intended as individual investment advice. This material is presented for informational purposes only, and should not be construed as individual tax or financial advice. Bank and trust products are provided by KeyBank National Association, member FDIC, and Equal Housing Lender. Key Private Bank and KeyBank Institutional Advisors, are part of KeyBank. Investment products, brokerage and investment advisory services, are offered through Key Investment Services LLC, or KIS, member of FINRA, SICC, and SEC, registered investment advisor. Insurance products are offered through Keycorp Insurance Agency, USA Incorporated, or KIA. KIS and KIA are affiliated with KeyBank. Investment and insurance products are not FDIC insured, not bank guaranteed, may lose value, not a deposit, not insured by any federal or state government agency. KeyBank and its affiliates do not provide tax or legal advice.

Individuals should consult their personal tax advisor before making any tax related investment decisions. This content is copyright by KeyCorp 2022.

August 19th, 2022

Welcome to the Key Wealth Matters Podcast, a series of candid conversations with leading experts about how individuals and organizations can grow and protect their finances, tailored around current events and trends. Here's your host for today's podcast, Brian Pietrangelo.

Welcome to the Key Wealth Matters weekly podcast, where we casually ramble on about important topics, including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to unlock the mysteries of the markets and investing.

Today is Friday, August 19th, 2022. I'm Brian Pietrangelo, welcome to the podcast. And it's that time of year again, back to school season. So good luck to students and parents, especially those doing the college drop-off for the first time, as well as those returning to their university experience. With me today, I'd like to introduce our panel of investing experts.

Here to provide some additional education on this week's market activity. George Mateyo, Chief Investment Officer, Steve Hoedt, Head of Equities, and Cindy Honcharenko, Senior Fixed Income Portfolio Manager. As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our Wealth Institute on many different subjects, and especially our Key Questions article series, addressing a relevant topic for investors each Wednesday.

For this week's economic data we had a light schedule, centered around housing data and retail sales. Housing starts for July fell 9.6% from the prior month, and building permits declined 1.3%, likely due to higher mortgage rates and inflationary pressures. Later in the week, existing home sales fell 5.9% in July, the sixth consecutive month of declines. Over on the side of retail sales, for July they were flat from the prior month, or 0.0% increase. However, if you exclude gas and auto sales, the remaining components in aggregate were up 0.7%, which is a nice sign from a consumer spending perspective. Yesterday, weekly initial unemployment claims came in at 250,000, about even from last week. And the Fed meeting minutes from July were also released this week so we'll cover them as well.

George, let's kick off the conversation with some of your observations and insights.

Well, I think you're right, Brian, I think it was actually more of a mixed week overall in terms of some of the numbers that came out from various economic reports. I think the week started on a sour note. We climbed out of it from the market perspective, but there were some negative headlines earlier in the week with respect to some of the regional manufacturing indicators, people watch, which suggest actually a slight slowdown. And those numbers were, I think, a bit worse than expected.

Housing looks like it's in a recession, frankly. So the numbers throughout the week suggested the housing market is really downturning, I guess if you will, or signaling a downturn for sure. Probably not surprising, given where interest rates have been and maybe some of the overall levels of affordability have been pretty stretched. We've been talking about this for quite some time, but we continue to get more and more confirmation that the housing sector is really falling down pretty sharply and slowing down pretty meaningfully.

On the other hand, though, it seems like retail sales have actually picked up, so it looks like the consumer's still spending. By my calculations sales are up some 10% year-over-year, some of that probably has to do with price though. We were all paying for more than we were for many things, but nonetheless, momentum seems to be pretty strong. And some of the numbers in the eCommerce line was actually really strong, so maybe it was Amazon sales or Back to School or something like that. But it suggests that the consumers still doing pretty well from a spending perspective

And then also later in the week, contradicting that regional report that I mentioned earlier, the overall broader measure of industrial activity was actually pretty brisk. I'm not sure how to square those two circles, but it seems to suggest that the manufacturer was actually stronger than expected. We talked about jobless claims, they had edged down a little bit and so that's one thing we've been watching as a earlier indicator for what's happened with labor market. Still seems it's pretty healthy. We'll get some more numbers in a couple weeks on the official employment situation. But the fact that employment is actually stabilizing is probably a good thing.

And in the face of this all, the Fed has been out. I'm really actually [inaudible 00:04:06] hear what Cindy has to say about that. But the Fed speakers have been out in enforced this week, talking pretty hawkishly about things and suggesting that, again, inflation is likely to remain uncomfortably high for a while, which is what we've been saying is well too. But in the face of that, the stock market has rallied. Credit markets are pretty healthy and actually been stronger as well.

So it seems like economic health is not a near-term worry. I'm still a little bit concerned about what the economy might look like in a couple months from now, but for now you've got inflation cooling, coming off the boil a little bit. The economy's slowing, but it's still growing so I think the market's responding to the fact that inflation at the margin is getting better and the economy is actually hanging in there pretty well.

You've got those forces happening right now. Earnings have come down a little bit. Steve had a really interesting chart in his chart pack this week that showed that very visibly, but nonetheless, things are hanging on for right now, it seems like. But Steve, what's your view of that market these days from the equity market perspective?

Well, a couple different things. First off though, to jump on the economic numbers, the retail sales numbers, if you strip out some of the more chunky items, we saw them up pretty solidly. And I think what this reflects to me is that when you have oil prices come off the boil, you see that effectively work as a tax cut for the American consumer. So the fact that oil prices and gasoline prices that people are paying at the pump are lower now than they were three months ago or six months ago, has acted as a tax cut, which has helped to boost these retail sales numbers that we're seeing today.

Now that's a great thing. My question here is though whether that's really sustainable as we move into the back end of the year, because I think crude oil prices continuing to hang out above $85 when everybody thought that they were going to be lower than that at this point in time, makes me wonder if we're not headed back for another leg up in oil prices and hence gas prices as we move into the fall. So that's something to keep our eyes on.

The market, look, the market has now rallied up and through that 4177 number that we talked about all summer, and we tagged the 200 day moving average this week. As far as putting on my technical hat goes, it really does suggest to me that once we get into this area where the 200 day is, roughly around 4320, we likely are going to see a bit of a pause. I mean, we've come very far, very fast. Now a lot of people talk about very far, very fast and think that that's a bad thing. Actually, if you look historically, when we come very far, very fast, that bodes really well for forward returns for equity investors out 12 months. Too far, too fast is bullish. So I think that if we get a pause here, it's a pause that's likely going to be one that investors should be very interested in buying.

Part of the reason why we've been able to come so far, so fast, has been because of the fundamental backdrop. Everybody, I think, really came into earning season for Q2 thinking numbers were going to get significantly marked down, and that just did not happen. We had earnings numbers come down as forward guidance based on some economic slowing impacted the estimates that analysts are putting together. But we only saw the forward 12 month earnings number come down from just shy of $240 for the S&P 500 to 236.60. And we've really stabilized over the last three weeks here.

So earnings, as far as I'm concerned, that's a positive because people were thinking that this was going to be really bad, that you were going to see numbers get marked down significantly. That provided the fundamental backdrop, not being ... We say in the markets, when things go from bad to less bad, that's a really good thing. And I think that the expectations for earning season were so bad that when they came in less bad, that was a really good thing. And it truly provided the fundamental backdrop for this successful momentum ignition that we've seen the market have over the last two or three weeks.

I was curious to see that the fact that the Fed was tightening. And most people, when we came into this year, thinking this would be kind of a choppy year, we got that in spades in the first half. But I can remember seeing, and I'm sure you do too, people were throwing charts around in January, February, March, that said the market actually responds pretty well to the first tightening. It's the last couple tightenings that people get really concerned with.

The market seemed to preempt the Fed a little bit, because the market was actually [inaudible 00:08:55] off before the Fed actually did their work, so to speak. And now you're right, that most people thought that earnings would be the next leg to fall or the next shoe to drop and it really hasn't. Earnings have come down a little bit, but markets have of been looking through them.

Absolutely. They've been looking through that. And then, George, on your comment about front-running the fed, I mean, we've been playing the front-running the fed game it seems like all year, whether it was to the downside or now to the upside. And the financial conditions here in the US, one of the things that I stumbled across in the last couple of weeks and just mind-boggling to me, is that there are a number of these different financial conditions indexes that various broker-dealers or other entities put together. And they amalgamate a whole bunch of different economic measures to figure out, is liquidity tightening or is liquidity loosening here in the US, because if there's more liquidity or liquidity is loosening, you end up with a more bullish backdrop for the market.

And we saw one of the largest declines in US financial conditions, meaning financial conditions easing, getting more loose, from the last FOMC meeting until today, that we have ever seen on record. And it's mind-boggling to me that in the midst of this inflation situation, Powell's comments coming out that last FOMC meeting were perceived as being so dovish that we got a reaction of easing of financial conditions that was on par with those we saw during 2016, 2018 and 2020 post COVID, which is mind boggling to me when you think about it.

Yeah. Well, that's the exact opposite thing that the Fed wants. I mean, the Fed wants to slow things down, they want to see inflation come down. And as you point out, the market liquidity, liquidity-wise, the market's responding more favorably.

I think it's an odd backdrop, and I think that really just magnifies how unprecedented these times are. I hate using that word because everybody uses that word, unprecedented, but it truly, truly is. And again, you've got stocks and bond prices moving together, which also is somewhat uncommon.

I think it's also too, George, goes to part of the reason why so many investors are so confused right now about what to be doing. Because even though you've got this strong momentum impulse behind the market, there are a tremendous number of strategists and other folks, really smart people you see on financial TV and other places, who are telling you this is still nothing more than a bear market rally. And they have gotten caught on the wrong side of this in a big way.

And it really does seem to me that the fundamentals, the market itself is seen through some of these fundamentals that look so weak, and is really playing for the other side right now.

Yeah. I think we went neutral on risk assets sometime earlier this spring, around March or April, and I still think that's an appropriate place to be. I mean, I don't think you want to get over your skis with respect to equity risk in general, but you don't want to be totally bearish either, as you pointed out Steve.

But the Fed I think is probably still driving the game, so we should probably bring Cindy into the conversation. This Fed is a little bit quiet right now, Cindy, in the sense that they're not officially meeting until September, but of course they've got the ability to come out anytime and speak their mind. What do you think is happening with the Fed right now, and what should we be listening towards later this month when they get together in Wyoming?

Well, the Fed speakers that we've heard from this week have been very hawkish. They're talking tough. But the minutes that came out on Wednesday were pretty consistent with Chair Powell's message at the July presser, suggesting that ongoing increases to the federal funds rate will likely be appropriate, but will also be data dependent. The minutes stated that as the stance of monetary policy tightens further, it would likely become more appropriate at some point to slow the pace of policy rate increases, while assessing the effects of cumulative policy adjustments on economic activity and inflation.

More importantly, the committee noted that tightening by more than necessary is a risk, but also allowing inflation to become entrenched is an even more significant risk. So to that end, the consensus right now is, expect a 75 basis point Fed hike at the September meeting. But if we see a slow growth in the jobs report for September, we could see a 50 basis point hike. So we've really got to watch the data.

As far as Jackson Hole, up until yesterday it didn't even look like Powell was speaking because he wasn't even on the Fed calendar. I do see him out there today, on Friday the 26th he's speaking at 10:00 AM, giving an economic outlook. I think there's going to be four things that he's going to reiterate. He's going to reiterate the steps the Fed has taken to combat inflation, that the Fed's committed to bringing down inflation, that more rate hikes will remain appropriate and they are going to be data dependent.

I really don't think he's going to provide much guidance on the outlook as far as the September FOMC meeting, but the September payroll report is definitely going to be key there. I'm not expecting much of a signal or policy shift from Powell at Jackson Hole, and I expect that he'll likely reiterate key themes from his presser after the July FOMC meeting, and really focus on that data independence.

I'm always fascinated when we get to this point in the calendar, because we had ... I think one of my favorite things to do is to pay attention to the people who used to be on the Fed, who are no longer on the Fed, because it seems like they can actually speak truth to power, for lack of a better word.

And William Dudley here came out this week and really took the Fed Chair to task for his communications here recently, and said that he needed to use Jackson Hole as an opportunity to clarify his views on things. I found that fascinating. And then sure enough, as you said, Cindy, now Powell shows up on the speakers list. How curious that that happened right after Dudley's op-ed in the Wall Street Journal.

Exactly. Yeah, because he wasn't even on the schedule. So I wasn't 100% sure he was even speaking next week. And you're right, now all of a sudden he's on the calendar. But Bullard in Kashkari this week, they're full steam ahead. They're saying 75 basis points, and they're not looking for a decrease in rates next year either. So a lot of tough talk. I'm really surprised by Kashkari, being as much of a dove as he is.

Well, I think it's going to set up for another interesting week and probably a bit more volatility as we come back to school and get ready for the fall. Again, as I said a few minutes ago, I think we'd probably still want to emphasize a neutral position towards risk assets in general, not getting too far over our skis and expecting more volatility, which has been our content theme though for much of 2022.

Well, a great conversation today. And George, Steve, and Cindy, thanks for your insights, we appreciate it. And thanks to our listeners for joining us today. Be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app.

And as always, past performance is no guarantee of future results, and we know your financial situation is personal to you. So reach out to your relationship manager, portfolio strategist, or financial advisor for more information. And we'll catch up with you next week to see how the world and the markets have changed, and provide those keys to help you achieve your financial success.

The Key Wealth Matters podcast is produced by the Key Wealth Institute. The Key Wealth Institute is comprised of a collection of financial professionals representing Key entities, including Key Private Bank, KeyBank Institutional Advisors, Key Private Client, and Key Investment Services. Any opinions, projections, or recommendations contained here in are subject to change without notice and are not intended as individual investment advice.

This material is presented for informational purposes only and should not be construed as individual tax or financial advice. Bank and trust products are provided by KeyBank National Association, Member FDIC, and Equal Housing Lender. Key Private Bank and KeyBank Institutional Advisors are part of KeyBank. Investment products, brokerage and investment advisory services are offered through Key Investment Services LLC or KIS, member of FINRA/SIPC and SEC registered investment advisor. Insurance products are offered through KeyCorp Insurance Agency USA, Incorporated, or KIA. KIS and KIA are affiliated with KeyBank.

Investment and insurance products are not FDIC insured, not bank guaranteed, may lose value, not a deposit, not insured by any federal or state government agency. KeyBank and its affiliates do not provide tax or legal advice. Individuals should consult their personal tax advisor before making any tax-related investment decisions. This content is copyrighted by KeyCorp, 2022.

August 12th, 2022

Welcome to the Key Wealth Matters podcast. A series of candid conversations with leading experts, about how individuals and organizations can grow and protect their finances. Tailored around current events and trends. Here's your host for today's podcast, Brian Pietrangelo.

Welcome to the Key Wealth Matters weekly podcast, where we casually ramble on about important topics, including the markets, the economy, human ingenuity, and almost anything under the sun. Giving you the keys to unlock the mysteries of the markets and investing. Today is Friday, August 12, 2022. I'm Brian Pietrangelo, and welcome to the podcast. In case, you didn't know, today is National Vinyl Record day, so if you're a classic rock music fan like I am, you might want to pull out a few old recordings and have a listen.

With me today, I'd like to introduce our panel of investing experts. Some might say they're rock stars in their own right. Here to share their thoughts on this week's market activity, Steve Hoedt, Head of Equities, Don Saverno, Senior Lead Research Analyst covering International Equities, and Justin Tantalo, Senior Lead Research Analyst covering U.S. Equities. As a reminder, a lot of great content is available on key.com/wealthinsights including updates from our Wealth Institute on many different subjects, and especially, our key questions article series addressing a relevant topic for investors each Wednesday.

For this week's economic data, we had a light schedule. Of course, we had the consumer price index inflation print on Wednesday, so we'll get the panel's reaction to those numbers. But in addition, in today's podcast, we'll have a robust conversation on the equity markets, and hear more insights from our experts, specifically U.S equities, international equities, and the private equity markets. So Steve, let's kick off the conversation with some of your thoughts.

Well thanks, Brian. Definitely, an interesting week. Even though the economic data was light, the CPI and PPI both came in, and came in lighter than expectations. And that has really changed the narrative yet again, for the markets. If you remember last week, Rajiv and I were talking about how this report from the non-form payrolls on Friday had set up the potential for there to be a discussion about whether or not the Jackson Hole Fed Confab at the end of August was going to be a live fed meeting or not. And here we are a week later and as now completely off the table, and we're talking about again, is it 50 basis points instead of 75 basis points because the inflation numbers came in so much better than expectations.

Equity markets responded favorably to this. We've seen the market clear that, that 4177 level, which had been pretty key on a chart basis, which had served not only as resistance, but also served as a beacon. Because now once you get closes above that, you start to see higher highs established. And potentially, if we roll higher lows and higher highs and higher lows is the definition of a change in trend.

So, I think we've seen a lot of people start to come to the conclusion that this is a new bull market. When you take a look at things that we watch, a number of breadth indicators, market internals, they are not universally across the board telling us that this is a new bowl, but there is an awful lot of evidence that is suggesting that is exactly the case. So while not universal, the balance of the evidence tells us, "Hey, you've got to be looking at this market now in a different way than what we have since early this year." Typical bear does not see a retracement or see a revisit of the lows or make new lows once you clear the 50% retracement of the peak to trough move. And right now, that is exactly where we sit.

So, I think as we head into the back end of the year, you've got the election cycle. You've got the potential for earnings to possibly surprise to the upside with this PPI, CPI mix, throwing in a bit of dollar weakness. And you put that on top of the potential to see wages decrease as opposed to increase, given that we've had this inflationary impulse that maybe is starting to wane a little bit. If we want to put our optimist SATs on, it seems to me that we're headed to a fairly decent place. And that is completely counter to where all the flow of data and anecdotes have been over the last two or three months, for sure, if not before that. So, the market has a funny way of seeing through all of the negativity and cutting to the chase about what is going to occur or likely to occur in the future.

And the market's just taken a more optimistic view of things right now. And that has flowed through not only in large cap equities, but it's also flowed through into small caps, other equity spaces. And when we think about the equity landscape, private equities really become a very important piece of the puzzle for investors over the last few years including, providing diversification benefits and difficult macro environments like we've had in the first half of the year. We have Justin Tantalo on the call with us today. He's going to give you and share our additional thoughts or share some deeper thoughts on the current state of the private equity markets and how things have actually held up during that difficult first half of the year. Hey Justin, how are you doing?

Hey, Steve, how you doing? Unlike public equities, the private markets don't have weekly returns or even monthly returns and changing narratives for better or worse. But give you an insight into what we've seen in the first half of the year. And put in context with how that relates to the public equity backdrop. If we start with sort of fundraising, the first half of the year North American PE fundraising was about $250 billion, that was down about 15% from record levels last year. But we're still on a very healthy pace for probably what's going to be the second largest fundraising history. So in aggregate, private equity fundraising is about as strong as ever. If we take a look at some of the underlying segments, and the health of those. First, we start with buyout funds. Now these are what you traditionally think of as private equity.

They focus on taking control of larger performing businesses. That segment's been the least impacted. You can see some of the blue chip buyout managers like Carlisle, Blackstone, KKR, they're trucking along. They continue to raise record sized funds. And the biggest of which are now in the range of $20 to $25 billion. So, all is well on buyout fundraising. Elsewhere, if you think about the health of the venture capital market, that's where the story is a bit mixed. In the early stage, the seed type venture deals where businesses are just getting off the ground, some are pre-revenue. The deal flow there and valuations are relatively unscathed by the market volatility and public equities. The valuation and the outlook for a purely or early stage conceptual business doesn't really change a lot with public market corps.

Justin, is that true with the fact that we've seen, like the Goldman Sachs unprofitable tech stock index or unprofitable stock index. It's down something like 85% from the peaks that we saw last year. Is there any correlation to this, to the flows into VC due to what we see in the public markets, or really, is it a totally separate discussion?

So you're right. And that brings us to the last segment. I mentioned that the early stage, seed type deals are pretty much progressing as usual. The later stage venture or what they call growth equity, and those are usually the pre-IPO type deals. Businesses are larger, revenue strong, revenue growth is strong. Most are not profitable, but those kind of software type businesses that you mentioned that largely dominate that index of non profitable tech in index at Goldman Sachs maintains. Fundraising, deal flow, and valuations, they all have all been weak in the private markets. And that mirrors what we've seen in the public markets in the sense that inflation concerns, higher interest rates... Those are all heavily influential in the evaluations of these software businesses or these late stage tech growth venture and space.

That's exactly right though. If you look at the index of the venture backed IPOs, those are down about 50% from the beginning of the year. Pretty much in line with some of the weakest segments of the tech index. And the IPO market... that window is still pretty much closed. So you're right. That segment, that index, is a window into the weakest part of private equity, Rick Large, and that is the late stage venture or growth equity segment. It's in cardiac right now.

Hey, Justin, later stage growth equity, are those managers or the incremental dollars? Are they going into other segments of the private market or are the normal players sitting out right now?

It's kind of a pause. The deals that are getting done are a continuation providing capital to businesses that are essentially running dry on cash. Those deals are being done pretty close to previous valuations or previous marks. They're very small. They're meant to provide additional runway to try to get toward the IPO. The venture funds are backing their own businesses to try to give them additional runway, but turning toward other segments or looking for other deals that are outside of your portfolio. That's pretty much ground to a halt as everybody tries to assess the health of their existing portfolio, those works required.

You mentioned valuation. How are private equity valuations holding up relative to public market valuations? We've definitely seen a huge amount of multiple compression on the public equity side this year. Have you seen the same thing over in PE?

Trickier to capture, to be honest. Of course, the private assets, they lack a market to get an insight into what's happened to valuations and what's happened to asset prices. And there's a lot of variation in how managers mark their own investments. So, take what I say with a grain of salt. But there's another way to get an insight through the back door, and that's the secondaries market. So if you look over the past 15 years, the secondaries for private equity stakes, that's continued to grow. It's a pretty robust and liquid market nowadays. And this is where an investor will sell a stake of a private equity fund that they've invested in a brokered transaction to another investor. We've seen the volume of secondaries in the first half of the year almost double to north of $30 billion.

So, there is some interesting valuation insights there. On average, and in aggregate, the discount to net asset value. So the discount to nav in these deals was about 15%. If you take just the venture capital segment of the secondaries market, the average discount to nav was closer to 30%. So it turns out that investors buying these secondary PE and venture capital stakes, they're paying prices that are more commensurate with what you're seeing in the public equity market, but the managers themselves, the net asset values, they move a lot slower than do the transactions in the secondary market.

I want to pivot here a little bit and get done into the conversation. Don, earlier in the call, I mentioned how we've seen the PPI CPI this week, come in lighter than expectations. That's caused a turn in the US dollar as well. We've seen the dollar weaker and fairly significantly. So on the week, has this played in the international markets, which I know that you watch very closely for us?

Yes, Steve. So, some places around the world have seen a decided turnaround in the last week or two, but other places, especially as Justin mentioned, the growth equity spaces in the market, like the China Onshore market, we haven't really seen that turnaround. In fact, China CPI came out and it was tamer than expected. And the reasons for that really are they continue to shut down in their zero COVID policy, but they did warn that CPIs moving forward could actually be above 3%, which is pretty rare over there. We're actually seeing a disconnect between the onshore and the offshore market within China, where the higher tech names, the growthier names, are actually starting to gain a little bit more traction than they have earlier in the year. And let's contrast that with what's going on in Europe. In Europe, it's really a tale of two different places.

It's the Eurozone and UK. The UK is very dower and downbeat on the future, expecting much higher CPI numbers in the future. The Bank of England actually threw out numbers in the 12% to 13% range expected over the winter, due mostly to absurd energy costs in worse case scenario, while the Eurozone, we're actually seeing a more moderated approach. Seeing maybe 5% inflation over the next year or so. So, we'll have to see how that plays out, but the different central banks are taking much different tax. The Eurozone is actually being a little bit more reactionary to prevailing market conditions, while the Bank of England is going full force ahead and trying to tame what they expect to be a really tough couple year period within Great Britain.

Great conversation today gentlemen. So Steve, Don and Justin, thanks for your insights. We appreciate it. And thanks to our listeners for joining us today. Be sure to subscribe to the Key Wealth Matters podcast, through your favorite podcast app. And as always, past performance is no guarantee of future results. And we know your financial situation is personal to you. So reach out to your relationship manager, portfolio strategist, or financial advisor for more information, and we'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you achieve your financial success.

The Key Wealth Matters podcast is produced by the Key Wealth Institute. The Key Wealth Institute is comprised of a collection of financial professionals representing key entities, including Key Private Bank, KeyBank Institutional Advisors, Key Private Client and Key Investment Services. Any opinions, projections, or recommendations contained here in, are subject to change without notice and are not intended as individual investment advice. This material is presented for informational purposes only, and should not be construed as individual tax or financial advice. Bank and trust products are provided by KeyBank National Association, member FDIC and equal housing lender. Key Private Bank and KeyBank Institutional Advisors are part of KeyBank. Investment products, brokerage and investment advisory services are offered through Key Investment Services LLC or KIS. Member of FINRA, SIDC and SCC registered investment advisor. Insurance products are offered through KeyCorb Insurance Agency, USA Incorporated or KIA. KIS and KIA are affiliated with KeyBank. Investment and insurance products are not FDIC insured, not bank guaranteed, may lose value, not a deposit, not insured by any federal or state government agency.

KeyBank and its affiliates do not provide tax or legal advice. Individuals should consult their personal tax advisor before making any tax related investment decisions. This content is copyrighted by KeyCorp 2022.

August 5th, 2022

Welcome to the Key Wealth Matters podcast, a series of candid conversations with leading experts about how individuals and organizations can grow and protect their finances, tailored around current events and trends. Here's your host for today's podcast, Brian Pietrangelo.

Welcome to the Key Wealth Matters weekly podcast, where we casually ramble on about important topics, including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to unlock the mysteries of the markets and investing.

Today is Friday, August 5, 2022. I'm Brian Pietrangelo. Welcome to the podcast. And with me today, I'd like to introduce our panel of investing experts here to share their thoughts on this week's market activity. Steve Hoedt, Head of Equities, Rajeev Sharma, Head of Fixed Income, and Paul Toft, Senior Fixed Income Portfolio Manager. As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our Wealth Institute on many different subjects and especially our Key Questions article series addressing a relevant topic for investors each Wednesday.

For this week's economic data, we have a mix of information. Earlier in the week, PMI data that was released for both manufacturing and services still indicate economic expansion, however they both showed signs of slowing in July. Initial unemployment claims on Thursday for the prior week were 260,000, so not much change or anything to discuss there. But the big news was the jobs report this morning. New non-farm payrolls increased by 528,000 in July, almost twice that of June, in a positive upside surprise. Unemployment rate went down a small amount from 3.6% over the past four months to 3.5% in July. But again, the big news is the payrolls.

So as we think about the implications for the jobs report, not only is it huge for the Fed but also the overall economy to go back and forth whether we are or not in a recession. So let's start with you, Rajeev. What do you think this means for the overall Fed's outlook and their possible positioning?

Thank you, Brian. 528,000 jobs added in July. That's a very big number. Unemployment rate edging down as well. So immediately, markets are pricing in a 70% chance or so of a 75 basis point rate hike in September. With all of these rate hikes coming, the issue really starts to revolve around demand destruction and a stronger dollar.

So the U.S. is really leading the rest of the world as far as these jobs go. And the market got overly optimistic last week when there was a lot of sentiment that the Fed was going to pause or maybe slow down or perhaps even cut rates early next year. This takes all of that really away right now. And the Fed is going to really start to continue to raise rates until they see inflation start to slow down. The odds of a recession have increased as well. And the Fed is clear on their goal. They're going to combat inflation. This jobs number completely supports that goal. They're focused on inflation. And when they see a number like that, it really tells them that full steam ahead.

So now if you look at the Treasury curve post a huge jobs beat, we see that the curve has flattened. The inverted 2s/10s curve remains inverted to the order of about 43 basis points. That's the lowest that we've seen since 2000. This jobs number is stronger than forecasted. Upward revisions on the prior data is also there as well. So it shows a very tight labor market.

As I said, 75 basis points is back on the table for September, especially if the CPI print next week comes in hot. And traders are wasting no time sending the two-year back, well above 3%. Powell has stated in the past in his presser that some softening of the labor market will be necessary to get inflation back to 2%. The number today is quite the opposite of that sentiment. What are your thoughts there, Steve, on this number?

You know, I think it's interesting because there's definitely some puts and takes within the two different employment surveys that came out today. The thing that concerns me is that yeah, I think you're 100% right, Rajeev, that the Fed is on the table for 75 basis points. Who knows? Maybe even more if you get a crazy hot CPI report next week and employment is hot again at the beginning of September.

But you go deeper in the numbers, and I think that we get this idea that maybe we have people taking on more than one job and that's kind of some of the hit that we're seeing that's driving some of these numbers to the upside. And that's because we've got this economy that's got this inflationary impulse that's hard for people to deal with. They need more money.

So I think the report today really looks to me like it's consistent with an inflationary boom. And it's something that the Fed is going to have to work hard to it get under control. It's just not going to go away anytime soon. This idea that there's a Powell pivot coming, I think we can put that to bed.

Yeah. I was going to say that, Steve. If you remember the presser from last week, he said 2.7 million people hired in the first half of the year, it doesn't make sense that the economy would be in a recession. So Rajeev, where do you think we are going to go for the terminal rate then and to Steve's point about maybe not a pivot at the beginning of next year in 2023?

No, Steve makes a great point. There was a lot of talks about a pivot. I don't see that coming right now. And with that jobs print, we see the 10-year surge back to 2.8%. It's a far cry away from those calls that we were seeing just a day ago where there was a lot of talk about the 10-year going to 2.5%. Why is this happening? Because the Fed's back in the picture. The Fed pause is, that's off the table right now. The Treasury curve is flattened pretty dramatically after that huge beat today.

What's truly incredible is how the risk on trade was alive and well on fixed income last month. We saw fixed income, risk assets rally. It's very interesting to see high yield gaining almost 6% in July. That's really incredible when you look at how bad the first half of the year has been for high yield, investment grade. We saw this dramatic shift in high yield getting almost 6% in total return in July. It carried through up till today in August. It's the biggest one month rally that we've seen in a decade. And why? Because the market really interpreted, to Steve's point, that the Fed would pivot and the Fed was going to get dovish. And that was really optimistic and it didn't happen.

And with these numbers, I don't think it's going to happen. It's really interesting to see the sentiment has shifted just today itself. We're seeing risk assets start to sell off today. So I think that fixed income's coming into a lot of pressure right now. It was a good July when it lasted, but there's a lot of wood to chop right now.

Got to admit that I'm pretty surprised at the equity market reaction to this though. So we knee-jerked traded down to just about 4,100 on the S&P, but we're right back to 4,140, almost close to where yesterday's close was. I mean, it seems like this bullish impulse right now in the equity markets is something that is clearly to be respected. You know? Bad news seems to be good news for stocks, at least it has been over the last month or so. And we've gotten some clear momentum signatures in the market here in the last two or so weeks, really more like the last 10 days. And these things bode well for forward 12-month returns.

Now, there could be additional signals that would help increase the case that near-term returns look even more positively skewed than the 12-month. And we'd love to see additional signals like that. But clearly there's been a change in market tone. And when we get close to this June high, 4177, I look at that, if we were to break above that level, that starts to set the idea that you could have higher highs and lower lows. You know, that's a true definition of trend change. And if you take a look, you go back to 1950, we've never seen a bear market rally that's exceeded to 50% retracement of the peak to cycle lows move.

So all these kind of things tell me... And that number right there, 50% retracement, it's 4231 and we're less than 100 points away from that on the S&P. So the bear case, at least from a price perspective in the equity markets has a really tough road to hoe right now because we've got this momentum impulse and we've got all these things starting to line up on the positive side of the ledger. On the negative side of the ledger, obviously this idea that the Fed is going to maybe not pivot and what's that going to mean for earnings, profit margins, those types of things. But the market tends to look six-plus months forward. And the market is seeing definitely a different scenario than what the Fed is.

Steve, do you think that the Fed is looking at earnings right now and pleasantly surprised at some of these earnings reports that are coming out?

I think they have to be. I think they have to be. I mean, I think that the earnings reports, the reason why we had earning support for the market over the last two to three weeks is that they came in much better than expected from the standpoint that the market really thought earnings forward expectations were going to have to get knocked down significantly. And that did not happen.

So forward numbers have come down. So forward earnings are down to 236 and change from almost 240. So they've come down $4 for the aggregate earnings for the S&P 500, but that is not some type of a collapse. And this goes kind of to the thing that I've mentioned before on these podcasts that people need to remember their earnings are measured in nominal dollars. And when you get into an inflationary boom scenario, corporate earnings actually are going to be pretty strong because they're measured in nominal dollars.

So we've seen this impulse from an inflation perspective course its way through the economy and that's showing up in revenues for corporate America. And that is a countervailing force to the economic slowdown that we've been experiencing, at least at a GDP level, here in the first half of the year.

So Rajeev, we keep going back and forth every week on this podcast about are we in a recession, are we not in a recession, so on and so forth. This data on jobs jumbles that again for the conversation. But we also talk about the yield curve inversion and the fact that the 2s/10s was already negative but the three- month and 10-year was not. So when do you think we're going to get there or do you think we will get there?

Great question, Brian. I think the 2s/10s, we've talked about it, 43 basis points or so right now of an inversion, very significant. But many investors feel that the 2s/10s may be skewed because of the amount of balance sheet that the Fed has right now and the amount of accommodation that has done. So people start focusing on the three-month, 10-year which had been positively sloped, which gave the Fed a lot of encouragement that recession is not near and everything's fine.

The three-month, 10-year curve has started to flatten quite a bit. And I think we do see an inversion coming forward. I think we could see that. It's not there yet. The difference is when the two-year and the 10-year invert, you have about six to 18 months before a recession. When the three-month and the 10-year invert, the timeline is much more shorter. So we could see a recession within three to six months after that. So we are pointing in that direction. I think we're keeping an eye on that result, Brian.

So we've got a special guest today, Paul Toft from our muni market. And Paul, we would like to get your observations on what you see happening in the muni space given that a lot of our clients out there are looking for tax advantage opportunities and what are you seeing in those signs.

Yeah, Brian. Thank you. I think July was a great month for munis, as Rajeev alluded to, in the taxable fixed income space, and high-yield corporates had a great month. Things were good in the muni space too depending on what part of the yield curve you were invested in. You know, munis rallied 1.5 to 2%. It's not earth- shattering, but given what a challenging year we've had, it was welcome news in July.

But as we've talked about on this call, I think today's job number puts the summer muni rally in jeopardy. As Rajeev and Steve alluded to, this gives the Fed more flexibility to keep fighting inflation knowing that they're not going to kill the jobs market down at 3.5 unemployment rate. I think that ties the 50- year low. So it gives them, I think, the will to go forward in their dual mandate. I think they've said they want to focus on inflation now. The other part of their dual mandate, full employment, they've kind of reached. So I think it could be a tough next couple months in the muni space.

Munis in general have had a good year versus other fixed income securities. They're rich to Treasuries. What does that mean? All else being equal, when you buy a muni, you want to look at your tax-free return and compare it to what you might get on a taxable instrument. Because of the relatively good performance, they're somewhat overvalued and people that aren't in the maximum tax rate are probably better off buying Treasuries and paying the taxes now rather than buying munis just because of the relative richness.

So it's something to keep an eye on. And the calendar has been pretty light, but we're gearing up for a slew of new issues the next couple weeks. So I expect munis to come under pressure a little bit over the next few weeks.

Paul, have you seen fund flows change at all? I mean, last year we saw investment-grade corporate bond funds getting a lot of flows, inflows. We've seen a complete reversal this year, obviously with the jitters in the market and maybe a risk-off trade. But what are you seeing in the muni side? Are you seeing flows starting to ease up a little bit there?

Yeah. Same theme in the muni side, Rajeev. So in 2021, we had record inflows, money coming in to open-end municipal mutual funds. And we've just had a slew of outflows year to date, roughly 80 billion going out. However, we have seen some slowing of the outflows. And actually, just yesterday they announced we had modest inflows for the week. So again, if you have new money coming in, that always helps. You know, you got that bigger calendar building on the horizon, you want to have some new money coming into mutual funds to suck up that new issue supply.

So that could help. But I think just with the kind of bearish tone and the Treasury market today, the relative richness of munis, I think we're going to see munis come under pressure the next few days, especially in the shorter end of the curve, that two to four-year range where we have a lot of clients. I think there's been a lot of buying there. I think munis have performed well. So if you're in munis, it's been great. But on the margin, they just look a little rich versus other fixed income securities at the moment.

So Steve, Rajeev, and Paul, thanks for your insights. We appreciate it. And thanks to our listeners for joining us today. Be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app. And as always, past performance is no guarantee of future results. And we know your financial situation is personal to you. So reach out to your relationship manager, portfolio strategist, or financial advisor for more information. And we'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you achieve your financial success.

The Key Wealth Matters podcast is produced by the Key Wealth Institute. The Key Wealth Institute is comprised of a collection of financial professionals representing Key entities, including Key Private Bank, KeyBank Institutional Advisors, Key Private Client, and Key Investment Services. Any opinions, projections, or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. This material is presented for informational purposes only and should not be construed as individual tax or financial advice.

Bank and trust products are provided by KeyBank National Association, Member FDIC and Equal Housing Lender. Key Private Bank and KeyBank Institutional Advisors are part of KeyBank. Investment products, brokerage, and investment advisory services are offered through Key Investment Services, LLC, or KIS, Member of FINRA/SIPC and SEC-registered investment advisor. Insurance products are offered through KeyCorp Insurance Agency USA, Incorporated, or KIA. KIS and KIA are affiliated with KeyBank. Investment and insurance products are not FDIC insured, not bank guaranteed, may lose value, not a deposit, not insured by any federal or state government agency. KeyBank and its affiliates do not provide tax or legal advice. Individuals should consult their personal tax advisor before making any tax-related investment decisions. This content is copyrighted by KeyCorp, 2022.

July 29th, 2022

Welcome to the Key Wealth Matters podcast, a series of candid conversations with leading experts about how individuals and organizations can grow and protect their finances, tailored around current events and trends. Here's your host for today's podcast, Brian Pietrangelo.

Welcome to the Key Wealth Matters' weekly podcast where we casually ramble on about important topics, including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to unlock the mysteries of the markets and investing. Today is Friday, July 29th, 2022. I'm Brian Pietrangelo, and welcome to the podcast.

With me today, I'd like to introduce our panel of investing experts here to share their thoughts on this week's market activity. George Mateyo, our chief investment officer, Steve Hoedt, head of equities, Rajeev Sharma, head of fixed income, and Cindy Honcharenko, senior fixed income portfolio manager.

As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our Wealth Institute on many different subjects, and especially our key questions article series addressing a relevant topic for investors each Wednesday. So for this week's economic data, fairly robust in terms of the GDP report came out negative 0.9% for the second quarter of 2022. We also had a significant meeting with the federal open market committee and J Paul and the committee on Wednesday. So we're going to have an update on that from Cindy in the group. And we've also got consumer spending today. This morning's report along with the consumer spending price inflation, also known as PCE inflation, which was up 1.1% in June and plus 6.8% year over year. So inflation continues to run hot. So let's start with Cindy in terms of an observation and update what'd you hear from the fed from your perspective, Cindy?

So my top three takeaways from the FOMC meeting on Wednesday the 1st, they voted unanimously to raise the target range of the fed funds rate by 75 basis points. The new range is two spot two five to two spot 50, the two 50. So now they're at the high end of the range and technically are at the Fed's neutral. The key change in their statement relative to June was the first sentence, recent indicators of spending and production of soften. By contrast, the first sentence of the June statement noted that economic activity had picked up. So the rest of the statement for July is more hawkish. The second would be we're back to data watching. Overarching theme of Chair, Powell's press conference was a commitment to bringing inflation back down to the Fed's 2% target. And he noted that although there's been a slowdown in economic activity in second quarter, underlying demand remains solid and the economy is probably not in a recession.

When he was asked about potential conflict between the Fed's inflation and jobs mandate he stressed that price stability is crucial for achieving sustainable employment. He also noted that growth needs to slow below potential and the labor market has to soften inflation to return them back to their target. And finally, it's looking like a more hard-ish landing as the base case, Chair Powell emphasized returning inflation again, back to 2%. And he noted that that's very significant and it suggests that the fed has a high pain threshold to get inflation back to their target. This is consistent with this hesitance to say that the economy will not go into recession. And his statement that the risk of tightening too much in the short run is less than the risk of tightening too little.

And we have to keep in mind that the economic data and the fed... Everything's lagging. So as we're going along here, there's going to be technical tightening going on behind the scenes. And that's going to take six months to a year to actually show up in the market. So we need to keep that in mind. So as they slow down, probably September, we're thinking 50 basis points and then November and December both will be 25 basis points. There's going to be... They've already front-loaded and now they have to sit back and slow things down a little bit and see what the effects of the front loading does on the economy.

I think that's a great summary, Cindy. I think you said a couple key things there. One of which is the fact that this machine that we call the economy does take some time to slow down and speed up and the fed is doing what they can with the tools they have. I mean, they don't have tools to fight things like food inflation or even prices of pump and so forth. The market seemed to kind of reflect, or maybe think about the fact that the fed was pivoting. I think it's more like a pirouette than a pivot, frankly, a small little pivot or a pirouette, but it does also suggest maybe that there's a peak that the tightening cycle. So in other words, the fed can probably keep going and raise interest rates a bit further, but the maximum point of pain seems to have passed a little bit.

I love ration there for you this morning, I guess, but I would suggest that the market seems to be looking through this a little bit. It'll be really curious. I think, we have a call, of course, a week from now and we'll get some fresh reading on the employment situation for the month of July. And it'll probably be pretty decent. I mean, I think the employment numbers are still going to be pretty strong, but the labor market six months from now could look vastly different. And that's the thing that probably people aren't really thinking about at this point in the conversation where six months from now, things could have slowed down materially, as you said, we've kind of gone through this period of time now where the fed has tightened rates considerably, financial conditions have started to tighten but the market is looking through that a little bit. Perhaps not thinking that farther ahead.

So you mentioned also the fact that the economy is slowing and yes, we did get the official reading for GDP this past week as well, showing that the economy did contract for the second three-quarter. Seemed to me again, kind of like a mixed bag. I think there are a lot of funky numbers inside there with inventories and trade and so forth that maybe sometimes gets overlooked. The consumer seems to be doing okay. I mean, consumer spending did kind of downshift a little bit but more noticeably was I think, a bigger shift between goods and services and maybe people thinking about experiences and vacations and things of that sort versus stuff basically. And certainly, the housing component of the GDP report was significantly weaker, which I think is probably somewhat expected. So again, now we've got this debate raging as to whether the two-quarter definition of recession really holds. People are kind of throwing water at that.

Some people think it is recession. There's an interesting oped in the New York Post that talked about how painful this might be for the administration. But irrespective of that, again, I don't think we're in a recession right now. I mean, I think it's kind of hard to kind of make that case. It was right to say that the overall GDP now cast was accurate in the sense that this was this model that we've talked about suggesting that the economy would contract a little bit, but when you've got employment rising, what around three and a half, 4%, I think initial claims have picked up a little bit, but they're still below where they were. Most recessions, for example, see initial employment claims of around 350,000, we're about 250. Now that's up a little bit, but the overall continuing claims, those people that have been unemployed for longer have actually kind of seen those numbers stay in your record lows.

And then this morning we got pretty healthy reading from the employment situation as well, where labor markets, labor costs rather rose about 5% year of year. Not maybe as much as feared but nonetheless suggested that the overall employment situation is still pretty strong. And then lastly, I would kind of reverse what I said last week with respect to the fiscal situation where it seemed to be kind of slowing down a little bit. It now seems that the mood in Washington right now is to spend more money. So you've got another fiscal impulse perhaps coming at the economy as well. So I love next pictures. But again, I guess it kind of [inaudible 00:08:04] of you Steve. I think it was kind of curious just to see how the market going back to the fed conversation from Cindy's address earlier, the market really seems to be kind of thinking that the fed is officially pivoted almost. And was kind of suggesting that the peak is over in terms of fed tightening. What was your rate of the market activity this past week?

Yeah, I think George you're right. I mean, the market has been looking through the whole recession business through. And really the inflation business and thinking about what's the world look like if all that stuff's in the rear-view mirror. Right? And they seized on the potential for a more dovish fed. I would argue that the fed really, if you read what they said and listened to what Powell said, the pivot quote, unquote wasn't anywhere near as dovish is what you might think. Because I think when you look at the way the numbers are likely going to come in, we have hot inflation baked in the cake from now through year-end. So if they're quote, unquote data dependent, it's going to be really hard for them to pivot dovish when inflation is running between six and 7%, so.

Yeah. It's not a pivot. Like I said, it's a pirouette or something. It's-

Yeah. I mean, I think-

[crosstalk 00:09:22], he didn't really pivot.

Yeah. So people need to be really careful about taking too much from what he said. What I would say is though that the market has really been trying to figure out... Okay, let's assume that they do make some kind of a pirouette to use your word, George. And this is something we've talked about on these calls in the past. And that is that it's becoming increasingly likely that the peak for fed funds, this cycle is likely going to be for the first time ever at a negative level, on a real rates basis when compared to inflation. That means that the inflation rate is likely going to be continuing to run higher than what the fed funds peak is when the fed finishes its tightening. That's never happened before. And quite honestly, if the fed declares victory on inflation with inflation running somewhere north of 4%, it's Katie bar the door for equity assets, growth assets, inflation, linked commodity type stuff.

I mean, we've mentioned before and I'll say it again. I think you can get into a scenario where things can light off like a Roman candle if that's what they actually do. And that's what the market's trying to front run. That's why we've seen this rally or so strongly on this idea that the fed might be pivoting because the market is front running. The idea that it's going to have to be really, really aggressive in response to some type of a pivot. Because the consequences of not participating in that rally are so negative for investment managers.

So Rajeev, what are the fixed income markets telling you at this particular time too?

I mean, it's a very interesting time. I mean, to Steve's point, if the fed decides that you know what, we had that 2% target and now we're going to say it's okay for inflation to be at 4%. I feel that the fed loses credibility by that. I think the fed needs to continue to combat inflation and try to move as fast as they can towards the 2% target. It's going to take a while to get there. The market, the fixed income markets are definitely not behaving that way. They think that the fed is going to pause. We saw it immediately if the fed announcement, the two-year U.S treasury moved almost 32 basis points above the tenure. So again, we remain inverted. And as we've mentioned, many times on these calls about the inverted yield curve being a historical predictor of imminent recession, we still see that inverted.

We immediately saw the tenure fall to 2.74%. We saw the two year move below 3%. It's as Cindy mentioned, the fed and the way their messaging seemed dovish is completely different than the actual statement itself. The statement read a lot more hawkish than the way the pressure was. Fed Chair Powell mentioned that he could slow the pace of tightening. That's really what the market caught onto and risk assets rallied and continues to rally. Credit spreads rallied, high yield spreads rallied. They're putting a lot of faith into the pressure and the notion that the Fed's going to slow down. They're going to need to really see the data. And I mean, they have an opportunity here to wait till September, they'll have some more data. I think one good thing that came out of that fed meeting was the fact that they are giving up on their market guidance.

That doesn't help at all when you look at back-dated data of inflation, so they're not going to be doing... That's kind of following the leap from the ECB. So we're going to probably look at a base case of September being 50 basis points. The issue really is when the Fed's going to pause. I totally agree that as soon as we get that notion, the fed is going to pause. Risk assets are going to rally. We saw in the last two days, but I really think that we need to see a lot more. The curve could... We have a lot of fed speakers coming up now they were on a blackout period. They didn't get to say much. They're going to come out. I have a feeling that the next week or so, fed speaker's going to talk about again, inflation's number one target. We have something to worry about inflation, and you could start seeing the flattening of the yield curve again at that point.

George, back to you. I think you had some additional thoughts.

Yeah. I was just going to piggyback a little bit on what Steve said about how the market's trying to front run a little bit of this end date or end period of, I don't know what we would call this, fed tightening maybe. But I think what's curious to me, you still have this dynamic where stock prices and bond prices are kind of moving together still. And that seem to be working in our favor lately, where both, excuse me, both bond prices and stock prices have been rallying. But there's also the counter side of it where we've seen much of this year, seen pressure on both sides, both stock prices and bond prices have fallen. So I do think it's important not to abandon that idea and think about diversification more fully. So we do want to think about how we construct portfolios and being more robust about portfolio construction and using other things in just stocks and bonds to really try and provide the diversification in these periods of volatility. Which again, I don't think they're over just yet for sure. But Steve, we also got some pretty upbeat, I guess you could say upbeat news from the earnings front this past week. What was your take on the earnings releases that we've seen across the board at a macro level?

Yeah, they've been good enough. I mean, I think the ones that people have been the most focused on, especially in the press has been the mega-cap tech earnings. And what's funny is if you actually look at the earnings numbers for the mega-cap tech companies, I think that their average beat was by about a half a percent, something like this. And the average beat for everybody else is something like six and a half percent. But the reactions that we've seen in the mega-cap tech names have been way outsized for that. I mean, take a look at Amazon shares today and you see that writ large. I mean, I think that the macro for me is that a company like Amazon in the world we live in today, post-pandemic is probably a better window into the health of the American consumer than a company like Walmart or Target. Those are a couple of companies that have had more troubling signs, whether it's inventory other things. And I think people are trying to make read through some of these individual companies to the health of the economy. And when you see the type of report out of a company like Amazon last night, it really makes you think that the consumer continues to have pretty good legs frankly, George.

Yeah. So I guess I just kind of closed by saying that I think the overall assessment seems to be things are maybe a bit worse than expected in terms of the slow down the economy, maybe some of the earnings point are as robust as you mentioned but they're probably better than feared. And so I think the market is definitely hanging off that for now. And with that, I think we have to be very vigilant and just at the fed is being dependent, so do we. So I think on that note, we'll wrap it up and wish for a very good rest of the week and a good weekend.

George, Steve, Rajeev, and Cindy, thanks for your insights. We appreciate it. And thanks to our listeners for joining us today. Be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app. And as always, past performance is no guarantee of future results. And we know your financial situation is personal to you. So reach out to your relationship manager, portfolio, strategist, or financial advisor for more information. We'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you achieve your financial success.

The key wealth matters podcast is produced by the Key Wealth Institute. The Key Wealth Institute is comprised of a collection of financial professionals representing key entities, including Key Private Bank, KeyBank Institutional Advisors, Key Private Client, and Key Investment Services. Any opinions, projections, or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. This material is presented for informational purposes only and should not be construed as individual tax or financial advice. Bank and trust products are provided by KeyBank National Association, member FDIC and equal housing lender. Key Private Bank and KeyBank Institutional Advisors are part of KeyBank. Investment products, brokerage and investment advisory services are offered through Key Investment Services, LLC or KIS, a member of FINRA, SIPC, and SEC-registered investment advisor. Insurance products are offered through KeyCorp Insurance Agency USA incorporated, or KIA, KSN, KIA are affiliated with KeyBank. Investment in insurance products are not FDIC insured, not bank guaranteed, may lose value, not a deposit, not insured by any federal or state government agency. KeyBank and its affiliates do not provide tax or legal advice.

Individuals should consult their personal tax advisor before making any tax-related investment decisions. This content is copyrighted by KeyCorp 2022.

July 22nd, 2022

Welcome to the Key Wealth Matters Podcast, a series of candid conversations with leading experts about how individuals and organizations can grow and protect their finances, tailored around current events and trends. Here's your host for today's podcast, Brian Pietrangelo.

Welcome to the Key Wealth Matters weekly podcast, where we casually ramble on about important topics, including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to unlock the mysteries of the markets and investing. Today is Friday, July 22, 2022. I'm Brian Pietrangelo, welcome to the podcast.

And speaking of human ingenuity, this week on July 20th, 53 years ago, the trio of Neil Armstrong, Buzz Aldrin and Michael Collins traveled on board Apollo 11 into space and culminating with Armstrong and Aldrin being the first humans to set foot on the moon, launching a fantastic run in the evolution of space travel and technological advancement.

With me today I'd like to introduce our own trio of investing experts here to share their thoughts on what they see beyond the horizon and in the markets and the economy, George Mateyo, Chief Investment Officer, Steve Hoedt, Head of Equities, and Rajeev Sharma, Head of Fixed Income.

As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our Wealth Institute on many different subjects and especially our key questions article series addressing a relevant topic for investors each Wednesday.

For this week's economic data it was fairly light. Housing data showed declines for June in all three areas, building permits, housing starts and housing completions. Other leading economic indicators were also down about 0.8% also for the third month in a row. And initial unemployment claims were at 251,000 for the week, which was the highest in eight months. So we're seeing some signs of the economic slow down, also permeating into our conversation in addition to a couple commentaries on the Fed meeting next week. So George, let's start with you with your general thoughts.

Well, there wasn't a whole lot of economic news that really moved the market it seemed this past week, Brian. I think there were some indications that confirmed that things we already know, like the housing market is coming under a bit of pressure, maybe in response to higher interest rates. I think it's also a reflection of demand cooling a little bit. I think for the first time, I think it was in three years inventories of homes for sale actually rose. So I think we've kind of been in this environment for the past three years. I'm sure somebody, Steve or Rajeev can correct me if I'm wrong, but for the first time in a while we've actually started to see inventories come back up again. And I've seen things that suggest that the homes are taking longer to sell. It's still a pretty decent market overall, but it is cooling pretty quickly. So I think that was probably some of the headline news and some of the economic news that was out this week.

We also got more data that suggests that inflation is definitely cooling. Not all of the news is good unfortunately, but many employers now started talking about revisiting hiring plans. There's been a few increases of some layoffs, even. The jobless claim numbers that we often look at week on week out did tick up a little bit and I think they're at about a six or seven-month high. So they've actually escalated. They're still well below recession levels, but they've also trended in the wrong direction. And I guess there's some extent that maybe as these numbers continue higher, they further suggested they're doing kind of the work for the Fed. I mean, they're taking some of the pressure off of the labor market and that's maybe one of the reasons why the equity market is starting to respond favorably.

I'd also note that from the inflation perspective, Senator Manchin out of West Virginia was out this week that got some attention when he was kind of backing away from the climate change deal. And not to make too much of this of a political statement, but I think it was interesting, this was the first time I can remember that a politician actually said he didn't want to spend more money. And I think there's probably some argument that suggests that maybe the market is sensitive and kind of appreciates the fact that there's a bit more fiscal restraint going on as well.

So combined you've got kind of some softening in the labor market, you've got maybe some tightening with respect to fiscal spending, a cooling housing market. We'll get Steve's take on earnings in a second, but those things to me suggest that maybe the market is kind of doing the heavy lifting for the Fed in kind of taking some of these inflationary pressures down before the Fed actually has to intervene too much. And maybe, if we think about what the Fed might be doing next, it maybe won't be as aggressive as once feared as we thought maybe just a few weeks ago.

But Rajeev, let me get your thoughts. It's been a pretty active week on your side of the desk with respect to central banks and, I guess, why don't we start with the ECB because I think that was a pretty interesting move what they did this week out of Europe.

Very interesting, George, indeed. It just proves that inflation is truly a global phenomenon, a global issue. And now we have more than 60 central banks trying to do what they can do to combat inflation, and you can add the ECB to that list where yesterday they raised their key rates by 50 basis points. It's the first increase for them in 11 years and the biggest since 2000. And the rationale here, again, is the same, to combat surging inflation. And that, too, with global recession risk rising, but the ECB is doing what they need to do.

They also introduced a tool called the Transmission Protection Instrument, TPI, which allows the ECB to buy public sector securities with no preset limits. And those details remain vague, but it really shows you that the ECB is really trying to get in front of the curve, they're behind the curve as well, just like the Fed, but basically they're going to try to do what they can with this new tool to undo any abrupt changes of financial conditions. If you compare that with what the Fed has done, it's very different. The Fed's monetary policy, they ended their asset purchases before they began raising rates. The ECB is actually trying to do it at the same time, raise rates and also have this tool that allows them to buy securities if need be.

But if you go back to the central bank actions, these are all aggressive rate hikes when you think about it relatively speaking. We're used to 25 basis points from most of the central banks, but now we're in this club, the 50 basis point club, where you're seeing all these banks around the globe raising rates, trying to combat inflation. The ECB move was double what the market was expecting. It's in line with those outsized moves that we've seen from other banks, but it just shows you that inflation is a very strong market condition right now and I think that the central banks around the globe are really trying to do what they can to combat it. The question really is going to be, does the Bank of England follow suit? Do they raise 50 basis points? They have a meeting coming up. And what does the Fed do? The Fed, are they going to try to go beyond 75 basis points next week? We have a lot to do next week as well.

Yeah, what do you make of the Fed? I mean, again, I'm kind of thinking that the market is kind of done some of the heavy lifting for the Fed, and I know we've talked about it's a pretty foreground conclusion that they'll raise rates 75 basis points next week. A few weeks ago, there was some speculation they might raise 100 basis points. The market seems like that's pulled off and I don't think that's completely gone away. But I think the bigger question many people might be asking is, what does the path look like from there?

So September, for example, I think is the following meeting, and not to get too far ahead of ourselves, but September was one of those meetings that people thought they might back off a little bit, they might raise 50 basis points. We got that hot CPI number and then those percentages of 75 base points or more went off the table or went off the charts, rather, thinking that 75 basis point would happen. But if we look at September, what's the market now suggesting the Fed will do then?

Great question. I think that it's so quick how probabilities change on what the expectations from the Fed are. When the CPI print came out right on that day itself, the expectation was the Fed was going to move 75 basis points in September, 100 basis points next week. Now the odds of Fed speakers coming in, Fed members have kind of dialed back those expectations. Now we're talking about 75 basis points next week being the consensus and the consensus for September being 50 basis points.

We also have a Jackson Hole meeting in August, which typically you don't see a Fed doing a rate hike in those meetings. But when that CPI print came out, the consensus became that, okay, we're going to have a Fed that's going to be in motion next week. The August Jackson Hole meeting, there will be a rate hike that day. And then you go September and you're talking 75 basic points. But within two days, that all cooled down. And now there's actually talks, I've heard economic professors coming out today and saying, inflation's going to slow down. The Fed's going to be done after this hike next week. I don't know how these type of expectations just play out so quickly within the day. But to be honest with you, I think that the Fed has not signaled that at all. They're signaling that they're going to do what it takes to control inflation. I expect the 75 basis points next week, 100 is not off the table, but I do think they'll stick with 75. I think come September, you're talking at least 50.

Well, as always, we'll have to say 10 to that, but meanwhile, we've got earnings out, Steve, and we've now seen north of 15 or so percent of the S&P 500 report earnings. Numbers seem, from what I've seen, pretty decent. I'm sure you can probably discern some more precise trends. But what do you see in earnings? And also, what's the outlook like for the rest of the year so far?

Well, it's been an interesting earning season as it always is. And what we've seen is that while the numbers have come in, in fact, better than expectations, we've seen the market really not care about earnings, George, which is funny because the thing I watch is what's the market reaction to the numbers themselves, right? And we've seen both stocks that are beating expectations and stocks that are disappointing on expectations end up with positive returns and significantly so on the day out and a day after the releases.

So really the market is rewarding poor performance and good performance this quarter. So, that tells me that the bar was just set incredibly low as we came in. When you look at the overall earnings line for the S&P 500, the earnings aggregate, the number has started to drift lower here in the last couple of weeks. It's continued to drift lower as we've gotten through this start to earning season, as guidance is being taken down. So forward guidance is coming down. I mean, it really seems to me that the market narrative has shifted here lately. It's shifted away from this idea of inflation and kind of this obsession with worrying about it to much more of a focus on growth, where is growth going to be next year? It's these recession fears, the idea that the Fed is going to push stuff so far as to break things, those whole conversations.

I think the market really is focused on when is the Fed going to be done and at what level? And I think we've seen those numbers be in flux. We've seen those numbers get pulled forward into the first quarter of next year. Whether that actually proves to be the case is going to be a different question. I mean, those inflation numbers are awfully sticky. We've seen a number of different pieces from other folks. Maybe we've got academic economists thinking that the Fed is going to be done in another month or two, but you can make the case that the inflation numbers we're seeing now because of the way they're constructed, especially with the owner's equivalent rent portion, that these numbers are going to run hot all through the rest of the year. So the headline numbers are not going to be pretty irrespective of the fact that commodity prices and gasoline prices and things like that may have come off the boil a bit and made people feel a little better about it. The headline numbers are going to be particularly rough to deal with.

Market itself, when markets are [inaudible 00:12:12] on bad/poor news, that's to be respected. The rally obtains right now, it looks to us like we could see this follow through up to, say, 4,150 to 4,200 on the S&P 500. That is the high we saw back in late May, early June, also corresponds with the low we saw in late February. So there's significant technical resistance in that area. We'll see if there's enough momentum to carry it through.

We've watched a number of different batteries, a number of different indicators, I should say, a battery of indicators that we watch to see how is the market doing? Things like high beta versus low volatility, cyclicality versus defensiveness, a number of different types of things like this. And all of these indicators still tell us that there's a lot more wood for this market to chop before we signal all clear. Market participation still remains below where we'd like to see it in terms of strength. The strength that we do see is fairly narrow. We need to see that broad now, George. Maybe it happens as we move through the back end of the summer and we get into the typical summer doldrums, but this summer sure doesn't seem doldrum-like to me yet.

No, indeed it doesn't it. It sure doesn't. There's a lot going on at the headline level and certainly at the micro level too. Steve, before I let you go, though, we've seen a really pretty swift rotation since July started into some of these high growth names again, right? They were ones that really were taken down first and they've seemed to kind of rise more recently and probably outperformed by a good amount it seems like to me. These are companies in the tech space that again, were hurt pretty hard as interest rates were moving up and valuations were coming down pretty quickly. Do you think this rally into growth names is sustainable or where do you think we want to be positioned portfolio wise going in the second half of this year?

Well, I think that when you look at the tech names that have caught a pretty good bid, there is definitely a bifurcation in the market, right? So it's not the stuff that was necessarily the leaders post COVID, the low earnings or no earnings type of names. What you're seeing is rallies in profitable tech growth companies. And I think that what you see there is this tilt toward defensiveness. If you go back over the last five or six years, when people started to have growth fears about the overall economy, there was a gravitation to growth stocks because these companies have shown the ability to grow earnings and compound returns for shareholders, even through periods of economic weakness. And I think what we're seeing right now is we're seeing a return to market participants being willing to commit capital to some of these, maybe for lack of a better word, higher multiple, but higher quality growth names within a technology space, within the healthcare space. Healthcare has also been leadership, George. So those two areas have been noticeable to me.

Well, I think, again, lots to keep our eyes on. And again, next week I think will be a really critical week. Again, we've got the Fed coming out, as Rajeev mentioned, on Wednesday. And then the very next day, of course, we'll have the second quarter print of GDP, which people are trying to game that number, which could suggest that we're experiencing two consecutive quarters of negative growth. But I still think we're not quite in a recession yet. The labor market seems to be decent. Trends are not our friend at the moment, but for now it seems like there's still a lot of underlying strength in the economy that hopefully can endure a bit longer.

George, thanks for the recap for next week. And George, Steve and Rajeev, thanks for your insights. We appreciate it. Thanks to our listeners for joining us today. Be sure to subscribe to the Key Wealth Matters Podcast through your favorite podcast app. And as always, past performance is no guarantee of future results. And we know your financial situation is personal to you. So reach out to your relationship manager, your portfolio strategist, or your financial advisor for more information. And we'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you achieve your financial success.

The Key Wealth Institute is comprised of a collection of financial professionals representing Key entities including Key Private Bank, KeyBank Institutional Advisors, Key Private Client, and Key Investment Services. Any opinions, projections, or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. This material is presented for informational purposes only and should not be construed as individual tax or financial advice. Bank and trust products are provided by KeyBank National Association, Member FDIC and Equal Housing Lender. Key Private Bank and KeyBank Institutional Advisors are part of KeyBank.

Investment products, brokerage and investment advisory services are offered through Key Investment Services LLC, or KIS, member of FINRA, SIPC, an SEC registered investment advisor. Insurance products are offered through KeyCorp Insurance Agency USA, Incorporated, or KIA. KIS and KIA are affiliated with KeyBank. Investment and insurance products are not FDIC insured, not bank guaranteed, may lose value, not a deposit, not insured by any federal or state government agency. KeyBank and its affiliates do not provide tax or legal advice. Individuals should consult their personal tax advisor before making any tax-related investment decisions. This content is copyrighted by KeyCorp 2022.

July 15th, 2022

Welcome to the Key Wealth Matters podcast, a series of candid conversations with leading experts about how individuals and organizations can grow and protect their finances tailored around current events and trends. Here's your host for today's podcast, Brian Pietrangelo.

Welcome to the Key Wealth Matters weekly podcast where we casually ramble on about important topics, including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to unlock the mysteries of the markets and investing.

Today is Friday, July 15, 2022. I'm Brian Pietrangelo. Welcome to the podcast. And with me today, I'd like to introduce our panel of investing experts here to share their thoughts on this week's market activity. George Mateyo, Chief Investment Officer, Steve Hoedt, Head of Equities, and Rajeev Sharma, Head of Fixed Income.

As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our Wealth Institute on many different subjects and especially our Key Questions article series addressing a relevant topic for investors each Wednesday.

As far as this week's economic data, it was centered around inflation and retail sales. The CPI for June, the Consumer Price Index and inflation indicator for June was up 9.1% year over year versus 8.8% expected and higher than last month's read in May of 8.6%. On a month- over-month basis, it was up 1.3% for June, again higher than the 1% in May. So inflation continues to surprise, almost a carbon copy of what we had last month.

On the other side of the equation, retail sales continue to rise, up 1% in June versus .9% expected, after a lower level back in May of only .3%. So the consumer seems to be strong, which is positive for the economy. Initial unemployment claims yesterday were at 244,000 in June, up about 9,000 from the prior week. Again, we continue to monitor this opportunity for what's going on in the overall employment picture.

So as we think about this overall CPI print, again, being very hot, Rajeev, what do you think it means for the overall Federal Reserve, and what do you think it means for the overall interest rate policy?

So, yes, the Fed is in motion. The Fed has always said they're going to combat inflation. And with the latest CPI print, the Fed is going to continue with that. But it's amazing how quickly 100 basis points is back on the table. July 27th is when we're going to find out what the Fed's going to do. And all odds are now on 100 basis points. It's amazing, before the CPI print, 75 basis points was the norm of what the Fed is going to do, and now we're seeing 100 basis points of what the Fed is going to do. And that's what everybody's expecting. Now, the difference between 100 basis points and 75 basis points, it doesn't seem like a lot, but I think if the Fed decides that we want to go 100 basis points, I think that does change everything as far as what the Fed is going to do going forward.

There were a lot of economists, a lot of investors that thought that, okay, we'll do 75 basis points in July by the Fed and then perhaps another 75 or another 50. But now you do 100 basis points in July, everything is back on the table again. The odds of a 75 basis point hike for the next meeting after that have increased tremendously. That CPI print really puts the pressure back on the Fed and to prove that they are behind the curve. And it's going to be very interesting to see if they continue to be as aggressive as they are. We did see a couple of Fed speakers this week that are trying to walk it back, which is very interesting, trying to say 75 basis points is what most members are thinking. But I think the market's really looking at 100 right now. And I think that's going to continue.

So I really feel that whatever it takes for inflation to come under control, the Fed's going to do it. A 100 basis points is the predictability and the probability of the next hike.

What do you think that means for yield curve inversion, Rajeev?

The yield curve has inverted on several points on the yield curve, obviously the 2s/10s we look at quite a bit. There's been a lot of talk about the 2s/10s and the inversion of what it means and how sustainable that inversion is. We did see the 2/10 invert back on July 5th, and it's remained inverted. I think it really is a strong signal for upcoming recession, but there is that thought that the Fed has really distorted the picture as far as all the accommodation that they've done over the years, their balance sheet, what they're going to do.

But when you see a 2s/10s invert, it's really saying two different things. One, the front part of the curve is very influenced by Fed policy, so that remains elevated. If you look further out in the curve, the 10 year has not really moved higher as far as the two year goes. So we've had an event where the 10 year has been very sustainable and actually moved lower in the market expectation that we are going into a recession. So you're seeing that inversion. It continues to be that way. I personally feel that that inversion can continue for a while. And it has now been since July 5th where we've seen that inversion. I think that's continuing.

So George, same question. With the CPI print and then this morning's release on retail sales where it's a little bit more positive, what do you think those two indicators mean for the overall economy going into recession as Rajeev alluded to? And any other thoughts that you have in a big picture way.

Well, it's a really challenging time right now. And I think the takeaway from me is you want to really be diversified and really kind of know what you own and why you own it as we say. Having a little bit of cash in dry powder these days is probably not a bad thing.

But I think still equities for the long run are probably the best place to hedge inflation. There are going to be volatiles, we've talked about. That's going to be the case for the rest of the year, I think. But inflation, as Rajeev talked about, as you mentioned, it's just really running disturbingly high. I mean, just look at these numbers. I mean, in June we saw gasoline prices up 60%, 60 year over year. They were up 50% in May. Electricity up 14%, food up 10, cars up 10, housing up six. The Fed has got to do something and the Fed is determined to do it it seems like.

I mean, markets are kind of the head of the Fed as we talked about. The Fed has kind of two tough choices, basically. I mean, they need to raise rates enough to bring inflation down and they'll probably have to push the economy into recession, or they could just let inflation kind of run hot and get out of control. And I think, as Rajeev pointed out, the market is trying to convince the Fed that they need to do this and they should do this. And that means that probably, again, a mild recession might be a case to kind of think about.

I think you also noted the fact, though, that retail sales and other kind of consumer behavior is pretty strong. I was actually in New York this week and it seemed like it was more than back. I mean, I don't think... Interestingly, the offices weren't as busy as I thought, but the streets were pretty packed and restaurants were full and hotels seemed to be pretty active. I mean, I know that's just a bunch of silly anecdotes. But in hard numbers, retail sales were strong this morning. Amazon Prime sales were up, I think what? 19% or something, ahead of expectations. So the consumer wants to spend. The economy is not in recession now I don't think. The risks are growing that the Fed are going to have to push us there to kind of take some of these inflation pressures off just like a physician would sometimes have to take a patient into a coma to try and heal him or her. So I think that's probably the risk down the road, but right now it seems like things are strong enough to kind of withstand some of these pressures.

And then I guess on a forward-looking basis, gasoline prices have come down a little bit. I think they're, according to some forecasts I've read, slated to fall close to $4 from well over five a few weeks ago. Freight rates seem to be easing up a little bit, so some of the pressures of the ports seem to be easing. I've heard kind of conflicting signals on that. But you look at the signals like copper, fertilizer prices, those things are down quite a bit too. So it's going to be a really difficult, I think, environment to kind of navigate through. And so, again, staying diversified more than anything else is probably really important these days in this environment.

And then more lately, we've talked about with respect to the stock prices. Steve, I'd like to get your thoughts on earnings. I mean, earnings have started coming in a little bit. Kind of a mixed picture there too so far it seems like. What do you think?

Yeah. Earnings have been a mixed picture to say the least, George. I mean, the big one this week was one of the large money center banks coming out and basically not only cutting guidance, but also taking their share buyback off the table. And I think that as we go through this corporate earning season, we're likely going to hear a lot more of that type of commentary, whether it's related to the strong dollar for multinational companies having problems translating things back to the U.S. or whether it's just this mixed picture, kind of malaise here domestically given the fact that we still have supply chain issues that these companies are working through and labor cost pressures that are proving more problematic to pass through to the end consumer than what people had thought. So to us, it really is going to come down to probably seeing some pressure on margins, and how are margins able to hold up as we move through earning season's going to be key to the outlook.

We do seem to have rolled over a little bit here on forward earnings. We're down about a dollar from where we were a month ago. It's not a huge decline, but the trend is something that we're definitely going to want to watch as we move through the season. You know, talking about the inflation versus kind of growth trade off is really what I think the market is really weighing right now. I think the market's kind of over inflation, to be honest. You didn't really see a huge reaction to the CPI information earlier this week on the equity side. I think the market has gotten the message the Fed's going to do what it needs to do.

Yeah, I think the market just wants the Fed to get it over with, right? I mean, the market's saying just come on, let's get it over with and let's get on with it.

Correct. I mean, the market's kind of moved on to the discussion of what's going to happen to growth later this year because of what the Fed's going to do. The market's telling the Fed to move more aggressively. Because, I mean, when the market prices in 100 basis points as the effectively default option for July, takes the dovish pivot off the table for September, and puts in 75 basis points, that gets you to 350 on the Fed funds rate. If you look at the futures market, futures market are telling you that we're going to start cutting rates from 350 in the first quarter of 2023. I really have my doubts whether that's going to happen or not.

If you take a look at what the inflation numbers are likely to be, yeah, okay, gasoline prices are pulled back. But if you start to go inside the numbers and look at how that stuff is actually calculated, the rent numbers have a huge impact on it. And basically, there are increases in the rent numbers baked in the cake for the rest of the year that are going to cause these inflation numbers to run at least 7%, if not closer to 9% over the balance of the year. And that's irrespective of what happens with the things that we see every day called food and energy, which the Fed tries not to pay attention to, but consumers do. So there's some kind of inside baseball stuff there, of course. But the bottom line is we're likely going to be dealing with hot headline numbers for the balance of the year whether we like it or not.

Like I said, I think the market has kind of gotten the message on this and understands it. The real question's going to be how far is the Fed going to push? Is 350 really the terminal rate? If the terminal rate ends up having to be higher than 350, then I think we have some downside risk to equities as we move from now through the balance of the year. If 350's right, then the market will start to price in that dovish pivot sometime in the fall. And I think then we are going to be in a situation where cyclicals and growth stocks, high, multiple growth stocks are probably going to be a place where investors are going to want to be.

That's kind of what makes this a really difficult market right now, in that you may think that near term the market's going to have problems, but you really don't want to position yourself such that you're so bearish because if the Fed gets dovish because the economy's weakening, you are not going to be able to catch up to this market on the upside when they start cutting from a position of already what are negative real rates.

Yeah. You've seen a little bit of that change in tenor inside the market internals. Things I look at kind of suggested some of those factor rotations, they haven't really moved in a big way yet, but they've kind of, sort of inflected a little bit here and there where you start to see, as you mentioned, some of the rotation out of the cyclicals into growth names in particular, which is probably one of the reasons that people think about being just diversified in this environment because you can get really whipsawed pretty quickly. So we tend to take not, we tend not to take, I should say, too big bets on those type of things either way.

But Steve, on the energy side, I mean, we have seen futures gasoline, I'm sorry, gasoline futures come down a little bit. Of course, Biden was in the Middle East this week. And next week we'll probably be talking a little bit about Russia and what they may or may not to do in Europe, I'm not sure. Do you have any views on that situation?

I mean, if you want to talk about Russia with Europe and the gas situation, look, I think that the Russians have historically, even when it was the Soviet Union, they've talked about being a good partner, right? So I think that you've got to take them at face value on their desire to deliver gas. It's not in their interest to not deliver on contracts that they already have in place.

The issue for them with the repairs, they always do repairs on Nord Stream 1 during the summer because it's the low season. The issue with them is that some of the repairs are done in countries that are taking different views of the way to implement the sanctions. Namely, these turbines that get repaired. They're Siemens turbines that get repaired in Canada, and the Canadians didn't want to allow them to be shipped back.

So I think that it's interesting to watch. I think they're going to turn the gas back on in another week. But it could be chaos if they don't. There's no doubt about that. Gas prices, as you said earlier, George, look like they're headed to four bucks in my view.

Yeah. I think that's hard to really game that out, right? There's so much game theory that could be done with respect to that situation and probably, no pun intended, but it's a pretty fluid one at that.

So maybe one last turn for you, Rajeev. Any thoughts, I guess, with respect to credit spreads or the corporate bond market, kind of how it's positioning and kind of thinking about this time right now with the economy conceivably kind of going through this digestion and maybe this transition, as Steve pointed out, from concerns about inflation versus concerns about growth. So anything that we can kind of glean from the credit market with respect to growth?

I mean, it's a very good question, George. I mean, we've seen investment grade spreads be orderly, but they've been wider. But I really feel like when we talk about recession, we talk about the Fed combating inflation. This whole notion of recession being there, we've seen lower-rated credits actually really underperform in the last couple of months. It's being even more pronounced now. Default rates are very low, but if you look at CCC market, high-yield market, they've actually come under a lot of pressure in the last couple weeks. The trade of up in quality has been something we've talked about for a very long time, and I think that continues.

To Steve's point, I mean, if we hit a peak of 3.50 in the first quarter of '23, there's also this notion that the Fed will eventually start to cut in the first quarter of 2023. If that happens, I do think that some of these lower- rated credits, high-yield will rally, but to time that is going to be very difficult. I do think that spreads continue to come under pressure. But we have seen a lot of issuers decide that they don't want to come to market in this environment. And that could be a strong technical for spreads to at least remain orderly.

So George, Steve, and Rajeev, thanks again for your insights. We appreciate it as we do every week. And thanks to our listeners for joining us today. Be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app. As always, past performance is no guarantee of future results. And we know your financial situation is personal to you. So reach out to your relationship manager, portfolio strategist, or financial advisor for more information. And we'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you achieve your financial success.

The Key Wealth Matters podcast is produced by the Key Wealth Institute. The Key Wealth Institute is comprised of a collection of financial professionals representing Key entities, including Key Private Bank, KeyBank Institutional Advisors, Key Private Client, and Key Investment Services. Any opinions, projections, or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. This material is presented for informational purposes only and should not be construed as individual tax or financial advice. Bank and trust products are provided by KeyBank National Association, member FDIC and Equal Housing Lender.

Key Private Bank and KeyBank Institutional Advisors are part of KeyBank. Investment products, brokerage, and investment advisory services are offered through Key Investment Services, LLC or KIS, member of FINRA, SIPC, and SEC registered investment advisor. Insurance products are offered through KeyCorp Insurance Agency USA, Incorporated, or KIA. KIS and KIA are affiliated with KeyBank. Investment and insurance products are not FDIC insured, not bank guaranteed, may lose value, not a deposit, not insured by any federal or state government agency. KeyBank and its affiliates do not provide tax or legal advice. Individuals should consult their personal tax advisor before making any tax-related investment decisions. This content is copyrighted by KeyCorp 2022.

July 8th, 2022

Welcome to the Key Wealth Matters podcast. A series of candid conversations with leading experts, about how individuals and organizations can grow and protect their finances. Tailored around current events and trends. Here's your host for today's podcast, Brian Pietrangelo.

Welcome to the Key Wealth Matters weekly podcast, where we casually ramble on about important topics. Including the markets, the economy, human ingenuity. And almost anything under the sun. Giving you the keys to unlock the mysteries of the markets and investing. Today is Friday, July 8th 2022. I'm Brian Pietrangelo. Welcome to the podcast. And with me today, I'd like to introduce our panel of investing experts. Some might say for this week, they were certainly running with the bulls. George Mateyo, our chief investment officer. And Steve Hoedt, head of equities.

As a reminder, a lot of great content is available on key.com/wealthinsights. Including updates from our wealth institute, on many different subjects. And especially, our key questions article series. Addressing a relevant topic for investors, each Wednesday.

As far as this week's economic data, we had some pretty important information. Basically, centered around jobs and employment. So if we go back to earlier in the week, there was the JOLTS report. Which is the Job Openings and Labor Turnover Survey, from the Department of Labor. Where there still remain 11.3 million job openings. Which is quite a strong signal, relative to the overall health of the job market. Then yesterday, we had the initial unemployment claims. Which comes out every week. Again, that number centers around 235,000. Which has been moderating for about the last few weeks. Although, elevated from earlier this year.

And finally this morning, the employment situation. Which has a bunch of different factors that are reported on the Friday. And a particular highlight is the 372,000 jobs that were new, in terms of non-farm payrolls for June.

So with that, under the guise of what's going on in the overall employment market with those three factors coming out this week, George what are your thoughts on that and more details that you see in the job market?

Well I think Brian, the big story of the week, as you mentioned, is on the employment side. And this morning's job report was probably the one that people are going to focus most on over the weekend, to try and understand where we are right now. I think the number suggests that the economy is doing quite well still. I know there's been a lot of clamoring around recessions. Whether or not, we're in recession. Whether we're going to be in recession sometime. I think that's a good academic debate. But I think the number suggests this morning that the economy is still doing rather well, from a job's perspective.

Payrolls were up some 300,000, which was a bit ahead of expectations. The unemployment rate that people look at, was about 3.6%. Unchanged from the prior month. Hours worked, people look at that as a leading indicator for... Future gains was also pretty decent. And wages, which is feeding into the inflation narrative, slowed a little bit. I think they were actually up about three tenths of 1%, month over month. On a yearly basis, they're about 5%. And that's pretty much been the line where it's been, for the past couple months or so.

So it's I guess, reassuring to see that it hasn't escalated beyond that. But we have seen the level stay somewhat, high. So I guess... As I think about this... Again, the risks of a recession, they're growing. The Fed is likely to continue it's tightening campaign, given this report this morning. This means that another 75 basis point rate hike is probably baked in the cards, based on news this morning. The Fed, as we probably should take a [second 00:03:34] back and think about what they're trying to do... I mean the Fed has two goals, basically. They're trying to provide an economy, and the conditions so that the economy can can grow. But they're also making sure that prices don't get out of hand.

And so they've got this dual mandate, as people refer to it as. And I think what it says this morning is that on the one hand, the mandate around growth is probably secondary concern. And said that the Fed is now focused fully on inflation. So to some extent, this report this morning validates the fact that growth is still pretty decent. But it's almost irrelevant I guess you could argue, Steve. In the sense that now, inflation is going to probably become the more important reading. And I guess next week, we'll have more to say about that. Because, I think some key inflation data is going to be out midweek next week. So the overall labor market seems to be doing rather well. I think that dismisses some of the near term anxiety around recession. But again, we're going to probably be focused mostly on inflation, heading into next week. And when we get together next week, we'll be talking a lot about that for sure. So I don't know if that's a fair summation, Steve. But I think that's how I'm thinking about where we're at right now. What do you think?

I don't disagree with you, George. I mean, I think the inflation story is the story that is dominating the narrative right now. And when you see hourly earnings continuing to remain high... Yeah. They didn't go any higher than they were last month. But that's three tenths now, for three months in a row. So we're seeing no sign that wage inflation is slowing. And when you think about the Fed's view of inflation, wage inflation is a bigger driver of what the Fed has been commenting on, on the inflation story. The commodity inflation.

If we remember, commodity inflation is the inflation that they were talking about being transitory. And to be honest, we've seen significant pullbacks across all the commodity complexes. It does look like it's transitory, in terms of commodity prices anyways. At least, here in the near term.

But clearly, the wage inflation story is something that they're going to be paying attention to. A number of numbers caught my eye, in this report. One of them was the underemployment rate. So that's people who are viewing that their employment activity is not as much as what they would want. And when you start to include that in, along with people who are unemployed, that rate dropped to 6.7% from 7.1%. And that's something that's again, going to catch the Fed's eye. Because that's more... That's just yet another sign of just how tight the labor market is. And what's disconcerting is that, the labor force participation rate dropped again. This time to 62.2%, from 62.3%. Which... It did help keep that unemployment rate stable. But I think the Fed has really been thinking that, that labor force participation rate was going to go up, not down.

And when you look at the way the bond market's trading, we're just hanging out here around 3%. I know a lot of people have thought that these bond yields were going to go significantly higher here. But even though maybe we've had a "technical breakout" of a 40 year down trend, sure looks to me like it could be a false breakout. And that we could just be back at the top end of a trading range that we've been in, for the last eight to 10 years.

And maybe we get that mean reversion trade as the economy does slow, as the Fed gets what it wants. In terms of moving rates higher. And you mentioned rates going higher, 97% chance that we get a 75 basis point cut... I mean hike, in July now.

Yeah. No slip of the tongue there I guess, with respect to rate cuts. But it is interesting to see that if you think about what... I guess what I'm trying to think about Steve is, what are we going to be talking about 12 months from now? I mean, we've had this ongoing saga of I think, the market trying to play... Well, I guess I should say it the other way. I think what we're trying to understand is that, the economy is catching up with the market almost. Where it seems as if the economy has been lagging the market for quite some time, since coming out of COVID. Now, things are slowing down a little bit. But the market's already down some 20% or so, from it's highs. A year from now... As you think about rates actually being cut... I know you didn't mean to say that. But there are some forecasts out there that are thinking that 12 or 18... 18 months from now rather, rates might actually be lowered.

So we might go through this campaign. As you mentioned, it's [baked 00:08:19] to the cake now, for the rest of this year. Or at least in the next couple months, that rates might be moving up.

I would hope that the Fed would sometimes just take their breath and look around a little bit, to see if they've done too much. Because at some point, it almost suggests that what the markets might be getting worried about is that, they might just overdo it.

But again, looking out farther, maybe 12/18 months from now, I know some of the numbers suggest that rates might be lowered at that point. Again, we're going to have to probably go through a bit of a soft patch, to really get that number to take hold. But stock's already down 20%. I mean, they've already priced in a lot of bad news. We've talked about earnings as something to really watch, going forward. And that could provide perhaps, some headwinds. Because earning estimates seem like they'll be moving lower a little bit, not staying high. But how much do you think Steve, is... In terms of what we might think about, a year from now. How much is priced into the stock market, as relates to good news, bad news going forward from here?

Well that's a good question, George. You're right, it was that slip of the tongue. But when you look at the market, the Fed funds Futures is pricing in 75 basis points of easing at the end of 2023 already. So the markets are anticipating that this weakness is going to eventually lead to a peaking of the hiking cycle next year. And when you think about where the peak of this cycle is going to be, it's very possible that the peak of this cycle could be at a Fed funds rate that results in negative real yields. This would be the first time ever, that we've had a Fed funds tightening cycle that did not peak with positive real yields. And to me, the really difficult part for equity market investors is if we get a Fed funds Futures cycle peak that is with negative real yields, and then the Fed starts a new cutting cycle or an easing cycle from that point, market could light off like a Roman candle. With long duration, growth assets being the leadership.

And I think a lot of people would be caught on a wrong foot. Especially because, people have tilted themselves so defensive here. So I know it's really hard when the market is having a difficult patch like this, to think about the other side of the chasm, so to speak. But that's exactly what we've got to try to do here. And it's what makes things so difficult. Yeah. The market could have a earning soft patch here. An earnings recession maybe. See earnings cut $15 to $20 on the S&P 500 aggregate. But all things considered, because the multiple has compressed so much so far, we may not see the market go down all that much. Because, people are going to be gaming the other side of this chasm. And they understand that if we get a easing cycle in an environment where we already have negative real rates, it's just going to be like throwing gasoline on a fire.

So let's define that, for some of our listeners. When you talk about negative real yields, what do we mean by that?

It means that the... Say that the Fed funds rate goes to 3%.

[inaudible 00:11:59].

Or three and a quarter. Say three and a quarter. And -

Starting from where, Steve? So where are we right now?

From 25 basis points. So effectively, zero.

Right.

So let's say we go to three and a quarter, which is up 300 basis points from that. If CPI inflation is running at 3.5% when that Fed funds tightening cycle peaks at three and a quarter, that is a negative real yield of 25 basis points. So as long as the policy rate is below the rate of CPI inflation, that is a negative real yield.

And we've never seen a tightening cycle peak with negative real yields, since the Fed has been using the Fed funds rate as the policy controlling rate. Which is the early 1990s. It's never happened.

Yeah. It really would be I guess, another one of those things when we say, unprecedented. I mean we've said that word how many times, in the past three years? But here again, we're probably looking at another unprecedented environment.

And this is one of these things too, where people have always said you get... And Warren Buffet is one of them who says, you never like to say it's different this time, in the markets. But if we've never had something happen, it really is different this time. And that's why I think it's difficult to game how to position yourself as an investor, in this environment. Because, it truly is different this time. And very sophisticated people, hedge fund investors, others are just as confused as the average investor is.

No, that's so true Steven. So I think what we've been trying to suggest is that equities I think, are still attractive for long term investors. I mean they really are probably the best compounder of growth, for a portfolio. Not withstanding some volatility. And we've seen all that happen this year, in spades. And I would suggest that we're probably going to have more not less, going forward. In the sense that this fall could be a little bit of a choppy summer, choppy fall.

Again, we've got some earning seasons that could be a little bit uneven. That provides even more volatility, unfortunately. And again, as we think about the downturn and maybe the down shift in growth, again that provides perhaps more headwinds unfortunately, in the near term. But I still think over a medium to long term, stocks are really probably a great investment for long term investors.

Bonds provide some protection. And they haven't done a great job of that, this year. And that's one reason why we've been a little bit more I guess, under weighted fixed income assets. Something we're revisiting. But right now, maintaining somewhat of an underweight towards fixed income. And instead looking for other places to provide either different return streams or diversification benefits, or things that are less correlated with stocks and bonds. And at the same time, we've also got probably a bit more cash in some portfolios, to provide some optionality and some dry powder if things become a little bit on shaky ground.

So that's I think, maybe a way to summarize our views. One maybe topic we could just close on really quickly, has to do with the news that broke overnight, with respect to Prime Minister Abe being assassinated.

That's probably a topic that deserves it's own podcast, Brian. But as I see, it's just a terrible tragedy. I mean, the man was a remarkable leader. Frankly, did so much to really help Japan modernize it's economy. And I think he deserves a ton of credit for that. He brought forth a lot of shareholder friendly reforms, that previously didn't exist. And I think at one point, I was viewing Japan as potentially, a new emerging market.

And he essentially resurrected Japan from a pretty significant funk, in terms of overall economic [delays 00:15:40]. And really brought that economy into much more of a stable position. Unfortunately, demographics had been weighing pretty heavily on Japan. That maybe if not for those policies that Abe put forth, Japan might have been in a much different situation. But I think he deserves a ton of recognition. And our thoughts are with everybody in Japan, given that significant loss. So with that, Brian I'll turn it back to you. Wish everybody a good rest of the week. A great weekend. And we'll catch up with you very soon.

George, thanks for those comments on Prime Minister Abe. And George and Steve, thanks for your insights. We appreciate it. Thanks to our listeners for joining us today. And be sure to subscribe to the Key Wealth Matters podcast, through your favorite podcast app. As always, past performance is no guarantee of future results. And we know your financial situation is personal to you. So reach out to your relationship manager, portfolio strategist, or financial advisor for more information. And we'll catch up with you next week, to see how the world and the markets have changed. And provide those keys to help you achieve your financial success.

The Key Wealth Matters podcast is produced by the Key Wealth Institute. The Key Wealth Institute is comprised of a collection of financial professionals, representing Key entities. Including Key Private Bank, KeyBank Institutional Advisors, Key Private Client. And Key Investment Services.

Any opinions, projections or recommendations contained here in, are subject to change without notice. And are not intended as individual investment advice. This material is presented for informational purposes only. And should not be construed as individual tax, or financial advice.

Bank and trust products are provided by KeyBank National Association, member FDIC. An equal housing lender. Key Private Bank and KeyBank Institutional Advisors are part of KeyBank. Investment products, brokerage and investment advisory services are offered through Key Investment Services LLC. Or KIS. Member of FINRA, SIPC. An SEC registered investment advisor.

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July 1st, 2022

Welcome to the Key Wealth Matters Podcast, a series of candid conversations with leading experts, about how individuals and organizations can grow and protect their finances, tailored around current events and trends. Here's your host for today's podcast, Brian Pietrangelo.

Welcome to the Key Wealth Matters weekly podcast, where we casually ramble on about important topics, including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to unlock the mysteries of the markets and invest in. Today is Friday, July 1st, 2022. I'm Brian Pietrangelo, welcome to our podcast. And with me today, I'd like to introduce our panel of investing experts. Some might say they're a unique version of the Founding Fathers, responsible for the Declaration of Investments, here to share their insights on this week's market activity. George Mateyo, Chief Investment Officer, Steve Hoedt, Head of Equities, Rajeev Sharma, Head of Fixed Income, and Don Saverno, Senior Lead Research Analyst covering international markets. As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our Wealth Institute on many different subjects, and especially our Key Questions article series, addressing a relevant topic for investors each Wednesday.

In addition, we recently shared our Wealth Institute's Summer Reading List, including recommended books from today's podcast's guests that might peak your interest to enjoy as we head into the long weekend. So as far as this week's economic data goes, we had mixed results. First, new orders for manufactured durable goods in May increase 0.7%, which was up the last seven of eight months, following a 0.4% increase in April. We've got this Atlanta Fed GDPNow estimate that's really vacillated for Q2 of 2022, and in the last couple days between +0.3% and -1%. And back on June 15th, it was 0%. So George will talk a little bit more about this, is my guess, in terms of what we think GDPNow estimates mean. Other than that, we've got the S&P CoreLogic Case-Shiller Index for home prices, continues to increase across the US at about a 20% annual gain from April of last year.

We've also got some negative sentiment in terms of the Conference Board's latest reading on, on consumer confidence, which showed consumer expectations in June fell to their lowest level since 2013, and expectations have fallen well below where they were before, suggesting weaker growth in the second half of 2022, as potentially a growing risk of recession by year end. Initial unemployment claims for the week continue to be low, at about 231,000. We've also got the Bureau of Economic Analysis reported personal consumption expenditures, which actually increased 0.2% for May, which means that the consumers are continuing to spend, it is positive, but if we'd look at it relative to inflation, or inflation adjusted spending, what's called real PCE actually decreased 0.4%. And this is the first time in the year that real PCE was negative, and prior months were revised lower, indicating a slowdown in the economy.

Last but not least, in terms of inflation, from the same report, from the Bureau of Economic Analysis, core personal expenditures from the Fed's preferred measure for May, which excludes food and energy, increased 4.7% from one year ago, which has come down from prior levels for the third month in a row. So George, as we start with you, as always, when we think about this from an aggregate perspective, what does this mean from our forecast looking into the future, and how it might affect investors in terms of their portfolios? George?

Well, Brian you're right. It was kind of a mixed week for sure. I think we're starting to see though some cracks emerge throughout the economy, and some of the data that we've seen so far. And I think the problem that we're trying to wrestle with and markets are trying to cope with, is the fact that I think the Fed, in hindsight now, probably waited a bit too long to try and tighten and try to take some of the steam out of the economy, if you will. Typically, they're correcting and taking the liquidity away when momentum is running hot. And it has been running hot, but more recently it's started to cool. And the Fed is just kind of catching up with that. So I think the Fed is starting this backdrop of tightening monetary conditions, at a time when momentum is started to slip a little bit. And I think people are getting a bit concerned that maybe the Fed might be in a position that they're just playing catch up and might overtighten a little bit.

We've said many times of these calls that the playbook we've been using is the '94-'95 mid-cycle slowdown. That was a time when we didn't really officially enter a recession. And there were certain things like housing, manufacturing, in some parts of the consumer market and even jobs were in recession, meaning that they were starting to see some slowdown there too, but it wasn't really an official recession as people like to call it. And it certainly felt like one, but it was more of a mid-cycle slowdown as people refer to it as. And so that was our thought that this might play out this year, and we've got that right now. There are some gauges that people are watching. I think it's probably a big obsession now amongst people in Wall Street to focus on what's happening with this thing called the Atlanta Fed GDPNow nowcast. It's not a forecast, it's called a nowcast. And what it refers to is really just the near-term indicator of where economic growth might be.

And the number we got revised down this past week, which actually would tip us into a recession, meaning that the last quarter, was the first quarter, was negative by about 1.5% or so. The second quarter, based on this nowcast also suggests another decline of about 1%. I think there's a lot of noise in those numbers. And again, I think some of the online trends aren't probably as bad as, as people might think. But we did get some mixed signals that suggest that things are shortly slowing down. There was a big clunker out there with respect to retail sales. I think it was down about 1.5% as well. Some of that really centered on what happened in the goods sector, where we've seen probably an understandable deceleration of spending on goods at the expense of services, meaning people are traveling more and buying less stuff, basically.

And I think there's also some trends underneath that trend as well, that are somewhat worrisome in the sense that more and more consumers are relying on savings, credit, and other things to fund those purchases. We've also got the fact that real incomes, when you take a look at inflation, that really bites into income in a pretty big way. That's also now in negative territory. Housing has been a mixed bag. You mentioned home prices are doing quite well, but the overall trends of new activities, new sales is starting to weaken as well. And then lastly, on the employment side, this is where I think that the Fed has got to really pay attention in the sense that jobless claims have actually started in [inaudible 00:06:35]. More and more job cuts are being announced at the company level. But to put that in perspective, Brian, we've got about 230,000 people filing for unemployment this past week. That's down a lot from where it was a year ago, that number was about 400,000. But it's also from about 200 K just three months ago.

So again, that trend is not going in the right direction. So again, we've got this backdrop where the economy's slowing, I think it's probably not in collapsing mode right now. And I don't think it's contracting or shrinking, but it is slowing pretty rapidly. We've also got some really mixed pictures, mixed reads with respect to inflation. The headline number, I think, is going to stay pretty strong. And that's one thing that the Fed [inaudible 00:07:17] more recently, which takes into account things like housing and energy, which has been really boiling up, as we've talked about. But this other indication of inflation, the one that the Fed historically has watched more frequently is known as the PCE, or the personal consumption expenditures. And that only, I'm using air quotes there, only rose a little over 4% year over year. Contrast that with the headline number of CPI we got a few weeks ago, which was closer to 8.5%.

So I think the Fed is at a [inaudible 00:07:46] right now with respective to which number to look at, frankly. And basically, how this plays out from here. I think if we are in a recession, I think it could be more of a modest one, no really great foresight there. But I do think that it's more likely to be a bit more modest given that some of the big imbalances we've seen in the past really aren't apparent this time around. So meanwhile, we've seen a significant obviously repricing of risk with the stock market. And I kind of wonder, Steve, how much do you think is already discounted by the claim we've seen so far in the first half of this year?

It's an interesting question, George. I mean the first half of the year was dominated by multiple compression. We've seen the S&P 500 earnings multiple compressed from 21.5 As we turned the year to just below 16 as we sit today. And over that period of time, we've seen earnings climb from 220, roughly on a forward 12-month rolling basis to 239 as we sit today. So clearly, the market has been adjusting to the new higher rate world. My concern as we flip the calendar to the second half of the year, after we have just experienced the worst first half for the S&P 500 in the last 50 years, is that as we start to price in an economic slowdown, the 239 number that I mentioned, that number has to come down for the S&P. So we're at 239 in change today, two weeks ago, we were 239.50. So that number, it may not seem like it's much of a change, but the direction is the most important thing. And it looks to me like it's rolled over a little bit here as we head into this earning season.

And if that trend down continues, you can get the double whammy of having a lower multiple on a lower earnings number. And then that opens the door to potentially another leg down for the equity market. That being said, I think people, market participants, are really anticipating that earnings number is going to come down. And it's kind of the whole idea of, if something is well understood by the market, that you may not get the reaction you think. So earnings can come down, but maybe we've already experienced, as you said, a lot of the decline based on that. It's something that typically happens around this time in an economic cycle.

So if you go back and you look at forward earnings relative to trailing earnings, and what I mean by this is, if you compare where forward earnings estimates were 12 months ago to where trailing earnings came in actually today, so that gives you the difference between what analysts thought earnings would be today, and what earnings come in at, if you look back historically at recessionary periods, the analysts always get it wrong. There's a huge gap between where earnings are versus where they come in. The same thing actually happened when we came off the COVID low, everybody marked down earnings a ton, and then, 12 months later, the earnings were high relative to where the analysts were. So that was kind of the flip side of it. So there's been really four major errors in this time series, if you look back on it.

And I think that we're likely going to see that again, the analysts are going to be high. It doesn't necessarily mean that we have to have a big smash in the market from here, though. Quite honestly, we've kind of already gotten that out of our system. My big concern right now continues to be credit. I think for things to take another leg down, we really have to see credit deteriorate markedly from here. We have seen credit widen here in the last week. We've seen high-yield CDX go back toward the levels that we saw toward the end of June, where we had high-yield CDX peak at almost 600 in her day. It were 568 today. That's deteriorated even on days when the equity market has been positive over the last week to week and a half.

And that's something that I don't want to see, I really would like to see high-yield CDX, start to show some signs of improvement. And as long as it doesn't, we continue to have a bit of a tenuous market situation in my view. High-yield CDX, if you gave me one indicator over the last 12 years to look at, in order to try to determine equity market direction, that would be it. And that's really my big concern right now, is that we could see more deterioration in credit. But for now, it's a holiday weekend, we've got low liquidity conditions, and we'll see how we move through the next week.

So Steve, great comments as always, thanks for those terrific insights. Let's move over to Rajeev to get his thoughts on the credit markets. Rajeev?

Yeah, I agree, Steve. I think that credit spreads have, we've talked about credit spreads being orderly and moving wider, but not really at an alarming pace, but you are absolutely right, the CDX. If we look at that, that really does give you an indication that the volatility that we've seen in CDX lately, where we've seen ourselves move wider, it's a very thinly traded market. However, it is a strong indicator of where spreads are going to go, credit spreads, and equity markets as well. So we've been looking at that as well. I think what happens here is that corporate cash credit spreads are having the benefit of Fed being there, and perhaps providing liquidity. The CDX market is not as willing to accept that, I think they're much more indicative of where we are in the markets right now. And I think that we will see more of that, where we'll see more volatility, as CDX always seems to move forward and move wider.

So we've been seeing a lot of that lately. And I think the other thing I've been seeing is that talks of high yield specifically, if we talk about CDX, high yield has really been a strong indicator for the equity markets, and even the cash markets as well. I mean, we see the economic data this week, and specifically, if you look at the yield curve, we've seen the 10 Year move well below 3% yesterday, not maybe well below, but did move below 3% yesterday, at 2.97%. There is a run to safety haven assets. It could have been a month-end phenomenon, it could have been a quarter-end phenomenon, but we did see a run to safety haven assets. And we did see credit spreads blow out when that happened. We also see treasuries receive a bid yesterday, the frontend and the belly of the curve also saw yields moving lower.

That bid was maintained into the close of the month. We saw fives and thirties, the widest spread that we've seen, which is just 12 basis points, but that's the widest we've seen since probably the last two months. So there is a flight to quality and that is reflected in the CDX, and it's also reflected in credit spreads.

So does Steve's point earlier about how sometimes market participants are always fighting this war and perhaps looking for something that never really happens, one thing that people have been pretty bearish on this year is what's happened in China. And instantly, I would note that the Chinese markets are actually outperforming again, and they've had a pretty good quarter relative to other parts of the world. So Don, I'd love to get your take on what's happening overseas, China, Europe, and all things in between.

Sure. Thank you, George. So yeah, forward earnings expectations that Steve was talking about earlier, we saw some of that change earlier this year in China, in sympathy with the Russian invasion of Ukraine, and just seeing how the Western reaction to that invasion was. We saw Russian securities marked down to basically zero, almost immediately, within the equity markets. And other places around the world where we see geopolitical tensions, such as China with the West, we saw the same thing. So at one point in April of this year, the Chinese markets both onshore and offshore, were down more than 30%. They've come roaring back. And actually, as of this morning, they are right under a bull market. So a bull market is defined as a 20% rise from trough to peak, and they're right at 19% since the lows in April.

And in China, the other problems were really them treading water with their COVID zero policy. Shanghai was closed. Shanghai is one of their manufacturing centers where a lot of their products get sent to the West. Shanghai was actually fully closed for almost two months, but we're seeing things reopen there. Actually Disneyland Shanghai reopened earlier this week, museums, art galleries, tourist attractions, even cinemas are going to open soon. So they're back to more normal. But what the West has expected to happen, once Shanghai reopened, we have not seen that yet. So here's where China might be treading water a little bit, even though expectations have gone significantly higher over the past couple weeks.

So what we've seen is the manufacturing PMI actually did rise above 50, but just barely in June here. And that signals expansion. Services PMI is back to pre-pandemic averages, 53-54 range. And even with that higher sentiment, we're seeing weakened demand for products in the West. So factories are actually starting to cut production within China and they're dismissing workers. And this is a huge deal because the export sector in China employs over 180 million people. It's about a third of their non-farm payroll, total workers. We're seeing a rise in urban unemployments, the young unemployed are higher than they've ever been in China. So even with that backdrop, we're still seeing money flow into China from foreign investors, as maybe the drop earlier this year, or taking the capital out of the Chinese markets earlier this year was maybe a bit overblown. But we're still on the fence, we're still treading water on where the actual expectations are going to be moving forward within China.

And then finally, let's talk a little bit about Europe. So Europe is mired in the ancillary effects of the war between Russia and Ukraine. And what we're seeing in Western Europe, and the European Union in particular, is huge inflation in energy prices. This is nothing new, this has been going on since the invasion, but we're also seeing the European Central Bank, headed by Christine Lagarde, getting more hawkish on rates, but starting to use the term gradualization or gradualism to describe the process that they're going to be raising rates. So the current expectation is that there'll be a 25 basis point policy rate rise in July, maybe another 50 basis points in September, and then gradual as needed hikes after that. But there's the optionality to take a further step out, get more hawkish in the meantime, if necessary.

Also, she signaled that they're not going to return to the pre-pandemic disinflationary environment, that is no longer being priced in a year or two years out. And that they do believe within the European Union and the ECB that deglobalization is here to stay, that more countries are going to start trying to manufacture products and keep their inventories within their own borders, and that the energy and green inflation will continue. And along with this talk earlier this week by Christine Lagarde, we also saw manufacturing PMIs fall precipitously from 54.6 to 52, so a 22-month low. And the services PMI falling from 56.1 to 52.8. While still in the expansion territory, it's one of the biggest drops since the great financial crisis, if you take out the pandemic, because that was its own unique situation there.

We'd still expect the GDP maybe to be slightly positive in June, but there's definitely a sharp decline in business confidence, inventories increasing, and the manufacturing hub of the European Union, Germany, seeing a precipitous drop in orders and in manufacturing numbers in general. So definitely news on slowing economy coming out of Europe, and mixed news coming out of China. And with that, we'll pass it back to Brian.

So George, Steve, Rajeev and Don, thanks for your insights, we appreciate it. As we celebrate the 4th of July this weekend, I'm always reminded that independence, democracy and freedom are not free, and are the hallmarks that make our country great. So enjoy time with the family and friends this weekend with picnics, fireworks and apple pie. Stay safe, everyone. And thanks to our listeners for joining us today. Be sure to subscribe to the Key Wealth Matters Podcast through your favorite podcast app. And as always, past performance is no guarantee your future results. And we know your financial situation is personal to you, so reach out to your relationship manager, portfolio strategist or financial advisor for more information. And we'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you achieve your financial success.

The Key Wealth Matters podcast is produced by the Key Wealth Institute. The Key Wealth Institute is comprised of a collection of financial professionals representing key entities, including Key Private Bank, KeyBank Institutional Advisors, Key Private Client and Key Investment Services. Any opinions, projections or recommendations contained herein are subject to change without notice, and are not intended as individual investment advice. This material is presented for informational purposes only, and should not be construed as individual tax or financial advice. Bank and trust products are provided by KeyBank National Association, Member FDIC, and Equal Housing Lender. Key Private Bank and KeyBank Institutional Advisors are part of KeyBank. Investment products, brokerage and investment advisory services are offered through Key Investment Services LLC or KIS, member of FINRA, SIDC and SEC registered investment advisor. Insurance products are offered through KeyCorp Insurance Agency USA Inc, or KIA. KIS and KIA are affiliated with KeyBank. Investment and insurance products are not FDIC insured, not bank guaranteed, may lose value, not a deposit, not insured by any federal or state government agency. KeyBank and its affiliates do not provide tax or legal advice.

Individuals should consult their personal tax advisor before making any tax-related investment decisions. This content is copyrighted by KeyCorp 2022.

June 24th, 2022

Welcome to the Key Wealth Matters podcast, a series of candid conversations with leading experts about how individuals and organizations can grow and protect their finances tailored around current events and trends. Here's your host for today's podcast, Brian Pietrangelo.

Welcome to the Key Wealth Matters weekly podcast, where we casually ramble on about important topics, including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to unlock the mysteries of the markets and investing. Today is Friday, June 24th, 2022. I'm Brian Pietrangelo, and welcome to the podcast. As a reminder, we recently celebrated a new holiday this past Monday, known as Juneteenth, which is the celebration of the emancipation of African American slaves back in June 19th, 1865.

And joining me today on our panel of investing experts here to shine the light on this week's market activity. We have Steve Hoedt our head of equities, Tim McDonough, senior portfolio manager for fixed income and Justin Tantalo, senior lead research analyst for equities. As a reminder, a lot of great content is available on key.com/wealthinsights, including our Key Questions article series highlighting a Key concept for the week that may be of interest to a lot of our investors. So for today's conversation, this week's economic calendar was fairly light. So we'll get into our open dialogue with Steve, Justin, and Tim. And as you think about your forecast coming up for the next three months into the summer, given that we just started back on Tuesday with summer and the summer solstice, when you think about it, are we in for brighter days ahead or are things looking more gloomy?

Thanks, Brian. Yeah, the economic data definitely sparse this week. So diving right into what was actually moving the markets and what kind of sets us up for a really interesting summertime period is the discussion that Chair Powell had in front of Congress with some testimony this week, basically doing his Mario Draghi, whatever it takes impersonation. And we've really seen recession probabilities jump on my Bloomberg terminal this morning. I'm looking at the recession probability within the next 24 months now is posting it 98.5%. Given that Chair Powell recognized in public that yeah, the cost of getting inflation under control could be a recession, albeit likely to be a modest one, but possibly one nevertheless.

And when you look at the Atlanta GDPNow cast, we're hovering right around zero. And that has proven to be a pretty reliable directional indicator of where we're headed in terms of what we see for the economic numbers that'll get posted when the numbers actually come out. Markets have been all over the place. I mean, there's been unprecedented volatility or divergence and volatility between equities and fixed income. I want to get Tim McDonough from our fixed income portfolio management team in here to talk about both of these things. Tim, what have you seen in the bond market this week when you're looking at the volatility and the reaction to some of this discussion out of the Fed maybe finally acknowledging reality, right?

Yes. Thanks Steve. You're right. We've seen moves in the bond market that are more akin to the equity markets, quite frankly. I think given the 75 basis point hike, and then the testimony to Congress this week where Paul reiterated that term, we will unconditionally fight inflation, has caused a rally in rates across the curve, actually. We kind of saw a peak last week and treasuries, munies, they're both lower, rates are lower on the week. So you're right. Powell has been the name of the game. We're hinging on the words that come out of his mouth in the testimony. And right now you're right. It's volatile. And it's something that we generally don't see in fixed income markets.

Market moved really aggressively too, to change the expectations for both what the peak of the hiking cycle would be, and the timing on it. The timing on the peak of the cycle, they pulled all the way into early 2023. And we actually started to see the Euro dollar futures market pricing in a significant cutting cycle starting early next year, which I think is a real, again, it's a reality check, right? I mean, we've seen these expectations shift and move and go all over the place. And I think people had thought that rates could potentially get quite a bit higher than what they may actually end up being.

We've certainly seen the energy complex come under a lot of selling pressure, commodities have pulled back as we've seen, the economic expectations of potential slow down get priced in. Something else that's been under a lot of pressure lately has been Bitcoin. And I want bring Justin into the conversation, Justin Tantalo from our multi-strategy research team. Justin, what is your take on what's been going on with Bitcoin? I mean, I could come up with a... We could use a euphemism for it given the recent performance, but I'm not going to go there. What do you think?

Yes. Thank you, Steve. Yeah. Good point. Bitcoin has not been spared some of the major draw downs that we've seen across financial markets. What might be interesting is that some of the correlations, usually Bitcoin sort of moves on its own and goes through boom bust cycles independent of traditional financial assets, but that's not been the case this year. It's had a very serious draw down, it's down about 70% from its 52 week high. Trading just around 21 or 20000 dollars right now. Whereas last year, mid to late last year, it was at a record level of 67,000. A couple things to note on that is, the first that this is not the first time Bitcoin has drawn down so aggressively. In the last 10 years, Bitcoin has fallen by 80% from its recent high three times, three separate times. In 2011, 2014 and 2019. So we're almost at the fourth time.

That is the nature of this super long duration speculative asset that really has no cash flow and is, as we all know, is kind of difficult to conceptualize what it actually is if at all a financial asset, but it's in good company, to be honest. If I look at some of the large cap stocks in the U.S. From their 52 week highs, there are some real brand names that are down even more than Bitcoin. I'll give you a few of them. And this is nothing to say about the valuation or the opportunity for any of these names, but just factually they're down by more than 70%. Those names include household items like Zoom, Moderna, Netflix, Zillow, DoorDash, Etsy, PayPal, Lyft, all these stocks are down by more than 70% from their 52 week high. So when we think about, like you mentioned, the Federal Reserve and Chair Powell and their aggressive move to sort of pop the everything bubble, Bitcoin certainly did not escape that.

Justin, you bring up an interesting point and that's something that I've been spending a lot of time thinking about, and that is this whole idea that Bitcoin, people may have thought of crypto originally, or not originally, but in the last couple years it had maybe been pitched as an inflation hedge, an alternative currency, this and that, but really what it seems to me that this pullback, this cycle here in 2022 has shown, is that really what crypto slash Bitcoin, that universe, is it's really concept capital, right? I mean, when I look at the names that you just gave, those are future focused conceptualizing, or technology enabling kind of companies. And really, it seems like Bitcoin is trading symbiotically with them. It definitely isn't quote unquote digital gold, it's something else entirely. And it doesn't mean that this thing doesn't have some kind of a future. It's just that it's not going to necessarily be the future that people may have thought, it's concept capital.

Definitely. If we think about how long we've had to think about stocks and bonds, these assets have been around for hundreds of years, cryptocurrencies were created in 2009. So we're really learning about the nature of these assets as we go, because we just don't have the history there. The early hypothesis was that since these are assets that have a fixed supply, they are digitally scarce. That must mean, or the extrapolation was, that they may be a terrific hedge against inflation, and that's where it came to the moniker of digital gold.

Well, that's not the only thing that affects the price of Bitcoin. If you think about it like a scarce digital asset, what else affects Bitcoin is the fact that there is no cash flow. It is a concept asset, as you mentioned, similar to some of the long term growth stocks that I listed through. And when there is a move toward tighter money, that may pop the aura around some of these long duration assets, these speculative assets, and there is no mechanism that ensures or that guarantees that in times when inflation increases, that scarce asset prices go up. And I think a lot of folks have learned that about cryptocurrencies the hard way.

Hey, Justin, one question, have you seen any correlation between Bitcoin and investor sentiment throughout 2022?

So that's hard to sort of isolate and say with certainty, but certainly an observer may conclude that yes, as tighter money came through, as some of the hiccups in inflation outlook started to come through, that causes the tide to go out. And as the euphemism suggests, those who are swimming naked become obvious and apparent. And there are some idiosyncratic parts of the cryptocurrency space like LUNA and Terra, that had their own sort of problematic de-leveraging stories that go over and above what's happening in the equity markets.

But certainly anything that has to do with concept financial assets or crypto or long duration growth stocks, when there is a change in the monetary policy and change in the stance of inflation expectations, people take a sobering look at what their historical thesis was with some of these assets, and then it becomes a speculative run for the exit. So it probably does have an increasing correlation between the speculative stocks and speculative crypto. Both have their idiosyncratic quirks to it. But yeah, I would say that's probably a pretty apt observation is that when bubbles are pricked, they seem to have a lot in common.

Well, the other thing too that jumps out is with the move down in Bitcoin and Ethereum, which is the other major one, I mean, you can see that there are a number of these hedge funds that have been involved in this space in particular, not going to list them here, but it's been all over the financial press that these guys aren't even returning calls anymore for investors and such. So it seems like there's quite a bit... There's going to be a rationalization of this space due to the pullback. It's no different than the move down in 2000, 2002 in tech stocks. You got a rationalization of the space, changes in the actors who were involved in this space. But if you look back in history, you did pretty good if you bought Amazon on a 95% drawdown in 2001, right? So I think we just all need to have an open mind about how this is going to evolve. I don't have any idea but I'm fascinated to watch it. Fascinated to watch it.

The one thing I'll say about Bitcoin and cryptocurrencies that sort of is pretty interesting within the context of the dot-com bubble that you mentioned 20 years ago, is that pets.com and some of the flagrant violators of forward outlook, those businesses eventually went away. And so we didn't hear much about those stocks that dropped 99% because they were de-listed. They went bankrupt, et cetera. The interesting quirk about Bitcoin is that as a peer to peer network, it sort of lives in the background, even in very dark days. And prices may reflect that. They may be down 80, 85% as they have a few times over the last 10 years, but it just sort of never goes away. So it'll be a force to be reckoned with in all boom and bust cycles, unlike maybe pets.com that was memorable for some folks, but then moved on in life sort of to speak.

So I'm going to pivot back to finish our discussion on equity markets for the week. So nice to see the S&P 500 closing the week on a positive note. The month of June is likely still going to finish down, but it definitely, we're rebounding off of the oversold condition that we had been in. We've seen the S&P now up a number of days in a row, gapped higher this morning. So definitely a feeling like we're having a decent bounce here, likely look for this to carry toward the round number at 4000, and then we'll have to see how things go. That's also the neighborhood of the declining 50 day moving average, which right now is around 4065. To me, you still are playing with the bear market playbook, as long as you have a series of lower highs and lower lows in place.

So really to start to get more positive on the S&P 500, we need to see the market move higher through the level, right around 4200, that would start to get us more positive on the outlook. And to say that the bottom is in, you can tell by the tone I've got though that I don't necessarily think the bottom is in. If you look historically at the playbook that you use during a midterm year, and you use during a... And we've seen in the past, in years where we've had a start like we had this year, typically the summer is a period of time for market volatility, and you don't get the bottom put in until you get to September, October, right ahead of the election season. And then the market rallies into year end.

That's the playbook that we think is likely to obtain this year as well too. So even though it feels nice this week, we still argue that you need to stay rigged for heavy running in this market environment, and to expect more volatility as we move here through the rest of the summer. Next week, we look for the market to be pretty quiet, frankly, you've got the July 4th holiday weekend next weekend. The market is closed on the Monday following next weekend. So pretty much the back half of next week is likely going to be crickets. So we'll look forward to seeing the rest of the summer and seeing how it plays out. We're two weeks away, two and a half weeks away from the start of earning season. Corporate earnings are going to really be important this month as we go through and see are analysts going to start to mark down expectations.

We've not really seen the S&P 500 forward earnings numbers come in yet at all. Will there be another shoe to drop there or not? I think it's an open question. Analysts have not historically been too accurate when it comes to being spot on with these things when it comes to cycle terms. And we have really seen them not mark down expectations whatsoever, even with economic activity slowing. So I think the next couple weeks are likely to be pretty important for the path that we have during the rest of the summer, but next week it's likely going to be pretty sleepy. So any thoughts on that stuff, guys, as we head into end of the call here?

Yeah. I'll just say that I'm looking at the earnings estimates analyst forecast and you're right. That sort of has plateaued. We haven't seen very many cuts yet to next year's earnings that maybe is the cross currents between an expected recession. And where do inflation, how does inflation show up in corporate earnings, right? You may have inflation of earnings estimates offsetting that lower demand coming from a potential recession. So we may not see major cuts if indeed it is a mild recession as the investment community is starting to aggregate around. But yeah, that's certainly a point of focus for me. And as you know, on a day to day basis, the outlook and expectation around inflation is changing and evolving. And so those are for me, the two most important parts in what might otherwise be a fairly sleepy time going forward.

Thanks Steve, Tim and Justin, for the interesting conversation today, we always appreciate your insights and thanks to our listeners for tuning in. Be sure to subscribe to our Key Wealth Matters podcast on your favorite podcast app. And as always, past performance is no guarantee of future results. And we know that your situation is personal to you. So please reach out to your relationship manager, your portfolio strategist, or your financial advisor to get more information, and we'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you achieve your financial success.

The Key Wealth Matters podcast is produced by the Key Wealth Institute. The Key Wealth Institute is comprised of a collection of financial professionals representing Key entities, including Key Private Bank, KeyBank institutional advisors, Key Private Client, and Key Investment Services.

Any opinions, projections, or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. This material is presented for informational purposes only, and should not be construed as individual tax or financial advice. Bank and trust products are provided by KeyBank national association, member FDIC and equal housing lender. Key Private Bank and KeyBank institutional advisors are part of KeyBank. Investment products, brokerage and investment advisory services are offered through Key Investment Services LLC or KIS, member of FINRA, SIPC and SEC registered investment advisor. Insurance products are offered through KeyCorp Insurance Agency USA Incorporated, or KIA. KIS and KIA are affiliated with KeyBank. Investment and insurance products are not F D I C insured, not bank guaranteed, may lose value, not a deposit, not insured by any federal or state government agency. KeyBank and its affiliates do not provide tax or legal advice.

Individuals should consult their personal tax advisor before making any tax related investment decisions. This content is copyright by KeyCorp 2022.

June 17th, 2022

Welcome to the Key Wealth Matters podcast, a series of candid conversations with leading experts about how individuals and organizations can grow and protect their finances tailored around current events and trends. Here's your host for today's podcast, Brian Pietrangelo.

Welcome to the Key Wealth Matters weekly podcast, where we casually ramble on about important topics, including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to unlock the mysteries of the markets and investing. Today is Friday, June 17th, 2022. I'm Brian Pietrangelo, and today is actually in between two holidays. Tuesday this week celebrated Flag Day to commemorate the creation of the US flag back in 1777 during the American Revolution unification of our soldiers. Also, this coming Monday marks the observation of a new federal holiday, Juneteenth, representing June 19th in the emancipation of enslaved African Americans in the US in 1865.

With me today, I'd like to introduce our team of investing experts here to provide their insights on this week's market activity. George Mateyo, chief investment officer, Steve Hoedt, head of equities, and Cindy Honcharenko, senior fixed income portfolio manager. As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our Wealth Institute on many different subjects and especially our key questions article series, addressing a relevant topic for investors each Wednesday. And this particular week's key questions article actually has a recommended summer reading list. You might want to take a look at that from our experts and what they're reading these days. Very entertaining.

So we've got three major topics for this week that include economic data releases, the Federal Open Market Committee meeting, which we'll spend some time on, and also some of the stock market volatility. So in terms of the economic data release this week, we've got housing slowing a little bit, including housing starts from May down about 14% month over month. Building permits down 7%. National Association of Home Builders confidence in June also fell to the lowest level in two years, and all of this coming around the fact that average 30-year mortgage rates are at 5.78%, the highest since 2008.

In addition, retail sales slowed a little bit, the first negative monthly reading since December of 2021. PPI, or the producer price index, was up fairly significantly at 10.8% year over year. And then we've got some other. Atlanta Fed GDP Now predictions for Q2. GDP is roughly at a flat zero in terms of what we think is going on or what they think is going on with respect to the overall GDP and the economy in the United States. Initial claims were basically where they've been for a couple weeks. And then we've got the opportunity to talk about the Federal Open Market Committee meeting and market volatility.

So George, let's start with you in this particular day. What are your thoughts on the overall economic data as we end the week?

Yeah, what a week it was, Brian. I'm not sure exactly where to start, but maybe just to recap some of the economic readings. It seems to suggest that things are slowing pretty rapidly. Retail sales down about 30 basis points or three times of 1% month over month. Year over year they're still up some 8%, so still positive, but things are sliding a little bit. Noticed that furniture in particular is down, and that maybe is a harbinger for what's happening with people's migration away from staying at home and that type of thing. Grocery sales, food and things like that were actually positive, hugely so in the sense of a big pop up in grocery sales. Some of that probably is pricing for sure, but again, it does reflect a really interesting change in consumer behavior. And services is also quite strong, particularly airline, from what I could see.

Housing starts, again, probably another early indicator of what's happening with the economy, shrunk 14%. I think there's probably some noise in those numbers with respect to what's happening with demand, but it does suggest that things are slowing as mortgage rates really backed up. And then jobless claims, which is a key thing to watch with respect to the employment situation, actually fell week over week rather. It's still where it was just a few months ago or so, so it does suggest the employment situation is getting a little less favorable, but it's still pretty strong overall.

But you put all these things together and you get a really complicated environment for central banks, for sure. Again, I think there's still a lot of noise in the numbers with what's happened post-pandemic. We're still probably seeing some aftershocks there in terms of really where the economy's trying to level out. And now the Fed is still trying to play catch up and really just figure out where things are right now. So again, that was the backdrop that got us through this week in some of the numbers underneath the hood a little bit, but of course I think the main event was what happened with central banks, not only the Fed, but other banks around the world. We'll talk about that maybe a little this morning.

But Cindy, let me bring you in the conversation. The Fed had a lot to say this week and did quite a lot. What'd you take away from this week?

Well, the bottom line for me is the Fed raised their target rate 75 percentage points. The new range is 1.5 To 1.75. This is the largest rate hike since 1994. And I feel like Powell hedged. Basically they took the free option of hiking 75 basis points at this meeting, and that's largely because after the CPI number on Friday, the markets basically told them you're going 75. And basically the last few meetings that seems to be what the Fed's taking direction from the markets.

And the summary of economic projections showed the Fed fund's midpoint at 3.375 at the end of 2022. It's mostly in line with most forecasts, but now we're starting to see some economists come in and say, "No, we see that more 4, 4.25." And that would mean that we've got a 75 basis point hike at the July meeting, because we know that inflation numbers and labor number, they're not going to come down to where the Fed needs them to be. So expect a 75 basis point hike in July. It's looking like 50 basis points in September and 25 November, 25 December, although those economists that are saying the terminal Fed funds rate by the end of 2022 is around 4%, 4.25, they're tacking an extra 25 basis points onto those last couple meetings this year. So expect more volatility. The Fed's telling us follow the data, not the guidance, because apparently guidance-

What guidance? What guidance? I mean, this is a clown show, Cindy. This has been a clown show for the last week. I mean, if you look at last Friday or late last week, Powell said, "No way. 75 basis points is off the table." And then we get the CPI print and the market tells him he's got to do it, so he does it. And then there's rumors that they could have gone 100. And then we've got the Swiss Central Bank coming in this week with one guy on the street predicting a 25 basis point increase and literally every other economist saying zero, and they did 50. I mean, it is a central bank clown show. Nobody likes uncertainty in the market, and we've never had central banks that have given us more uncertainty than what we've got today. It's no great shakes that equities have had an incredibly rough week in that tape. I mean, I'm fascinated by it, but at the same time, I mean, I have no idea what to make of it. It's like they've completely lost control.

I would agree with that. The only central bank so far that's been true to their word is the Bank of Japan with their announcement this morning.

Yeah, I mean, you put it in context. I think what you picked up on, Steve, around the Swiss National Bank, I think, was really telling. I mean, this is a governing body, basically, that has kept rates below zero for 15 years or something like that. I mean, they have a very strong currency, so they've been heavily, heavily motivated to keep rates really low. In fact, negative. And now maybe in response to what others are doing, maybe not in their own best interest, but just doing what others are doing, took their rate up, as you said, 50 basis points, which was completely unexpected.

And now we have the Fed at the same time following the data. I mean, they're not really leading things. And they're also following data that they can't control. I mean, I think the thing that I took away from the comments from the chairman in his press release, in his press conference rather, was they're focused on if [inaudible 00:09:19] focused on this thing called PCE, right? Personal consumption expenditures. What's the consumer doing? How are they spending? What kind of prices are they paying? And now they're talking about CPI overall, which includes things like food and energy, and those are big drivers, and most people feel that, but they can't control those things. They can't control those at all.

And so I think it says to me that they're becoming more politicized even if they don't want to, which is going to create perhaps even more volatility, to your point, Steve. But at the same time, I guess if we really put our emotions aside a little bit, I think it's probably also noteworthy that the Fed is really focused on that price stability. Right? They're really trying to get prices down almost to the point of acknowledging that employment or unemployment has to come up. Right? So they have to do probably some damage to the economy.

I don't know if you took anything to that point, Cindy, about their forecast. It seems to me like an aspiration where they can take interest rates up a lot, but also unemployment only moves up a couple tenths of a percent. Is that just fantasy or is that attainable? I mean, again, this whole notion on a soft landing is something that people have talked about in, as you wrote earlier this week, any landing is a good landing so long as you land somehow on your feet. But is that forecast attainable?

I don't think so. I think it's a long shot at this point. I believe the SEP numbers do have recession baked in, because the Fed knows what the risks are. And let's face it. I don't think the Fed is really good at predicting recession, to be honest.

So maybe we should look at earnings, too. I mean, I was kind of surprised, Steve, that as we continue to think that earnings are going to come under some pressure, given wage pressures, given margin constraints, maybe demand softening now a little bit. I just saw some numbers this morning that suggested that earnings actually got revised higher this past week. Maybe not by a lot, but they went up a couple of ticks.

When you look at the economic data and you listen to what companies that are especially in the retail channel are talking about when it comes to margins, I mean, it's very clear to me that inflation is having an impact on margins. So wage pressures and cost pressures are not 100% pass throughable to the end consumer in the current environment. And it doesn't really matter where you're at in the supply chain. So I see this as a recipe for earnings numbers to come down as we move through the second half of the year. If you look historically, earnings numbers for the S&P as we've moved into a recession, and now I'm making the assumption that's likely going to be the case at some point in the future here, is anywhere between say a 20 to 25% decline on the low end, so that's a typical run of the mill recession, to a 50% decline if you're in a 2008 scenario. Okay?

Now we don't think it's a 2008 scenario. The economy's in much better shape than it was in the wake of the global financial crisis, right? But we've got earnings numbers that are still going up right now, not down. So I look at the compression that we've had in the multiple for the S&P 500 as this bear market has unfolded, and it seems to me maybe investors are pricing in some cut to earnings along with that. But I don't know that we've priced in the full effects of a decline in EPS yet. So it's going to be very interesting to watch that unfold over the back half of the year.

My biggest issue with the decline that we've had is while we've had some things show that the market is "oversold" from a technical basis and we may be due for a bounce, this decline in my book has just been way too orderly. So we've not had any massive spike in volatility yet. We've not had the market really print a chaotic minus 5% or greater day to the downside. I mean, earlier this week, the day that we were down three and a half to 4%, literally we moved down a half percent every hour that the market was open during the day. It was like the market was going through a meat grinder. That's not the recipe for finding a bottom. That is telling you that something structural is going on in terms of adjustments of positioning.

So we continue to watch for just a massive spike in volatility along with one of these downside days or a couple downside days in order to try to tell us that the near-term tactical trading low is in. Doesn't mean we can't bounce. We can obviously bounce given how stretched things are to the downside, but man, I'm shocked we have not seen a blow off in volatility.

So Steve, if we combine your comments on earnings that you just mentioned and we go back to Cindy's comments on raising the terminal rate from the Fed funds rate up to 3.75, 4, something in that vicinity, the current 10 year's at about 3.24. So that pretty much points to an inverted yield curve and the possibility for a recession. What are all of your thoughts, George, Cindy, and Steve?

Yeah, I guess the risks are rising. I think it's still possible that we can side step one this year. Right? I know that sentiment's getting negative. You've got many people talking about recessions more and more. I guess I would point out, though, that as Steve pointed out, a lot of the damage to the equity market might have been done, so maybe there's some more downside yet to come. But even in recessions, Brian, what we typically see is stocks fall, I don't know, 25, 30%, which isn't all that pleasant, for sure. We're down roughly 20%. So we've covered a lot of ground already and seen a lot of downside and assets getting repriced. And as Steve mentioned, valuations have come down more so than earnings. But then usually the returns going forward in and out of recession are quite positive. In fact, they're really significantly positive.

And if anything, I would note that markets turn ahead of the economy. So even if numbers on the economic front weaken, it wouldn't be surprising to see maybe stocks stabilize at some point. Yeah, they could have some more volatility, and as I think Steve rightly has said, this is going to be a pretty choppy summer given some other geopolitical events that we've covered on various conversations. But prospectively, again, we don't know the bottom until it's already passed, I guess I would say, and it's not surprising to see markets move in anticipation and even ahead of that a little bit. We've seen that already. Stocks down. The economy's actually doing pretty well so far, but if things get a little worse, yeah, that provides some headwinds, but typically stocks move ahead of that recovery.

So that's one thing that I would point out a little bit to our listeners to keep in mind, that nobody can really time these things. It's a fool's errand to try and do that, but it's typically stocks recover before the economy does.

I would add to that that Chair Powell in his press conference noted that the Fed is doing everything they can with the inflation equation. And he basically sent out a shout out to our leaders in Washington that he can't control the supply side of things, so he needs some help on that side of that in order to combat inflation.

And I'm also seeing that the consumer is now depleting their savings that they built up through COVID and they're now switching over to credit cards. So I think that we're headed down the path of a recession. We may not see, like George said, until next year, probably the second half of 2023. But I definitely think that if we continue down this path, recession is inevitable.

The one analog to the bear market information that George mentioned that gives me cause for concern is the '73, '74 analog. So that year we saw multiples compressed with the nifty 50, which was overvalued market leadership, which is akin to what we've seen over the last 12 months plus, with technology and the COVID leaders. You had an oil price shock in '73, '74, which led to above average inflation and an aggressive Fed. And you saw the market continue to get pushed lower as opposed to the more typical bear market scenario where things are rosier 12 months to 18 months hence.

So that's the only thing that gives me cause to concern here, that the analog that seems to have a lot of things in common with what we're experiencing today did not say this was a great time to put money to work. So hate to end on a bad note, but I mean, that's just history.

Yeah. I've looked at that, too, Steve. I mean, you're right to say that the 12, 18-month time period might be, again, full of a lot of fits and starts. But what I saw was even if your time horizon is a bit longer in that two to three-year window, the returns thereafter are positive once we clear this. So I think it does suggest what we've said all along is that you've got to be prepared for volatility. You've also got to be selective with your entry points. And to your point, Steve, around looking for those big moments of volatility in the downside, that's probably when it feels the worst, it might be time to actually put a little money to work, because no one's going to know how this is going to play out. No one's got the foresight to know exactly when things recover.

But I would suggest that if you do have these big risks off moments and, again, your time horizon is beyond 12, 18 months or so, nibbling, I think is not a bad idea. But with that, I guess there's always a silver lining somewhere, right?

So George, Steven, Cindy, thanks for your insights. We appreciate it. And thanks to our listeners for joining us today. Be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app. And as always, past performance is no guarantee of future results, and we know your financial situation is personal to you. So reach out to your relationship manager, portfolio strategist, or advisor for more information, and we'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you achieve your financial success.

The Key Wealth Matters podcast is produced by the Key Wealth Institute. The Key Wealth Institute is comprised of a collection of financial professionals representing Key entities, including Key Private Bank, KeyBank Institutional Advisors, Key Private Client, and Key Investment Services. Any opinions, projections, or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. This material is presented for informational purposes only and should not be construed as individual tax or financial advice.

Bank and trust products are provided by KeyBank National Association, member FDIC, an equal housing lender. Key Private Bank and KeyBank Institutional advisors are part of KeyBank. Investment products, brokerage, and investment advisory services are offered through Key Investment Services, LLC or KIS, member of FINRA, SIPC, and SEC registered investment advisor. Insurance products are offered through Key Corp Insurance Agency, USA incorporated, or KIA. KIS and KIA are affiliated with KeyBank. Investment and insurance products are not FDIC insured, not bank guaranteed, may lose value, not a deposit, not insured by any federal or state government agency. KeyBank and its affiliates do not provide tax or legal advice. Individuals should consult their personal tax advisor before making any tax related investment decisions. This content is copyrighted by Key Corp 2022.

June 10th, 2022

Welcome to the Key Wealth Matters Podcast, a series of candid conversations with leading experts about how individuals and organizations can grow and protect their finances tailored around current events and trends. Here's your host for today's podcast, Brian Pietrangelo.

Welcome to the key wealth matters weekly podcast, where we casually ramble on about important topics, including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to unlock the mysteries of the markets and investing. Today is Friday, June 10th, 2022. I'm Brian Pietrangelo. In case you didn't know, just as a fun fact, today is National Iced Tea Day. My preference is the Arnold Palmer type, mix of half iced tea and half lemonade. It really hits a spot on a nice summer day, here we are in June. So with me today, I'd like to introduce our panel of investing experts here to provide a refreshing take on this week's market activity.

George Mateyo, our chief investment officer, Steve Hoedt, head of equities, and Rajeev Sharma, head of fixed income. As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our Wealth Institute on many different subjects and especially our Key Questions article series, addressing a relevant topic for investors each Wednesday. The market's been a little choppy this week with declines up until Thursday and an expected decline here on Friday morning. The economic releases that came out were twofold. One, the initial unemployment claims that came out Thursday morning. Again, that number comes out every week with a slight tick up of about 27,000 initial claims for the ending June 4th.

That number is now at around 229,000 for the week. We look at that number because it's been fairly steady. If you go back to pre-pandemic levels, it was around that 200,000 level. At 229, it's still consistent with being low, but at the same time is beginning to tick up. It's a number that we're going to watch. In addition, the four week average of that number is around 215,000. Again, fairly consistent. The real number is the inflation print from the Consumer Price Index that came out today this morning. The numbers were a little bit higher than expected, which again is worse for the economy as inflation continues to be on the minds of everybody, including the Federal Reserve and consumers.

With that particular number going up 1% month over month, and then 12 months year over year going up 8.6%, was higher than expected because we had the initial decline last month, which gave us the possibility of thinking that inflation might be peaking. This read negates that with, again, going up in the opposite direction. From an overall consideration, George, as we begin to have our conversation on today's podcast, we think about the implications for inflation with regard to the economy, with regard to the bond market, with regard to the stock marketing, and with regard to the Federal Reserve's policy. What are your thoughts here on inflation George?

You're absolutely right, Brian. I mean, it's been a week of not much new news to talk about other than what's happened this morning with respect to the inflation headlines. Interestingly, the Department of Labor talked about the fact that inflation has now soared over eight and a half percent, which is the fastest base since I guess it's May of '81. In terms of some of the detailed numbers that you mentioned, just to elaborate on the point, the overall inflation print was about 1% a month over month. I think the consensus was about 70 basis points. Consensus was a bit shy.

And then in the core level, when you take out food and energy, it was also a bit hot to expect it, which is probably the more worrisome number, I guess, in the sense, I think people kind of thought that the overall headline print would be a little bit hot. It's not surprising in one level the sense that the situation in Russia and the invasion of Ukraine along with some tightness in the commodity markets would suggest that overall inflation has been running hot for a while and people are expecting that. But I think when you look at some of the details, some the online components were a bit hot expected. The bottom line, I guess, is that really the inflation situation is just running way too high.

The Fed has to probably get really focused and will probably be very aggressive. Any thoughts of the Fed going less than 50 basis points and raising rates when they get together soon is kind of thrown out of the window. I think the notion that maybe inflation might be peaking I think got delayed, at least, for sure. There were some lingering effects, I guess, with respect to playing catch up from some of the disruptions around COVID and things like that. But bottom line again, inflation is just stickier than probably people hope it would be. Again, looking at some of the details, used car prices, I think, were kind of surprisingly hot. They actually had been ticking down a little bit.

Airfare, not surprisingly, but I think just the magnitude of the increase was pretty startling. Actually April's month over month gain in airfare was some 19% higher. People thought that might actually come down a little bit, but it actually picked up again in May. On a month over month basis, airfares were up some 13%. And then again, even some things kind of that are getting less pressed perhaps around inflation also are pretty hot in terms of things at medical expenses, for example, rent and housing, things like that, were also pretty hot as well. Bottom line, inflation is here for sure.

I think it'll be kind of curious to see what the Fed does with this a little bit, because they look at another indicator of inflation called PCE or personal consumption indicators, expenditures rather, and there'll be some differences there, but I think the overall CPI number are ones that people pay attention to. It's front and center in the media. Again, as we've said here now, it's pretty hot. I guess, Rajeev, as we think about what the Fed might be doing with this, it seems to me that it's a forgone conclusion that they're going to have to continue to be quite aggress with respect to interest rates. You agree?

Well, you said it, George. I mean, I agree with you. Headline and Core CPI both exceed expectations. If you see inflation climbing to another fresh 40 year high at 8.6%, like you mentioned year over year, that continues to put pressure on the Fed. The problem here is that you have a Fed that remains behind the curve. Any thoughts of the Fed pausing in September seem to be off the table. It's a clear negative for risk markets. This means more pain for bond markets as yields are moving higher post to print. Credit spreads are wider across the investment grade sectors. The market is now fully pricing in three half point rate hikes in the coming months. That would be 50 basis point hikes in June, 50 basis points in July, and 50 basis points in September.

There were some thoughts, like you mentioned, that September might have been a pause, but I don't see that happening now. Fed Funds Futures has now shown 80% chance of a 50 basis point hike in September. And that was 60% right before the CPI print. It has jumped. We even see a 30% chance right now that there could be a 75 basis point rate hike in July instead of 50 basis points. Another thing we have to monitor because 75 basis points were off the table for a long time. That's creeping up to around 30% for July. Overall, the market have great expectations for this year. They've increased. There's a new high there.

The expectation now is that the Fed will move more than 200 basis points within the next five meetings, pushing the benchmark rate to about 3% by December.

I think we have to be mindful of the fact that at some point, inflation could collapse a little bit under its own weight. I mean, at some point, demand destruction will start becoming a reality, meaning that price will become so high that people will start altering their spending habits. Maybe they won't take that trip after all. Maybe they'll actually have a staycation instead of a vacation. Steve, what do you see on the demand destruction side? Haven't we reached that point yet, or are we getting close to it at all?

On the side for gasoline and in terms of things that we live with and see every day, barely. Now that the US prices for nationwide average have hit $5 for the first time, we are starting to see a very little bit of it. But quite frankly, consumers up to this point have not backed off of consumption of those types of goods whatsoever. There's been a lot of accessing of credit in order to maintain living standards in the face of this, but clearly we haven't seen it yet. I think that the area where we have seen some troubling signs is in the diesel fuel area. Diesel fuel is in short supply, not only in the US, but also in Europe.

It's starting to impact supply chains here because there's problems pushing pricing pressure for diesel on the cost side, simply because the move has been so massive on a year over year basis that there's a lot of resistance to it. Whether or not we see that kind of start to flow through to store shelf availability I think is a real question mark as we get into the back end of the year. It really gets to your question, George, about, is there some type of self-recalibrating nature to what's going on in terms of the inflation situation? I guess, my concern is that the inflation situation ends up having that impact, but the impact ends up tipping the economy into a recession at some point maybe next year.

I think that's the thing that's really on the market's mind when we see the S&P 500 down over two and a half percent on the day when we see the print like we did with the CPI this morning.

In terms of flow through, I think it's interesting you mentioned Europe, Steve, and I would kind of suggest that what they're seeing over there is probably even a degree or two worse than what we're seeing here at home. They've been really at the epicenter of this energy transition debate, and now I think they're paying unfortunately a pretty high price for that it seems to me. At the same time, they've also been behind the curve, their central bank, the ECB, which actually has been around for as long as the Fed. Obviously the ECB came to existence in the early mid '90s, I believe. I think the inflation numbers that their expansion now are the highest ever in terms of what's happening to inflation there.

Of course, that's a smaller period of time than us here at home. But I do suggest that what's happening in the ECB could be a prediction watch. We've been thinking that they would probably have to... They actually would likely fall into recession sometime this year. And for that reason, we've been trying to position portfolios away from or maybe deemphasize exposure there. At the same time, I think we've also seen perhaps maybe some growing strains into their overall political apparatus. We've talked about the fact that here in the United States, we're still pretty fortunate in the sense that the employment situation is still pretty benign.

Brian mentioned, in fact, the small uptick in employment claims here in the United States, but the employment situation, for now anyway, is staying pretty healthy, which gives I think the Fed a little bit of room to maneuver. The ECB, on the other hand, doesn't have that flexibility and they have systemically higher unemployment than we do. There's also greater divergences in unemployment in many of their countries. Maybe, Rajeev, are you seeing any of these signs of stress inside the European arena right now?

Absolutely. I mean, I think you're right, George. I mean, the inflation story is a global one. The ECB had a press conference last week. They pointed to inflation being on the upside. At the press conference, they pointed to a gradual, but sustained path for further rate hikes. It's hard to be gradual there when you see those kind of inflation numbers. There's no news from them on quantitative tightening, but they will end asset purchases on July 1st. And all the impact of what the ECB talked about during their press conference and then some of the messaging that they've been telegraphing over the last few weeks has taken its impact on German and Italian bond yields.

If you look at the German 10-year, it was up almost 10 basis points right after the press conference. We're around 1.5% on the 10-year for Germany, and the Italian 10-year was up almost 20 basis points to 3.7% post the ECB conference. Yes, it is a global story on inflation and the ECB has a lot of wood to chop to try to bring inflation down over there.

Steven, the same regard, you've talked in the past with us, not only is gasoline getting a lot of attention, but food is also a larger contributor this particular month. You've got a view on sort of the world food inflation opportunity. What are your thoughts?

Yeah. I think that the food situation globally remains very concerning. It's not just the fact that there's problems shipping grain out of Ukraine anymore. It goes to the whole entire supply chain for feed grains in particular, which impact just about everything that we eat. If you look at the high natural gas prices, that impacts the production of ammonia and other fertilizers. I've heard anecdotally that there are a number of obviously farmers here in North America that have materially changed their planning intentions for the year, because they were unable to get and procure the amount of fertilizer necessary to generate the types of yields that are needed in order to feed not only us, but the world.

When you think about it, we've become very reliant not only on mechanized farming globally, but also on fertilizer in order to produce the food that's necessary to feed everyone. The fact that we've got dislocations not only in the actual movement of grain at this point, but we've got problems with fertilizer. It's impacting everyone. I think we see it now starting to manifest itself in the numbers that people are seeing in the CPI. We're seeing it in terms of the stockpiling behavior on behalf of consumers that are able to do so. I think that we're going to continue to see this as we move through the course of the summer.

I don't throw around the F word very lightly, but famine is something that I think that we are likely going to be hearing in certain countries as we move through the back half of 2022. It's a very unfortunate situation, Brian.

Great, Steve, thanks for that. Rajeev, are there any thoughts you have in the fixed income market? I know there's a creeping conversation coming back in about yield curve inversion if the two-year goes up and the 10-year does not. Where are we on spread and what are your thoughts?

Yeah, Brian. With that CPI print, we are seeing yield spike across the yield curve, especially in the front end. This, again, is pointed to the anticipation that the Fed will have to remain aggressive. We see the yield curve flattening on the print. We had talked about 3% on the 10-year being somewhat of a resistance point. In other words, over the past few weeks, whenever we saw the 10-year go above 3%, we immediately saw demand and it pulled it back below 3%. Now, with this higher than expected CPI read, the 10-year yield has an easier time remaining above 3%. We're around 3.11% right now post the CPI print. We could even see the two-year climb towards 3% as well.

The shift across the front end is gaining momentum this morning. The two-year is about 15 basis points cheaper on the day. We have talked about the prospect of an inverted yield curve over time. Well, now there's about maybe 12 basis points between a two-year treasury yield and a 10-year treasury yield. That's pretty tight. We could see that inversion again that talks about a two and 10-year inversion are starting to creep up again. The question will be, will that inversion happen? And if it does, will it be sustained? If you look at the five-year and the 30-year yield curve, that has inverted again after the CPI print, Brian.

Rajeev, hey, we're starting to see some signs of stress creeping into the high yield, that market again. CDX is for high yield, which are credit default swaps, are back very close to the highest levels we've seen in 2022. While below 2020 levels, they are above 2018 year end levels, which was the last time we had a period of stress that did not include COVID. Are you seeing any signs of some chaotic trading now starting to creep into the high yield market, or are things pretty orderly? Anything there giving you extra cause for concern right now?

That's a great question, Steve, and I think CDX is a good way to look at especially high yield. We've seen the cash bond markets kind of the orderly. We've been leaking out wider on cash bond spreads for investment grade and high yield. But if you look at CDX, which as you mentioned was a measure of risk, we have seen some whipsaw action in the CDX for high yield. I think we were talking about this just a few, maybe a week or two ago where we started seeing a little more calmer markets for the CDX. Things started looking a little better, but not anymore.

We're starting to see just along with all of the risk markets, it's really becoming a leading indicator for us to show stress on the markets. We are seeing a rotation out of high yield into more up and quality trees. I think that's adding extra strain on the market. And especially if you break down high yield in general, triple C's are really having a rough time at this point. Even within high yield, you're seeing those holders of triple C that are trying to move up in quality, maybe even towards single B or double B. I think this continues going ahead of the 2018 levels is very concerning.

As we take all this into consideration, maybe the final question for today's podcast will be, given all this, how do we think we should be thinking about portfolio positioning for our clients? Let's start with you George, and then go to Rajeev, and Steve.

Yeah, thanks, Brian. I think it is important to try and drive some of these points home, because I think the markets are very unsettling these days obviously and there's a lot going on that causes a great deal of consternation. I think, if anything else, I would probably avoid making too many rash decisions. Particularly when the markets are down as much as they are, I think people might have the instinct to try and do something and they might overdo it. I would advise not doing anything really bold or rash. It's probably not a bad time just to revise and... Not revised, but it's a time to revisit your financial plan and make sure it's kind of in line with what you are trying to achieve.

Sometimes that might mean having adequate cash reserve. There's always an idea of maybe having three to six months worth of spending or perhaps more just to provide some extra cushion. That's not a bad thing either in this environment. We've, I think, been somewhat modestly defensively positioned. We could probably get more defensive if we thought the risk of a recession arising. Materially, they still are somewhat benign, although I think it's still maybe our view that maybe a chance of a recession is still one in three. But based on the inflation print today, it suggests that it might be moving up a little bit.

We talked about the fact that yield curves are compressing, spread are widening on the credit space, which also suggests that, again, things are getting a little bit dicier out there. I would suggest that it's a time to be a bit cautious perhaps, really focused, as Rajeev about, on quality assets and sticking with the quality bias. We've also been hiding out a little bit in some of the value areas of the market versus high growth in high momentum stocks. I think those themes continue to work. And then I think at the same time, you want to be very diversified in your approach to portfolio construction. For that reason, we continue to advocate things like real assets and some alternative strategies that could be beneficial as well.

It's a time to be cautious. It's a time to be really robustly diversified, but I wouldn't be panic either at the same time. Steve, what do you think?

Totally agree with you, George. I think that when you get into a market maelstrom, it's not the time to be making large scale moves with your portfolio. That is better done in times when seas are calmer. Now is when you take time to look at bigger pictures, more strategic things, as you mentioned.

 

Eventually this will pass. I mean, that's the thing that we have to keep in mind. I know there's been a lot of headlines. To some extent, this could be a self-fulfilling prophecy when you've got major CEOs talking about a coming hurricane, right? But even hurricanes lead to some rebuilding. Eventually those things do result in some recovery and some repair. But again, I'll flip to you, Rajeev. Any closing thoughts from you on that point?

Yeah, I think we've been advocating for a while of upping quality trades, high quality assets. I would continue to advocate that. I also feel that this is the time really to look for those opportunities and dislocations of the market where you can increase your ratings of your fixed income securities. Also, you're looking at some of these issuers are very well-capitalized, very liquid, high quality names. If there's opportunities to look at those, I think this is the time. When others are panicking and you're starting to see opportunity, there are some high quality names out there that look attractive at certain levels here.

George, Steve, and Rajeev, thanks for your insights. We always appreciate it. Thanks to our listeners for joining us today. Be sure to subscribe to the Key Wealth Matters Podcast through your favorite podcast app. And as always, past performance is no guarantee of future results. We know your financial situation is personal to you. Reach out to your relationship manager, portfolio strategist or advisor for more information, and we'll catch up at the next week to see how the world and the markets have changed and provide those keys to help you achieve your financial success.

The Key Wealth Matters podcast is produced by the Key Wealth Institute. The Key Wealth Institute is comprised of a collection of financial professionals representing Key entities, including Key Private Bank, KeyBank Institutional Advisors, Key Private Client, and Key Investment Services. Any opinions, projections, or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. This material is presented for informational purposes only and should not be construed as individual tax or financial advice. Bank and trust products are provided by KeyBank National Association, member FDIC and Equal Housing Lender.

Key Private Bank and KeyBank Institutional Advisors are part of KeyBank. Investment products, brokerage, and investment advisory services are offered through Key Investment Services, LLC, or KIS, member of FINRA, SIPC, and SEC registered investment advisor. Insurance products are offered through KeyCorp Insurance Agency USA Incorporated, or KIA. KIS and KIA are affiliated with KeyBank. Investment and insurance products are not FDIC insured, not bank guaranteed, may lose value, not a deposit, not insured by any federal or state government agency. KeyBank and its affiliates do not provide tax or legal advice. Individuals should consult their personal tax advisor before making any tax related investment decisions. This content is copyright by KeyCorp 2022.

June 3rd, 2022

Welcome to the Key Wealth Matters podcast, a series of candid conversations with leading experts about how individuals and organizations can grow and protect their finances tailored around current events and trends. Here's your host for today's podcast, Brian Pietrangelo.

Welcome to Key Wealth Matters' weekly podcast, where we casually ramble on about important topics, including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to unlock the mysteries of the markets and investing. Today it's Friday, June 3rd, 2022. I'm Brian Pietrangelo, and with me today, I'd like to introduce our royal court of investing experts. Here to make sense out of this week's market activity, George Mateyo, chief investment officer, Steve Hoedt, head of equities, and Rajeev Sharma, head of fixed income.

As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our Wealth Institute on many different subjects and especially our key questions article series addressing a relevant topic for investors each Wednesday.

So for today's conversation, we've got a number of economic releases this week, notably focused on employment data. So if we take a look at a couple information pieces. Earlier in this week, we have the jobs report from the Bureau of Labor Statistics, where we talked about job openings available, 11.4 million. And that's about a 2:1 ratio with those that are unemployed, so the economic status of that is that the Fed will continue to look at that from the combination of additional information released this week. Examples of those information include the non-farm payrolls report that came out this morning, 390,000 new non-farm payrolls for May, and that was a pretty good number. In addition, the unemployment rate stayed right around 3.6%, and as they also report on a regular basis within that release, the labor force participation rate was at 62.3%.

In addition, just yesterday on Thursday, we had the initial unemployment claims that come out every week, and that was right around 200,000, which has continued to stay low for a while now. All three of those reports, good signs for the economy, but at the same time, do have implications for what the Fed will do going forward in the next couple meetings and later on this year.

So George, as we think about all that information together with some other information regarding productivity and ISM indices, what are your thoughts and where do you see the market headed?

So Brian, you're right, there are a lot of economic headlines this week and probably a lot of cross currents, too. I guess I start by noting that the employment sector continues to be pretty positive. This morning we got, of course, the employment report. It suggests that the growth is still pretty solid. And maybe even we've seen more evidence lately of some slowing inflationary pressures, too. I think inflation is still somewhat elevated, but the overall numbers suggest that growth is still here. So a slow down for sure. A recession, not quite so sure, I guess I'd say.

The overall employment numbers were revised higher from the prior month, and we saw really a pretty big significant gain in the overall labor market from the hospitality sector, which was, of course, hit pretty hard by COVID, but it's rebounded quite strongly. We also saw a lot of things this week with respect to ISM numbers, which are a way to calibrate near-term economic activity. They were pretty strong. Again, some cross currents there, too. I think there's a lot of confusion about just how strong the economy is right now, how vibrant the labor market is. But I guess when I take a step back and look at all these different parts of the picture here, I continue to think that things are pretty solid from a growth perspective. And again, inflation seems to be moderating a little bit.

The PMI numbers we talked about, again, these are some near-term economic readings just based on economic activity. It's some survey data, so it's anecdotal, but it is some near-term data. And again, if I look at the broader picture, you can point to a few things that are slowing down. Certainly China is slowing. Their numbers actually did pick up a little bit from the prior month, but it's still contracting a little bit. But overall about 83% of the countries in the world right now are showing signs of expansion. That's down about 2% from the prior reading, which was 85% of the overall global economy expanding. But 83% is still pretty healthy by my standards. And again, if you take a step back and look at the broader landscape, you'll continue to see expansion other places as well.

l contracting a little bit. But overall about 83% of the countries in the world right now are showing signs of expansion. That's down about 2% from the prior reading, which was 85% of the overall global economy expanding. But 83% is still pretty healthy by my standards. And again, if you take a step back and look at the broader landscape, you'll continue to see expansion other places as well.

So I think at the same time we've seen this happen. We've seen a lot of chatter from the Fed, I should say. A lot of different talking heads with respect to what the Fed might do with this data. It does suggest to me that they're going to continue raising rates, but the question is how much they might be raising rates and how quickly. So Rajeev, what do you make of the latest news from the Fed and, again, all the talking heads that are coming out right now to talk about future moves from the Fed going forward?

That's a great point, George. And there are a lot of talking heads this weekend. I think one of the biggest ones was the Fed vice-chair Brainard. Her comments hit the wire pretty strong. She said that we are getting mixed signals on the economy. For example, softer home sales, but she's attributing that to the impact of Fed tightening. The Fed's number one priority, as we've talked about many times, is combating this high, multi-decade high inflation that we have right now. And so she expects 50 basis point rate hikes in June and July and no really clear sense beyond July. But if there are no clear signs of deceleration in monthly inflation reads, another 50 basis points would be warranted in September. And that's what her comments were. She doesn't really see a real hard case of pausing in September. There were some other Fed members who said that maybe we can pause in September and look at the data. She says there's a lot of work to be done, and I think her words really impacted the market.

You mentioned the jobs data feeds. The job data really does feed into the expectation of Fed rate hikes. We see the front end of the yield curve impacted by the jobs number today. If you look at the longer end, bonds can benefit from speculation the higher rates will curb both inflation and yields. We got a 10-year bond that currently offers about a hundred basis points on average over their G-7 peers. So that makes them relatively attractive.

But in this environment where we have multi-decade high inflation, the primary focus for the Fed members, for the policy makers is curbing inflation and raising rates to do that. The labor market is too tight and the Fed is going to try to slow down the economy.

Gains of the magnitude that we saw today in the jobs number over time may result in the unemployment rates to start to fall a little bit. But if labor demand cools, part-time employees is something to look at as well. There were some numbers there that we saw today. There's the U-6 unemployment rate, which includes the part-time workers. That rose for a second month in a row. That reached 7.1%. The market reaction of that is higher yields and lower stocks, and that points to investors that are ready for a weaker job report and also ready for Fed to be locked in to raise rates and continue this 50 basis point rate hike for the next two meetings. In fact, if you look at Fed futures, they're pricing in 70% probability of a fourth 50 basis point move. That's up from 60 basis points right before [inaudible].

That's a significant sea change from where we were a week ago it seems like, Rajeev. Is that correct?

Absolutely. Last week, I think a lot of fingers are pointing towards the fact that maybe the Fed will slow down. Maybe there won't be another rate hike in September or maybe at least it won't be 50 basis points, but you've got a really strong employment number and you also have the fact that inflation's not coming down as fast as Fed officials think. So it's foot on the pedal right now.

At the same time, Rajeev, it still seems like the credit markets are flowing pretty well, and it doesn't seem to be that much sign of stress. Is that a fair assessment, too?

Yeah, it is. I mean, high grade US bonds did sell off a little bit this week, but high yield also had a seven-day rally. So you see that it's the longest winning streak for high yield since September 2021. This was pretty much all in part with another Fed member, Fed president Bostic's suggestion that the Fed may pause in September. That really lent a lot of momentum to the credit markets. We did see that pave the way for credit to have its largest rally in two years. We saw that last week. It was amazing to see, not only cash bonds, but also CDX. Everything started rallying last week.

It also brought issuers back to the market this week. We saw the issuers of debt. They cooled down when rates started moving higher, and last week we saw rates moving lower. We saw credit spreads reacting positively. We saw issuers come back to the market. Syndicate Desk had estimated about 25 billion new issuants in investment grade this week. We got 30 billion. So you know issuers are looking at this as well.

Great, Rajeev. So the other thing that caught my attention this week has to do with what's happening in the energy markets. So Steve, I was struck by the fact that we saw some really significant headlines related to the energy sector this week. We began the week when we saw the EU suggested they might be cutting their dependency on Russian oil, which would be a significant departure in policy. And then at the end of the week, we're now getting headlines that President Biden might be on his way to Saudi Arabia to try and release, I guess, or try to get some more supply back online from the Saudis. That's also a pretty significant departure in policy as well. So what do you make of the energy sector right now in terms of what we should be thinking about from the economy perspective and also geopolitically?

Well, geopolitics and the economics will go hand in hand here, George. We sit here today with crude oil just south of $120 a barrel. And it is according to the triple A, we've got US average regular gasoline sitting at 4.76. Never been higher heading into the summer, and the rough thing is that it looks like it's going to continue to head higher. We have not seen any demand destruction, really, which is amazing when you think about it. We've had this massive rebound in price from the COVID lows, but yet we have seen no demand destruction whatsoever irrespective of price moving higher.

The economics of that tell me that price is going to go higher until we see demand destroyed in order to try to bring supply and demand back into balance. We just have this global disconnect where even if the administration is successful in getting the Saudis to release more oil, the problem isn't that we have enough or don't have enough crude oil. The problem is that the global refining capacity is incredibly tight. There just isn't enough refining capacity available to be able to refine whatever we do get into the market for crude.

The situation in Europe is incredibly tenuous, both with respect to gasoline, but even more importantly, diesel fuel, because there are tremendous amount of exports of refined product that come out of Russia that are not able to be replaced by anybody in the world. So while there is a lot of talk about trying to extricate ourselves from, on a global basis, dependence on Russia or other actors, it's just a really incredibly difficult situation to try to do when you get down to dealing with the whole real world part of it. I mean, that doesn't even get into the real politic of the US going hat in hand to a dictatorship in Saudi Arabia when we're bemoaning buying oil from a dictatorship in Russia.

That's an interesting way to put it, Steve. I'd be curious to also get your thoughts. So there's a lot of things we could kind of pull on a few threads there, I think, one of which has to do probably with earnings and really the health of consumer. We'll probably get a better update in a few weeks when we've got a special call set up with somebody who's going to provide some great insights, I think, on the consumer. But what's your read for in terms of the overall health of the consumer right now, Steve? And you can maybe put that in context when you mentioned gas at six or $7 a gallon right now and going up and other prices ... I'm sorry ... other price pressures as well. How do you think the consumer's holding up these days?

Well, I said 4.76. I know we got a six and a seven in there, and hopefully we don't see six or seven.

Well, on the West Coast, though, we are, though, right? I mean, I know reports [inaudible].

Yeah, you're not wrong. When you look at the nation, there is a distribution there, and on the West Coast, it for sure is that level.

When you look, we are starting to see signs of the consumer tapping credit lines, which suggests that the budget is starting to get stretched by some of these inflationary pressures. We have not seen it translate into pressure on corporate revenues really yet, but time will tell. We'll see if that happens as we move through the course of the summer and we get into the next set of earnings. I've said on these calls for a while now, my big concern is that we've seen the market swoon this year, and it's all been driven by the P, price, not been driven by the E, the earnings, because we've seen earnings continuing to go up and to the right. And if we get into a scenario where we start to see earnings actually get marked down, then that's when we really start to get concerned about what the market could offer us in terms of trouble through the summer and into the fall.

I'm going to be watching to see if we do inflect lower on that earnings number. I think that's really what just about everybody who's concerned about fundamentals is focused on on the street right now. If that number inflects lower, then we have ourselves a situation on our hands yet again.

So at the same time, we've seen this tremendous volatility. I just was looking at a couple data points this morning. This last one year, if you take account all the volatility we've seen just in the last 12 months, the stock market is pretty much where it was 12 months ago. So we've gone up 14, 15%. we've come down about the same. I think year-to-date we're down something around 10% on the S&P, but relatively speaking over the last one year, the market's flat. So I think that's kind of an indicative situation of probably where we go from here. We talked about maybe some summer swoons and some volatility, but kind of flattish markets and a lot of choppiness in the near term. So I think with that in mind, we really want to stay very focused on diversification, focused on really building robust portfolios, and really remaining disciplined about how we put capital to work and when we do so. So with that, Brian, I'll turn it back to you.

Thank you, George. Just in the trip from Biden's visit going to Saudi Arabia, he also visited with Powell. Rajeev, do you have any comments about what you think that might mean or is it just basically a closed door visit?

It was a very, I would call it a rare situation where the President of United States meets with the Fed Chair, Powell, and Janet Yellen in a closed oval office meeting. I think that the whole outcome of that meeting I was expecting a little more ripples in the market when that meeting was announced, because you always want the Fed to be independent of any political pressure, even though it's always there, but you always expect it to be independent. I think it was a combination of showing the impact of what inflation is in the market right now. Obviously that's priority number one for the Fed, but it's also a big priority for the President of the United States, Biden.

So I think that the meeting was more a sense of making sure that the highlight is on inflation. The market didn't really react too much to the meeting. It would've been a whole different situation if President Biden was really demanding that we have a 75 basis point rate hike. That was not going to happen. Fed chair Powell is sticking with his thesis of 50 basis point rate hikes in the next two meetings. That has not changed. It just, I believe, highlighted the importance that inflation is on political circles as well with the Fed.

So George, Stephen, and Rajeev, thanks for your insights. We appreciated it. And thanks to our listeners for joining us today. Be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app. And as always, past performance is no guarantee of future results. And we know your financial situation is personal to you, so reach out to your relationship manager, portfolio strategist, or advisor for more information, and we'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you achieve your financial success.

The Key Wealth Matters podcast is produced by the Key Wealth Institute. The Key Wealth Institute is comprised of a collection of financial professionals representing Key entities, including Key Private Bank, KeyBank Institutional Advisors, Key Private Client, and Key Investment Services. Any opinions, projections, or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. This material is presented for informational purposes only and should not be construed as individual tax or financial advice.

Bank and trust products are provided by KeyBank National Association, member FDIC and Equal Housing Lender. Key Private Bank and KeyBank Institutional Advisors are part of KeyBank. Investment products, brokerage, and investment advisory services are offered through Key Investment Services, LLC, or KIS, member of FINRA, SIPC, and SEC registered investment advisor. Insurance products are offered through KeyCorp Insurance Agency USA Incorporated, or KIA. KIS and KIA are affiliated with KeyBank. Investment and insurance products are not FDIC insured, not bank guaranteed, may lose value, not a deposit, not insured by any federal or state government agency. KeyBank and its affiliates do not provide tax or legal advice. Individuals should consult their personal tax advisor before making any tax related investment decisions. This content is copyright by KeyCorp 2022.

May 27th, 2022

Welcome to the Key Wealth Matters Podcast, a series of candid conversations with leading experts about how individuals and organizations can grow and protect their finances, tailored around current events and trends. Here's your host for today's podcast, Brian Pietrangelo.

Welcome to the Key Wealth Matters Weekly Podcast, where we casually ramble on about important topics including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to unlock the mysteries of the markets and investing.

Today is Friday May 27th, 2022. I'm Brian Pietrangelo, and with me today, I'd like to introduce our round table of investing experts here to make sense out of this week's market activity. George Mateyo, Chief Investment Officer. Steve Hoedt, Head of Equities. Rajeev Sharma, Head of Fixed Income.

As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our Wealth Institute on many different subjects, and especially our Key Questions article series addressing a relevant topic for investors each Wednesday.

Before we begin today's podcast, I wanted to pause for a moment to reflect on two topics. First, as we head into the three-day weekend that ends with the Memorial Day holiday on Monday, I believe it's vitally important to honor those who died in military service to our country, the actual purpose of the holiday, with origins dating back to 1866, and with Congress making it an official holiday in 1968. Freedom is not free in our great country, and again, we honor those who made the ultimate sacrifice.

Second, I'd like to pause to recognize those individuals and families that suffered horrible loss of life in both Buffalo and Texas recently. Extremely sad news. Life is precious, so let's do what we can to help and support each other.

Turning back to the markets and the economy, it's been a positive week for the stock market advancing thus far through Thursday after multiple weeks of declines. We also had the Personal Consumptions Expenditure, or PCE, inflation print this morning indicating some moderate signs of slowing. Unemployment claims stayed low, and we had meeting minutes released from the Fed's meeting back on May 4th.

So, let's start with you, Rajeev. What did the minutes reveal? Did we learn anything new, and what are the implications for the Fed and the markets?

Thank you, Brian. If you read through the Fed minutes, most Fed officials agreed that The Central Bank needs to continue to tighten. So, we're thinking about 50 basis points per meeting for the next couple of meetings. That's exactly what the message is from the Fed minutes.

It continues to be an aggressive message, a set of moves that would allow the Fed to have some level of optionality by sometime later this year. So, say we have a 250 basis points move in the next two meetings, if we extrapolate from the Fed minutes, it would give them an opportunity then to assess the data and see where we are.

They also in the minutes updated the forecast for inflation, as measured by the PCE, of 4.3% in 2022, but they lowered their forecast to 2.5% and 2023 and 2.1% in 2024. This itself moved the market, because if the forecast is accurate, it would imply that the next expected three half-point rate hikes would end the current tightening cycle.

They would allow themselves to have a break at that point, and see whether the data's supporting their efforts, whether inflation's starting to finally come down. It would be interesting to see if we would have some kind of risk rally in the second half of the year, and I think a lot of market participants started feeling that way just by looking at the minutes.

The minutes also revealed concern over elevated inflation obviously, but some suggestion that inflation may have peaked, as it was starting to impact demand. Regardless, an inflation peak doesn't really change the Fed's near-term course. We still expect 50 basis point of rate hikes, because the level of inflation is still at multi-decade highs.

If you look at the Treasury curve following the minutes, they fluctuated, nudged a little wider. The spread between 5s and 30s moved wider, to about 23.5 basis points from 22.5 basis points before the Fed report. But if you look at the overall messaging of the Fed minutes, really the 50 base point hikes, it still seems hawkish, but in line with market expectations. There was nothing that really moved the needle, but there are a couple of things that were extraneous that you look at.

They may say that the Fed minutes did not mention anything about a 75 basis point rate hike, which is good for market participants, because no one is expecting that. Several officials also noted that there could be Treasury market volatility because of liquidity. Several saw risk in the markets as balance sheet shrinks, and many saw the Fed will be well-positioned later this year after the current tightening cycle.

So, that's really what the impact of the Fed minutes was. I'd be curious to see what you thought, George. Any impact on the market?

I think it's interesting, Rajeev. We talked about this a briefly last week when we got together, that the Fed might be starting to think about easing off the brakes a little bit, and then we shot that down to some extent.

But it was kind of telling to me to see a couple of Fed officials come out and suggest as much. Where there's a few, I don't know if they're maybe less important or maybe less followed Fed officials, but there seemed to be a bit of attraction behind that narrative that the Fed, as you pointed out, might be starting to think about how they walk this back a little bit, or consider pausing, or as you said, giving them some flexibility in the outlook.

Does the market, in your opinion, hang their hat on some of that narrative, or is it really just thinking that the data itself is slowing? Because we saw a lot of significant slow down numbers, if you will, this week. Housing, I think, was one of those sectors that had historically been quite strong. Again, this week we saw housing numbers, I think, the home price sales were down some 17%. Inventories have started to climb up a little bit, so we've started to see some of these pressures ease off a little bit.

But again, the Fed officials who have been commenting publicly that they might have to consider pausing, is that something that we can really believe?

That's a very good point, George. I think that the market, if you look at the Treasury market, it's almost supporting the Fed's narrative, in the sense that an economic slowdown is bringing down the tenure as well. We're seeing a tenure way below the 3% point that we saw just a few weeks ago. I think that kind of helps the Fed in the interim if they can ease off a little bit.

You also have a fact that they're looking to thread the needle. I think that what's going to happen here, is that the 50 basis points are already baked into the market. Anything less than that would be a tremendous upset to the market. I don't think we're going to see that, but it does give the Fed the opportunity to see where the data is mid-summer. If they do see a slowdown in inflation, it could help them take the foot off the pedal.

But I really feel the Fed generally works to complete their initiatives. I think that what will happen, as we've seen it in the past, the Fed sometimes overshoots, and I think that we could see that as well. I don't think any Fed official really has been speaking too much this week to slowing down in any way. Everybody just keeping along with the 50 basis point narrative for now. But do we see a slow down or give them the optionality later on the summer? I think we could see that.

Yeah, I think the optimal phrase that they see to be focusing on it clear and convincing evidence that inflation is going down. As you pointed out, and Brian mentioned too, we have seen some suggestions that it is coming down, but maybe not that much as well.

But the other side of the coin, we have that debate going on right now about inflation, where's it going? The other big debate, I think, on the investment side, is what does the outlook for growth? We saw some numbers this week that, again, suggest that growth is slowly as well.

So, we look at these things called PMIs, or these Purchasing Manager Indices. Typically anything above a 50 reading suggests that the overall economic activity is accelerating. Anything below 50 would suggest that the economy is contracting. That doesn't mean it's a recession, but it does suggests that the activity is less and it's going down.

Those numbers actually did come down a little bit this week. So, just a month or so ago, they were in the mid to high-50s, now they're more the lower end of the 50 range, if you will. Again, we've seen some momentum come down a little bit on some of those near-term indicators.

Then at the company level, Steve, I'll kick it over to you, because I think it's really that we're going see a lot of cross currents that have emerged with some of these really well-known companies reporting earnings. Some companies I talked to you about actually have pretty good top line growth, but some of the margin pressures were pretty acute.

We saw a ton of dispersion, it seems like, amongst the winners and losers in the overall corporate earning reporting season, if you will. So, what's the read through to you, Steve, with respect to earnings and where we're going from the equity market perspective and the focus on growth?

Well, it's very interesting, George. When you look at the 2Q estimates for the S&P 500 in aggregate, they're down 1.2% since the end of March. Bears have tried to flag that as a recessionary sign, but when you take a look at how these earnings numbers have evolved historically, when you take a look at 2Q EPS, literally every quarter we see a bit of a dip as we're getting to this point in the cycle, because we're still a month to a month and a half away from actually entering into the earning season.

So, this is the part of the earnings cycle this quarter where we see analysts actually lowering their numbers, so that the companies have a lower bar to beat when they actually report. So, I don't see anything right now that's out of the ordinary in terms of the earnings reporting numbers that gives me any cause for concern.

In fact, when you take a look at the earnings aggregate, irrespective of major retailers announcing what they're talking about, in terms of margin pressures and this and that, we still continue to see their earnings aggregate number for the S&P 500 trend up over the last month, not down.

So, I think that as long as we see that number continue to go up, it's going to be a potential positive, or a lift factor, for the equity markets as we move through the balance of the year. Where I really start to get concerned about the market is if we see that number start to inflect lower, but right now we don't have any sign of that.

Yeah, I think that's the key thing to watch, as it relates to the overall corporate backdrop in the equity markets. I also would point out, Steve, that we've seen this kind of move on again, with respect to the technicals too, and we've seen a pretty good move, in terms of the bounce. I think we're up maybe 5% or 6% or so from the lows of a few weeks ago. Is this bounce believable in your view?

Well, how durable it is to be determined. The fact that we were potentially primed for a bounce is obviously indisputable at this point since we've bounced. But I would say, that when you look at where we were at late last week, as we approached the seventh week in a row for the S&P 500 down, historically that has not happened very often. I think it was three times in the data that I cited last week. It just is not normal.

Then when you started to go into some of the market internals, sentiment was very, very washed out. Sentiment is not something I like to look alone, especially survey driven sentiment, which has been quite negative for a number of weeks now. But we started to see some other things such as put call ratios, other market driven sentiment measures, really start to move to levels that suggested things had been really washed out.

To me, and Rajeev will like this, the key has always been credit for this equity market. Intraday last Friday, we saw high yield CDX print a low that is now 83 basis points below where high yield CDX is trading today. That is a massive rally in high yield, so it really tells me that the risk sentiment this week has been full on. In fact, the risk move in high yield suggests that the equity rally may have a little bit further to run than we already have gone.

I think those are great points, Steve. I think it, again, reinforces what we said before as well, in the sense that I think that the correlations, if you will, the movements between stock prices and bond prices continues to be pretty elevated.

So, when people think about diversification, they think about portfolio construction, typically when stocks go up, bonds could be flat, perhaps. But when stocks have historically fallen, bonds could actually provide some stabilization to a portfolio. What we saw this year is that those movements between stocks and bond prices have been more correlated.

So, we've seen earlier this year stock prices going down, and bond prices going down, too. So, what we've been trying to recommend clients consider is maybe other things in their portfolio to provide some robust diversification, if you will. So, I think that's an important observation too, and I'm really glad you mentioned the fact that there is some read through for the credit markets, Steve, to equity markets. I think that's a great comment to make an observation to note.

I'll just end by saying I really want to express my heart thanks to all the brave men and women who continue to serve and protect our country. My sincere gratitude, and all of our gratitude, goes out to all of them and their family who sacrificed so much and really afford us the freedom that really makes it a country great. So, wish everybody be a great weekend, and thanks for listening.

George, Stephen, Rajeev, thanks for your insights. We appreciate it. Thanks to our listeners for joining us today. We hope everyone has a safe and enjoyable Memorial Day weekend. Be sure to subscribe to the Key Wealth Matters Podcast through your favorite podcast app.

As always, past performance is no guarantee of future results. We know your financial situation is personal to you. So, reach out to your relationship manager, portfolio strategist or advisor for more information. We'll catch up with you next week to see how the world and the markets have changed, and provide those keys to help you achieve your financial success.

The Key Wealth Matters Podcast is produced by the Key Wealth Institute. The Key Wealth Institute is comprised of a collection of financial professionals representing key entities including Key Private bank, KeyBank Institutional Advisors, Key Private Client, and Key Investment Services.

Any opinions, projections, or recommendations contained herein are subject to change without notice, and are not intended as individual investment advice. This material is presented for informational purposes only, and should not be construed as individual tax or financial advice. Bank and trust products are provided by KeyBank National Association, Member FDIC and equal housing lender.

Key Private Bank and KeyBank Institutional advisors are a part of KeyBank. Investment products, brokerage and investment advisory services are offered through Key Investment Services, LLC, or KIS. Member of FINRA, SIPC, and SEC Registered Investment Advisor.

Insurance products are offered through KeyCorp Insurance Agency USA, Incorporated, or KIA. KSA and KIA are affiliated with KeyBank. Investment and insurance products are not FDIC insured, not bank guaranteed, may lose value, not a deposit, not insured by any Federal or State government agency. KeyBank and its affiliates do not provide tax or legal advice. Individuals should consult their personal tax advisor before making any tax related investment decisions. This content is copyrighted by KeyCorp, 2022.

May 20th, 2022

Welcome to the Key Wealth Matters podcast, a series of candid conversations with leading experts about how individuals and organizations can grow and protect their finances, tailored around current events and trends. Here's your host for today's podcast, Brian Pietrangelo.

Welcome to the Key Wealth Matters weekly podcast, where we casually ramble on about important topics, including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to unlock the mysteries of the markets and investing. Today is Friday, May 20th, 2022. I'm Brian Pietrangelo, and with me today, I'd like to introduce our panel of investing experts here to make sense out of this week's market activity. George Mateyo, our Chief Investment Officer. Steve Hoedt, head of equities. Rajeev Sharma, head of fixed income. And Don Saverno, Senior Lead Research Analyst covering international markets.

As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our Wealth Institute on many different subjects, and especially our Key Questions article series, addressing a relevant topic for investors each Wednesday. So it's been a challenging week again with some big swings in the stock market.

We started the week with positive data on Tuesday with a decent report from the Census Bureau on retail sales up 0.9% month over month in April, and the stock market was up around 2% that day. Hence, the following day, on Wednesday, two bellwether consumer retail companies missed earnings reports, sending not only their stocks down, but the whole market lower by 3% to 4%. Not surprisingly, comments around the earnings misses referenced inflationary costs. So George, what's your read on this week's activity thus far? And do we think it changes the picture on the outlook for the consumer and the economy?

Well, as you mentioned, Brian, it's been a mixed bag this week in terms of things we've seen happen from the economy and also from the financial markets. Obviously a lot of volatility along the way. There do seem to be some clouds that are forming that are getting a bit darker in the sense that we've seen some real concerning headlines with respect to surging gas prices. Of course food prices and necessities such as baby formula are experiencing some significant shortages that have been well documented. And now we're starting to see some of those play through in some of the companies, as you mentioned, and also what's happening in the financial markets too. I think looking at the numbers from those two major retailers we've talked about, is that both companies actually reported higher sales versus the year ago.

So the consumer is still spending, but yeah, as you mentioned, not as all well, in the sense that many of these retailers have been stuck now with some excess inventories and they're also going to mean faced with some rising inflation pressures that are hurting margins. And there's also some evidence now that maybe the low end consumers starting to, perhaps, feel a pinch of some higher prices. So I would suggest that things are probably not all well, but things aren't terrible, either. The employment situation is still quite strong. Unemployment claims actually felt the low level of where they were back in 1969. So a 53 year old low in terms of people applying for new unemployment insurance. That's pretty good, and that really does not suggest recession is imminent, given those employment numbers. We also saw actually some modest deceleration in inflation.

So inflation is still pretty elevated to be sure, but it does seem to be peaking. Commodity prices have come down a little bit. Used car prices have also started ease a little bit, and also we've seen wages... They're still high, but they were maybe running at about a 6% clip, now they're running close to 5%. So still somewhat elevated, would come down a little bit. I think the Fed is getting what it's was hoping for though. In a sense, we've seen some of the air come out of the bubble, perhaps. Home prices are still elevated, but home sales actually fell now for a third straight month. So maybe some of those higher mortgage prices are starting to eat into that a little bit. But to me, it feels like a bit of a valuation correction. Obviously it's a painful one and a big adjustment for sure, but I would think that the Federal Reserve is probably pretty content right now to actually take some of the air of the bubble with respect to these high valuation stocks and maybe some of the profits coming out of the market.

You would note, for example, I think that this year, the market down in the mid teens or so, really there's about eight companies within inside the S&P 500 that are responsible for half that decline. And we talk about the S&P 500 all the time, but I think it's important to note that that's an index that's cap weighted, meaning the larger companies represent a larger share of that index. And so when you have these concentrated indices and coming into this year, these eight companies represented close to 30% of the overall market cap. So there's another 490 companies that represented the vast majority of the market, but the larger companies had such a big portion of the market it became somewhat concentrated, if you will.

And so we're starting to see some of these companies lose their momentum and that's playing out to the broader markets as well. But I think it's interesting to note that maybe that valuation compression is really most acute in the tech space in general. So maybe, Steve, if you don't mind, what are your thoughts with respect to the technology sector in the market today, and also going forward?

George, my colleague and I, Mike [Schroda 00:05:06] put together a Key Question article, it's available on key.com, that talked about this this week. And when you look at the technology space in general, valuations were very extended in reaction to the COVID-19 episode last year and the year before. Effectively, when people moved home and were ordering all of their necessities for daily life online, we really explosion in the idea that there was a new way to even do things and people bid up these stocks. And what we've essentially with the Fed stepping on the brakes in terms of monetary accommodation is we've seen valuation of multiples come in and compress. We've seen it for the market in general with the 500's forward PE multiple coming in to a little less 17 as we speak, but it's been even more in the high multi technology names.

You had seen stocks that were trading near 30 times earnings now trading around 23. So they still trade at a premium to that market multiple of 17, but that multiple has come down markedly. And given that such a high percentage of the S&P 500 and the market in general had been concentrated in those high multiple tech names, that's had a disproportionate impact on price in general for the market. When you talk about those consumer levered companies that reported earnings this week, I think the biggest takeaway for me on that, that companies in general are having a hard time pushing through all of the inflation [inaudible 00:06:52]. Maybe we could push through some price increases to deal with supply chain bottlenecks. Maybe they could push through [inaudible 00:07:02] increases, but when you start to get the type of [inaudible 00:07:05] that we've seen starting to impact things here over the last three to six months, we've kind of hit a level where these are having problem passing through all inflation they've seen, that weighs on profit margins.

And probably the biggest concern that I have as we head into the back end of the year, is impact the overall earnings number for the S&P 500. The S&P 500, the stock market in general, have a hard time going up when the earnings number is going down. Right now, we've seen that earnings number flatten out. If we were to see it inflect lower in an environment that we're in where we see multiples under pressure, that could lead us to another down leg. That's not necessarily what we're predicting right now, but it's something to watch. The other thing that's really been catching my eye has been the moves in the credit markets. Rajeev, what are you seeing there? I mean, are you seeing credit still behaving or are we starting to see things go a little sideways there? What's up?

Thanks, Steve. Yeah, credit markets have been going wider. The interesting thing is we've talked about this a couple of times that spreads have been very orderly. They've been going wider, orderly, but when you think about it has been leaking. So where we see ourselves now, credit spreads are wider on the year, obviously. And for the month itself, we're almost 22 basis points wider in investment grade, which is pretty substantial. If you look at high yield, we're about a hundred basis points wider. We can call that orderly just because they haven't blown out, like we've seen in the other risk markets, like equity markets. These companies are very well capitalized. They have strong balance sheets. They're doing all the right things. But there is this sentiment in the market right now, especially in fixed income, that there's kind of a risk off trade going on right now.

So as you see, the equity markets behave the way they are, you are seeing some outflows out of investment grade funds, mutual funds and ETFs, outflows out of high yield funds and ETFs. And I think this is kind of weighing on the market right now, because when an ETF or a mutual fund starts to have a liquidity issue or redemption issue, they tend to sell some of their most liquid names and try to get the best bid on it. When you do that, you start seeing some kind of jitteriness in the credit markets, and you start seeing some of these very well capitalized names start to be trading out there on bid lists. We've been seeing that for quite a while. We've taken advantage of some of those high quality names when they come out to the market. But at the same time, you can't deny the fact that credit has gone wider. We can compare it to 2020, March 2020, obviously we're not at those levels right now, but this constant leak has happened. And it's kind of telling you the total return picture for the year.

So Rajeev, if the economy continues to soften with what we're talking about during this call, do you see the Fed taking the same position that they've been predicting, or do you think they'll change their course?

As of right now, Brian, I think the Fed continues on course. They've telegraphed it repeatedly, the 50 basis points in at least the next two meetings. I don't think they take their foot off the pedal there. They've already been behind the curve before. They don't want that to happen again. And they're going to do whatever they can to catch up. So they're going to do those two rate hikes that we anticipate. The market right now is anticipating by the end of the year, about 7.7 rate hikes by the end of the year. So everything seems to be pointing to that direction. I would, again, reiterate that there's been a reset, if you will, with monetary tightening through both rate hikes and balance sheet runoff, which is supposed to start next month. You're seeing a reset in fixed income yields. It's creating this risk off tone in the markets, lower yielding and longer duration markets.

They've been posting those outsized total return losses for the year. But growth concerns are picking up as you mentioned, Brian. And we see that US Treasuries are becoming a safe haven of sorts, especially the belly and further out in the curve. In the front end of the curve, that's really being manipulated by this notion that the Fed is in play, those 50 base points hikes are going to happen. So the front end is reacting that way and going higher in yields. But you're seeing the belly in the ten year and further out start to flatten out a little bit. Yields are going lower. And you're starting to see that whole thing where we got to 3.2% on the ten year, we're far away from that right now. We're on 2.85% or so on the ten year. No signs of us getting close to 3% right now with all this pressure about economic slowdown.

So I think it's important to note though, too, Rajeev, you had an interesting chart this week that you were passing around that talked about the number of rate hikes the market is expecting the Fed to institute this year. And as you just noted, I think the forecast calls for slightly more than seven rate hikes or so in 2022. But that's down. I mean, I think just a few months ago they were suggesting they would do even more, right? So we've seen some of that pressure ease off a little bit. So I think Brian's question's a really salient one to try and understand maybe that if we're starting to see signs of slowing, maybe the Federal Reserve might have to back at some point later this year. [inaudible 00:12:05] they really can't ease off the breaks too much, in the sense they really want to see the economy slow down even further, but maybe there's a suggestion perhaps somewhere in the latter part of the year where the Fed actually kind of backs off a bit. Do you think that's plausible?

They do have an advantage, George. They have the advantage of that they could do the two rate hikes, the three basis points in the next two meetings, maybe one more, and then they have the summer off. There's no meetings in the summer. You can be data dependent at that point. You may decide that data's looking good and we don't have to do much more. I would also say however that when we saw ourselves about a month ago in that chart, that by the end of the year nine rate hikes, well, the 50 basis points took off two of them in early May. So that chart still kind of points to that notion that 7.7 or a little over seven is still in line with what the market was predicting just a month ago.

So back to the stock market for a second, I think, one thing that is worth noting is that, as Steve pointed out, earnings are going to be very key to watch going forward. And while it's unpleasant, and we are kind of talking about bear market territory, where I think most people define as a decline of 20% or more, obviously many, many of the stocks are down more than that. But typically when you see a decline of roughly 20% or more, the forward turns, even in the midst of recession, are actually positive 12 months later. So it doesn't suggest that this is going to be a fun ride. And it hasn't been a very fun year for sure for most investors, but really, markets can rebound typically from these declines as we go forward, and people don't often really know what would cause those things to turn around until they already happen. So a lot of unexpected things could still take place, and I think investors should be prepared for either scenario potentially going forward.

So George, Steve, Rajeev, thanks a lot for the great discussion on the US and domestic market outlook. And now let's turn over to Don Saverno. Don, what are your thoughts on the international markets and maybe some of the news that we saw coming out of China this week?

Sure. Thank you, Brian. So not only have we heard from China this week, we've also heard from some central banks from around the world as well. Actually earlier this week, the Bank of England, they came out and said that the economic momentum isn't really as weak as it was expected. They're actually going to be a bit more hawkish than we thought in general. And this is particularly due to retail sales. It's still a weakening trend, but not as bad as they thought. So expect more rate rises than maybe were previously expected. And also that the labor market in England is probably going to be a bit stronger for longer. Wage and price pressure, it's just a little bit better than Bank of England's expectations. And firms are always caught by macro shifts, inflection points, no matter how good the data seems to be.

And we're seeing that in the BOE here. They started out being really hawkish and now they're actually going to have to be even more hawkish to keep up on the inflation fronts. And then we also heard from the European Central Bank, the ECB, earlier this week as well. And they keep moving up the time that they're expecting to raise rates. Now it's happening that maybe as soon as July for a first rate hike. And we could actually see up to 3 25 basis point raises this year. And gradual seems to be the buzzword in the Eurozone right now. And that has to do with both the quantity and the frequency of tightening for the rest of this year to get on top of inflation. The council does agree, that it's essential to signal that the ECB is serious about inflation, but with negative rates still being the case in a lot of the Eurozone, they are definitely going to be cautious.

July's probably going to be short of what's necessary to be totally credible in the markets. So that's why we expect maybe a couple more rate rises by the end of the year. But the bigger news really has come out of China. There was a 15 basis point cut in the five year prime loan rate, and that was greater than the consensus expected and given what the pundits thought, that was actually a big surprise. Another surprise was that the one year prime rate wasn't cut. So this really gets at the property market within China. They're trying to prop up the property market and real estate market and make consumers okay with buying houses or continuing their speculation and buying maybe second homes. Also out of China this week, they did take... They removed their bid for a 2023 Asian Cup Soccer Tournament.

And this is really... I think the market's reading a little bit too much into this. So we've seen a little bit of hit in China's market once this was announced, but we actually think that this is because China can't guarantee that they're not going to have empty stadiums, that there would be full stadiums for this tournament. They are going to continue to have some type of COVID restrictions, and they couldn't say that next year that they're just going to allow a free for all within the stadiums for this tournament. So that's why they backed out there. And that gets at the main issue with why China's slowing down, why they need to lower rates at this point. And that's because they're maintaining their zero COVID policy. Earlier this year, we thought that they may be backing off of that, but now it looks like their zero COVID policy is going to be in effect almost through the end of this year.

If there's a change, we expect the change to happen really late this year, December, or even January of next year. And that's going to be after the party's congress. And that's going to be after the election for presidents, which we still expect President Xi to win with flying colors there. So in summation, we expect China's slow down to continue because of their zero COVID policy. Although we do expect some type of change there, and maybe reopening of China's growth story much later this year or even into next year. And we also see more hawkishness coming out of the European Central Bank and the Bank of England moving forward. And that's all I have for you today, Brian, back to you.

Well, thank you gentlemen, for the great discussion today. And George, Steve, and Rajeev, thanks for providing your valuable insights and a special thank you to Steve for giving us his podcast update in the car this week. We wanted to make sure that he was available on the call due to the market volatility this week. And he is in between client meetings, sharing his insights as well. So thanks again, Steve, for doing that for us. Thanks to our listeners for joining us today and be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app. As always, past performance is no guarantee of future results. And we know your financial situation is personal to you. So reach out to your relationship manager, portfolio strategist, or advisor for more information. And we'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you achieve your financial success.

The Key Wealth Matters podcast is produced by the Key Wealth Institute. The Key Wealth Institute is comprised of a collection of financial professionals representing Key entities, including Key Private Bank, KeyBank Institutional Advisors, Key Private Client, and Key Investment Services. Any opinions, projections, or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. This material is presented for informational purposes only and should not be construed as individual tax or financial advice.

Bank and trust products are provided by KeyBank National Association, member at DIC and equal housing lender. Key Private Bank and KeyBank Institutional Advisors are part of KeyBank. Investment products, brokerage, and investment advisory services are offered through Key Investment Services LLC or KIS, member of FINRA, SIPC, an SEC registered investment advisor. Insurance products are offered through KeyCorp Insurance Agency USA incorporated, or KIA. KIS and KIA are affiliated with KeyBank. Investment and insurance products are not FDIC insured, not bank guaranteed, may lose value, not a deposit, not insured by any federal or state government agency. KeyBank and its affiliates do not provide tax or legal advice.

Individuals should consult their personal tax advisor before making any tax related investment decisions. This content is copyrighted by KeyCorp 2022.

May 13th, 2022

Welcome to the Key Wealth Matters podcast, a series of candid conversations with leading experts about how individuals and organizations can grow and protect their finances, tailored around current events and trends. Here's your host for today's podcast, Brian Pietrangelo.

Welcome to the Key Wealth Matters weekly podcast, where we casually ramble on about important topics, including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to unlock the mysteries of the markets and investing. Today is Friday, May 13th, 2022. I'm Brian Pietrangelo and with me today, I'd like to introduce our panel of investing experts. It's great to have them on the call with us today. George Mateyo, our Chief Investment Officer, Steve Hoedt Head of Equities and Rajeev Sharma, Head of Fixed Income. As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our Wealth Institute on many different subjects and especially our Key Questions article series, addressing a relevant topic for investors each Wednesday. It's been an interesting week with the dominant theme being inflation. CPI ran a little bit hot. Some people interpreted it as good. Some people interpreted it as not good and PPI also was hot this week. Did the numbers tell a story of potential peaking or do we think inflation will persist? George we'll start with you.

So Brian, inflation was a little bit hot this week, as you mentioned. We talked about this from some time though, that I think it's interesting to see that the narrative around inflation is starting to change at the margin, where it does appear that it's peaking. But it's staying pretty high. The numbers bear the story out in the sense that the headline CPI, which includes everything increased about 0.3% month over month. That's about a 4% annual rate. That actually was the smallest increase in eight months. Again, we started to see some, some small change at the margin with respect to inflation. If you look at some of the core numbers, which take out things like food and energy, which is a clever way to think about inflation, perhaps, it did slow from about a little over six and a half percent to close to 6% even.

Then PPI, which includes producer prices and forth, stayed really quite elevated pricing almost 8% year over year. But that's down from a little over nine and a half percent the prior reading. At the margin, it does suggest that inflation is trending lower. But it's all sustained really quite high. I think the second derivative is an important argument that sometimes the market focuses on, which is the rate of change of the change itself and that it actually is improving a little bit. But when you see things like mortgage rates backing up, you would not be surprised to see some modest deceleration, inflation. At the same time, however, wages are starting to remain elevated, that suggests that inflation might say a little bit more elevated going forward. Also, energy prices are also quite high as we probably all know from just filling our car these days.

So again, I think the overall context or the overall storyline with respect to inflation, is that yes, it's peaking. But it's staying elevated and it's also probably staying uncomfortably high for the federal reserve. The federal reserve has an inflation target of around two to two and half percent and when I just throw those numbers of six, seven, 8% or so, one can do the math pretty quickly, to note that inflation is well above the Fed's target. To me, it suggests that inflation is not coming down quickly. There's a lot of issues with supply chains that are still problematic. That's been well documented by the financial press. But again, I think from the Fed's perspective, they probably weren't dissuaded by this with any disregard at all and are still likely to raise interest rates pretty aggressively, in the latter half of this summer. So Rajeev, do you think that's a fair assessment of where inflation is and what the Fed's thinking is, with respect to inflation?

Yeah, George. I think you're on point there. I think as you mentioned, we did see the CPI print fall to 8.3% from 8.5%. But the market consensus was for 8.1% and just by missing that, we did see that the markets reacted and the notion that the Fed is still not doing enough to control inflation. Will they be more aggressive? I think all of that narrative came back in. You could point to a Fed pointing to 75 basis point rate hikes again. It did come back on the table for the Fed. We may have peaked, as you mentioned. However, we did not see that cool down in inflation that we thought that maybe we would get to, at that 8.1% level. It doesn't seem like a lot there. But the market reacts to everything and I think as you mentioned, the Fed has to react to everything too.

The Fed seems to be continuing its path of 50 basis point rate hikes in the next three meetings. But as I mentioned, the odds of a 75 basis point rate hike, they've increased. They're still not the consensus, obviously, after the FOMC meeting, where a Fed chair panel said that it's pretty much off the table. But again, with us not seeing an immediate cool down in inflation to that 8.1% point, there were talks again about, is 75 basis points going to come back on the table? The impact of the CPI print and the PPI print. We really saw the 10 year and the 30 year US Treasury yields decline. We saw a flattening of the yield curve. The spread between two year and 10 year immediately flattened to 27 basis points. Specifically, we saw a 10 year decline by 20 basis points during the week and move below that 3% where we saw ourselves at the 10 year.

That's really telling you what the market's thinking about the economy and whether the Fed's going to continue on their aggressive way of controlling inflation, to the detriment of the economy. You're starting to see a 10 year, run for safety, in the 10 year. Fed Chair Powell, was reconfirmed yesterday. Wasn't a big surprise. The vote was 80 to 19. But then he did go on to make an interview right after that and he repeated that 50 basis points with the next two meetings would be appropriate. However, he did say that the Fed can do more if necessary and now market participants hear that and they view that as somewhat of a vague take on the 75 basis point argument again. However, data is going to be key here and the Fed Chair Powell did say that he's prepared to do what it takes to control inflation.

If they start seeing readings that are starting to come back in line with estimates, then perhaps they can do less. If they have to do more, they'll do more. But they are committed to getting inflation back to the 2% target. We also heard from other Fed members during the week, San Francisco Fed President Mary Daley. She said that 50 basis points should be appropriate and there's no reason to alter the course. A lot of moving parts in the market based on the CPI print, the PPI print. Also that 75 basis argument coming up again. But not in a big way, still not the consensus. But 50 basis points of the next three meetings is pretty obvious and it's been an impact on the equity markets as well. We've seen pain in the equity markets. I'd love to hear Steve's thoughts here about how the equity markets are dealing with this inflation number and also what the number one priority of the Fed is.

Thanks Rajeev. When I think about this, first, when I take a look at the 10 year yield, one of the most interesting things to me for the week and it's a positive for the equity market, is that we've had this big reversal at 3%. To me, when I look at a chart of the 10 year, what I see is a giant anomaly in 2020 and 2021, where we had this huge spike to the downside, close to the zero bound, as a result of the COVID situation and the response from both the fiscal and monetary side of things. Essentially, if you just cover up that part of the chart and you just look at it sideways, otherwise we've been in a trading range between one and half and 3% for the last 10 years, since 2012.

So we're at the top end of that range now and to me, it's a really important event this week, that we've had this reversal, at this key area on the chart, at 3%. We hit it in 2013. We hit it in 2018 and now we've hit it in 2022 and every time we've reversed. 3% to me is a really important number and to see the market turn there is important. The equity market has really just been getting hammered day after day, after day after day. Because yields have moved so fast, so far from 2% to 3% super fast. When things happen really fast in the fixed income markets, the equity markets do not like it. They like slow change and fixed income, not fast. To me, if we can get some stabilization here at 3%, at least it gives us the ability to have the equity market try to find some firmer footing. We've got a little bit of a balance going on today here, right around 4,000, on the SMP. But we're still going to see the sixth week of lower closes, for the first time since 2011.

The backdrop here in the equity market still remains weak. It's a market that is in show me mode or prove it to me mode until we see otherwise. Clearly we are focused like a laser beam on fixed income.

It's interesting, you mentioned the word, "Stability" Steve. I think counselors would tell many people that there are five stages of grief: denial, anger, something called bargaining, depression and acceptance. The markets don't bottom when we get acceptance. But to me, it does suggest that maybe things can stable out, once we have that acceptance. If nothing else, the market also is probably given people the ability to reprice and reset expectations and somewhat accept the price notion, that multiples might be somewhat constrained going forward. We've seen more declined if you will. The decline has been based on multiples, stock priced multiples, not necessarily earnings per setting. We've seen stocks re-rated, given where interest rates are now, given that inflation's under some pressure, unlikely to stay somewhat elevated and also geopolitically.

The situation that I thought was interesting this week, what Finland did, which essentially suggests that they want to consider joining NATO. Finland of course, was at war with Russia several decades ago. It shares a long border with Russia and they're trying to maybe posture a little bit to suggest that this geopolitical tension, that we've been dealing with for the past couple months might also persist. It's not to say that stocks are overvalued or undervalued. It just suggests to me that maybe there's some stability there. But also some repricing of assets around the fact that market multiples might be somewhat capped in the near term. What you said before, I think really bears watching, which has the earning story, take front and center, to think about where stocks should be going forward and going forward from here. To that extent, Steve, any thoughts on the general trend of earnings right now?

Earnings have actually come in better than expectations, during this reporting season. However, what I always focus on instead of the actual numbers themselves, is the reaction that the market has to those earnings. What we've seen is companies beating on both revenue and EPS, are outperforming by 1.6% so far this 1Q earning cycle. That's versus an average out performance of 1.7%. It's roughly in line, if you're a double bead. Companies that are missing on both are underperforming by 4% and that compares to an average of minus 3.1%. Basically if you flub the quarter on both revenue and EPS, you're getting penalized more than you have in the past. What that tells me is, again, the market is very focused. They are on these results and you're not getting a pass if you screw up and if you do well, you're just performing the same as you always would on a relative basis.

So it tells you that there's a clear negative sentiment in the market, when you see results rewarded this way. At the end of the day, though, the numbers still are going higher and that is the long term key for the equity market, in our view. It's very hard to have terrible, like 2008, 2009 or 2000 outcomes for the SMP500, when earnings are moving higher, like they continue to do so. It doesn't mean you can't have a bare market because of other factors. But it takes off those fat tail bad outcomes. It's been heartening to see earnings continue to move higher. To your point about multiples though, George, when you look at it, that anomaly period of 2020 and 2021, we saw multiples spike into the twenties and that coincided with those 10 year yields, which were at very depressed levels.

Essentially, the market multiple has just moved back into the middle, to the upper half of the trading range that the multiple was in, from say the period of 2014, through the pre COVID period in early 2020. We could see potentially another turn come out here and get back to that average of that period, which was, say 15 and a half or so. It wouldn't be surprising. But that's an outcome that I think would because the Fed to back off of its tightening.

I think that's an important point Steve. I think the only thing people should be considering doing now, in this environment ... When you do sell stocks, for example, that are down quite a bit, you actually do crystallize or realize those losses. You lock those losses in. Otherwise, they're mostly just on paper. You want to be thoughtful about how you harvest losses. There is a chance to use losses against your taxes and things like that. You can actually make the case for harvesting some losses for tax planning purposes. You also have the ability maybe to upgrade your portfolio, in terms of maybe looking at higher quality issues and higher quality names. Rebalancing is probably something that people should be considering doing, in this environment as well. In terms of quality, Steve and Rajeev, for that matter too,

I'd love to get your thoughts on this. We've seen a significant flight two quality away from real speculative assets and speculative instruments such as crypto. We as a firm, don't have a view on crypto. We don't offer crypto products or currencies to our clients. We've done a lot of thinking, a lot of listening around that. But it has been in the mainstream for the last couple weeks or as there's been an absolute carnage, with respect to what's happened in the crypto space. But I don't know. Rajeev, do you have any thoughts in terms of maybe how the crypto craze, if you will, if it does really burnout, how that might influence either the Fed's thinking or what that might mean from the economy perspective overall?

That's a great question and we did see that this week with the way crypto has performed. I think your point about a moving up in quality is something that we've talked a lot about, and that's across the board on asset classes. We've seen higher quality asset classes really be the place to be this year, in this type of environment that we find ourselves in and crypto's revealed itself as not being that high quality asset. It's more of a speculative asset. One thing to note is many people thought that crypto was that asset class that will be protecting you against inflation. That didn't come true either. That's obviously not true and I think what we're seeing right now is, we're seeing many investors that have played in this space. The investor base of crypto has increased quite a bit.

They're realizing very quickly that this is not what they signed up for and this volatility is a real thing. It doesn't just keep going up and we've been seeing that and same thing with the credit spreads. If you try to compare that as asset classes, we've talked about on this call, several times, the credit spreads though, they're wider, they're very orderly and they didn't sound any alarm bells. But when you look at an asset class like crypto, which is speculative, you see the alarm bells and they sound very, very loud this week.

Just one thing that jumped out to me in this whole endeavor is that if I think back to 2008, 2009, the thing that kicked off the whole cycle was the reserve money market fund, breaking the buck. Rajeev, you remember that? How that was it was like the beginning of the end of the world.

Correct.

Here we have this week, a, "Stable coin" which broke the buck. Did the financial system end? No.

No.

That tells you how important crypto is to markets.

Yeah. The takeaway's not very.

Correct. Not very.

I think that's an interesting analogy, Steve. Of course, what happened with a cryptocurrency or a stable coin, to use your term, versus a money market fund, which is pretty ubiquitous across all finance. It's a much different situation. But I do think that it does bear watching. Maybe what people should be thinking about doing now, is to look at their portfolio closely, see if there's a way to upgrade in quality. As we ride through some of this volatility, that will probably persist for the summer and really try to take that long term view in mind. I think upgrading quality and taking a long term perspective are really important things to think about in this environment.

George, Steve and Rajeev, thanks for providing your insights. We appreciate it and thanks to our listeners for joining us today. Be sure to subscribe to the Key Wealth Matters podcast, through your favorite podcast app. As always past performance is no guarantee of future results and we know your financial situation is personal to you. Reach out to your relationship manager, portfolio strategist, or advisor for more information and we'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you achieve your financial success.

The Key Wealth Matters podcast is produced by the Key Wealth Institute. The Key Wealth Institute is comprised of a collection of financial professionals, representing Key Entities, including: Key Private Bank, Key Bank Institutional Advisors, Key Private Client and Key Investment Services. Any opinions, projections, or recommendations contained here in, are subject to change without notice and are not intended as individual investment advice. This material is presented for informational purposes only and should not be construed as individual tax or financial advice. Bank and trust products are provided by Key Bank National Association, Member at the IC and Equal Housing Lender. Key Private Bank and Key Bank Institutional Advisors are part of Key Bank.

Investment products, brokerage and investment advisory services are offered through Key Investment Services, LLC or KIS. Member of FINRA, SIBC and SC Registered Investment Advisor. Insurance products are offered through Key Corp Insurance Agency USA, Incorporated, or KIA. KIS and KIA are affiliated with Key Bank. Investment and insurance products are not FDIC insured, not bank guaranteed, may lose value, not a deposit, not insured by any federal or state government agency. Key Bank and its affiliates do not provide tax or legal advice.

Individuals should consult their personal tax advisor before making any tax related investment decisions. This content is copyright by KeyCorp 2022.

May 6th, 2022

Welcome to the ""Key Wealth Matters"" podcast, a series of candid conversations with leading experts about how individuals and organizations can grow and protect their finances, tailored around current events and trends. Here's your host for today's podcast, Brian Pietrangelo.

Welcome to the "Key Wealth Matters" weekly podcast where we casually ramble on about important topics including the markets, the economy, human ingenuity, and almost anything under the sun. Giving you the keys to unlock the mysteries of the markets and investing. Today is Friday, May 6th, 2022. I'm Brian Pietrangelo. And with me today I'd like to introduce our field of investing thoroughbreds, not only do we hit the trifecta, we also hit the superfecta because we have four of our investment experts instead of the usual three. George Mateyo, our chief investment officer, Steve Hoedt, head of equities, Rajeev Sharma, head a fixed income, and Cindy Honcharenko, senior fixed income portfolio manager here to provide some additional thoughts on the federal reserve meeting this week. As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our wealth institute on many different subjects and especially our key questions article series addressing a relevant topic for investors each Wednesday. So we're off to the races for 2022 and it might seem odd to say that in May, however, just recently we now have key information that will help shape the outlook for the year, including first quarter GDP, first quarter corporate earnings, the continued war Ukraine, inflation, and certainly this week's fed meeting and outlook for rate hikes. So this has certainly caused volatility in the past two weeks. So Steve, what insights can you share as we make the turn from the back stretch into the second half of the year?

Well, Brian, we sure have had a return to volatility this week with the market jumping 3% on Wednesday in the wake of the fed meeting, going down 4% on Thursday. You know, I think the one thing that's really come home to me is that if you look, people like to talk about you don't wanna miss the best days in the market but what they fail to to discuss when they say that is that the best days in the market typically occur during bear market periods because you get these rallies that are just true face ripping rallies where things just go bonkers to the upside. But the volatility is it's a bear market trait. And you know, when I look at the S and P 500 right now we're perched at just precarious levels, and we're back to the February lows, breadth which is a measure, or measures of market participation are showing that things are weaker internally in the market than maybe what we see on the face of things and suggesting that things could be heading lower. And, you know, when I look at too, I look at credit. Credit really has been the most important thing for the market since the global financial crisis back in 2008, 2009. And I think credit gave us kind of a good tell that the market was getting ready to head weaker because credit, both investment grade and high yield in terms of credit default swap spreads, moved wider here in the month of April heading into the month of May. And you know, this gave us a tell that things were weakening underneath. So economic activity continues to look like it's slowing, inflation remains a problem. And when you look at the fed historically, I keep coming back to the fact that the fed has never navigated an environment like we've got today, where we've got high inflation and managed to get a soft landing on the deck. And that is really the conundrum that we're faced with as market participants. If they don't engineer a soft landing what does that mean for earnings? What does it mean for multiples? Means to me, earnings are likely gonna flatten if not head lower and multiples are gonna continue to contract which means the market's gonna likely remain under pressure. And, you know, if I was to sit around today and pause at you how bad could it get? Without a precipitous earnings decline, it's really hard to see things getting nefarious like 2008 or 2000 types of bear market draw downs, but you could easily see the market go back and retest pre COVID highs which for the average stock would be, you know, another 10 to 15% from here and same thing for the market. So, you know, I think that we're in a environment here where it pays to tread cautiously. You know, George may have a little bit more of a sanguine view than me. What do you think, George?

Well, I agree with you, Steve, that I think we are purchased at some really interesting and maybe potentially precarious levels. I do think from the economy's perspectives things are going along pretty well which maybe is a blessing and a curse in the sense that the economic momentum we've seen I think is pretty healthy still. I mean, we had employment report out today and, you know, it's not really perfect in every respect but things are still pretty decent. The markets aren't really taking it that way. But employment grew another 400,000 jobs almost which is pretty impressive. Wage gains were also pretty nice. We also saw, you know, parts of the economy broaden out in terms of the overall gains in the labor market. And so I think to some extent, that's all good and well but it probably also keeps further pressure on the fed in the sense that they probably need to do more than they might otherwise would. We've already seen a decent amount of financial tightening take place though. I mean, you've talked about bond yields moving up and they've risen considerably just in the past couple months or so, mortgage rates have followed suit. And we've also seen a lot of strength in the dollar which is gonna put some pressure on international countries as well. So we've kind of seen a lot of the things happen. I think China's probably responsible for some of the more recent weakness, they've been very aggressive with locking down their economy. It seems likely that the manufacturing and service sector there are slowing quite precipitously as a result of that. And that's something that we have to keep in mind is I think could be temporary. I mean, it's hard to really know exactly what happens next there, but if, I think maybe I don't know, six, or eight, nine months ahead or so, and if I ask myself, is the COVID situation in China get worse or get better? I would probably think it would get better. I mean, again, nobody's got a crystal ball on these things for sure. And everything outta China seems to be more opaque than we'd like it to be. But nonetheless, I would think that at some point they might have to change their stance or maybe just the virus itself kind of burns itself out. So when we've seen these headlines that kind of suggest that maybe growth is slowing, I think the epicenter for that is the Asian markets, in China in particular, and all likelihood we'll start to see some of the pressure subside perhaps in the back half of this year. Meanwhile, the fed is pretty aggressive as we talked about, they've been sending that they wanted to do more. And I think it's kind of right to say that we're probably in kind of this downward channel in terms of where the market's going. I think it's probably fair to say that bear markets are born out of optimism and bull markets are born out of pessimism. And so, as we've been saying, that maybe the one thing we can share about is fear in the sense that there is a lot of panic and a lot of concern in the markets right now. I tend to agree with you, Steve, that I think we're probably gonna be in a sideways to down pattern for a while now. Fundamentals really don't provide much support here when we have these moments. Earnings, as you noted, are you getting a little bit peaky and they're kind of topping out a bit and so far as they can stay somewhat elevated, I can read you that we might not see the big down draft, but that is a cause for concern and as inflation pressures continue to rise, we're likely to see some pressure on earnings too. So I think it'll be a really tough couple months or so, but as I said, as we look maybe forward and kind of seeing some of these pressures regarding COVID and other things as well, perhaps we can actually think about sunnier days ahead, later this year. But I do think the credit markets that you talked about are really worth watching, a key tell for sure. So let me flip it over to Rajeev for his thoughts on the state of the credit markets today. Rajeev?

Thank you, George. I agree with everything you're saying. I think the credit markets are really gonna be the telltale sign for how this market moves ahead. We did see credit widen yesterday. We saw a credit default index move sharply higher. But if you look at cash bonds credit actually widen out probably about five basis points in the day which, again, is orderly. And we've been saying that for a while that credit spreads have moved, they haven't really widened out a lot but I think they've moved very orderly. They've moved wider, they've leaked wider. And I think that, I think it says a lot about the credit market and how hopeful the credit market is. I agree with what Steve was saying, that as far as that it's very important for us to keep an eye on the credit markets and make sure that they don't widen out tremendously or there's some kind of liquidity crunch in the credit markets. We haven't seen that yet. New deals are being priced. We saw probably about 8 billion of new deals came up to market this week and they all got successfully priced and they all did very well on a week that you had the FMC meeting. Which generally, you don't see a lot of new deals come on the week during the FMC meeting. But we did see it this week and all of them did very well. They priced with some concessions, not too much. And I think a lot of dealers are very happy to see those. As far as the health of the credit market, we see very well capitalized companies come to market. They do very well. As far as the new issue calendar goes, we haven't seen tremendous widening even with treasuries extending their bear steepening move. I mean, we've seen some huge moves in the treasury markets this week with the fed in the market and at the FMC meeting, we saw yields decline at that point. Following immediately the day after, we saw yields surge higher and we have a tenure around 3.09 right now, but it's still cheaper by five basis points on the day. Many other investment shops have repositioned their idea of where the tenure should be. And I think right now everybody's kind of really looking at bear steepening, the curve is getting steeper. And I think that the focal point is what the fed said and what they didn't say. What they said was that there's no 75 basis points on the table anymore. But by saying that, I think the market reacted that this is good news, we only had 50 basis points. But I think the next day, which was yesterday, many investors were like, wait a minute, is that enough? Is the fed aggressive enough? And the bond market is really dictating the terms right now and deciding that that is not enough. And that's why yields went higher yesterday.

Yeah, it seems to me, Rajeev, that I think on Wednesday people thought that maybe J Powell, the chair of the federal reserve, had suggested that, you know, the 75 basis point move was off the table. But the next day, as you mentioned, everybody woke up and realized that inflation is not off the table. Inflation still here. Do you think he has to pivot again and maybe say, well, you know, I was wrong, and maybe we do have to raise rates 75 basis points?

I think that that's gonna be a tough call for him because he was so clear on the fact that 75 basis points was not on the table. And I think the market reacted as, again, the fed is behind the curve. They need to be more aggressive. And I think that that's gonna be an issue for him. It's very hard to do this soft landing and I feel that it would've been better if he didn't make that statement. Because now, again, market dynamics and market predictability about 75 basis points is off the table. I think that it's very hard to do that. I also think that the unanimous vote and no descendants on the vote was very interesting too. We would've at least assumed that one fed member would've said 75 basis points is the way to go. I think right now it's really gonna be data dependent. And again, you don't want the fed to be behind the curve which is the market sentiment right now that they are continuously behind the curve.

So let's get Cindy's perspective on this. And Cindy, maybe what do you think the average investor really needs to know about the fed these days in terms of what it's doing to their investment portfolio, to their bank account, to their financial situation? What do you think most people should really understand about the fed these days?

Well, I agree with Rajeev. I think the fed is done pivoting right now and they're gonna focus more on the data. And I think the average investor needs to keep in mind that the message this week was appropriately hawkish. I don't think chair Powell, he wasn't planning, he wasn't trying through his presser and the comments, especially the 75 basis points is not even being considered, I don't think he meant to stir up the markets and loosen up financial conditions. I think we'll get more clarity today, there are some fed speakers out today. Hopefully they can settle the markets down a little bit but the fed seems more like it's on a glide path now. It used to have these erratic narratives and caused a lot of volatility in the markets. I'm not saying yesterday wasn't a volatile day, it definitely was. But I think that there, with the communication being okay, we're moving ahead but you can plan on 50 basis point hikes over the next two meetings they're actually giving more forward guidance. And I think that's good and it's bad because I really think that the market, what happened yesterday in the market was the market being disappointed on the 75 basis point comment by Powell and his presser. So average investor, every meeting's live, don't take everything that chair Powell and the other committee members from the fed, don't take it too literally, seriously, because things change. The fed is definitely committed to bringing inflation down. I really think that chair Powell when he stepped out initially in the presser and addressed the American public, I really think he was genuine and he meant what he said. So just be very defensive with your investing decisions going forward. And we need to really watch the data. And like Steve said, the fed is in a really precarious position because they've never, this fed has never had to deal with this type of inflation. And I think that if they can snuff this out and prove to the American people that they definitely are serious about getting inflation under control that'll really help their credibility. I think what happened, a lot of people compare what's happening now with inflation to what happened in the 70s but I think the difference there was inflation wasn't snuffed out quickly enough in the 70s. It just got worse, and worse, and worse. And then that's what brought upon Paul Volcker. I don't think that this fed, I know Powell mentioned he he invoked Volcker during the press conference. I really don't think that this fed that we have now is willing or able to do another Volcker that we saw back in the 70s.

George, Steve, Rajeev, and Cindy thanks for providing your insights. We appreciate it. And thanks to our listeners for joining us today. Be sure to subscribe to the "Key Wealth Matters" podcast through your favorite podcast app. And always, past performance is no guarantee of future results, and we know your financial situation is personal to you. So reach out to your relationship manager, portfolio strategist, or advisor for more information. And we'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you achieve your financial success.

The "Key Wealth Matters" podcast is produced by the Key Wealth Institute. The Key Wealth Institute is comprised of a collection of financial professionals representing Key Entities including Key Private Bank, Key Bank Institutional Advisors, Key Private Client, and Key Investment Services. Any opinions, projections, or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. This material is presented for informational purposes only and should not be construed as individual tax or financial advice. Bank and trust products are provided by Key Bank National Association, member FDIC and equal housing lender. Key Private Bank and Key Bank Institutional Advisors are part of Key Bank. Investment products, brokerage, and investment advisory services are offered through Key Investment Services, LLC or KIS. Member of FINRA, SIPC, and SEC registered investment advisor. Insurance products are offered through Key Corp Insurance Agency, USA incorporated or KIA. KIS and KIA are affiliated with Key Bank. Investment and insurance products are not FDIC insured, not bank guaranteed, may lose value, not a deposit, not insured by any federal or state government agency. Key Bank and its affiliates do not provide tax or legal advice. Individuals should consult their personal tax advisor before making any tax related investment decisions. This content is copyrighted by Key Corp 2022.

May 2, 2022

[Announcer] Welcome to the Key Wealth Matters podcast, a series of candid conversations with leading experts about how individuals and organizations can grow and protect their finances, tailored around current events and trends. Here's your host, Tracy Collins.

[Tracy Collins] Welcome to the Key Wealth Matters podcast entitled "Get Your Governance Right, The Seven Basic Responsibilities of a Nonprofit Board". With me today is Elizabeth Voudouris, who is president and CEO of Business Volunteers Unlimited. Elizabeth, who goes by Biz, comes to us with almost 30 years of experience in providing consulting, training and executive coaching services to nonprofits and their board members. Welcome Biz and thank you for joining us.

[Elizabeth Voudouris] Tracy, thank you so much. It's a pleasure to be here.

[Tracy Collins] Thank you. And before we jump into today's topic I was thinking that there might be some of our listeners who aren't familiar with Business Volunteers Unlimited. So maybe could you just provide maybe a 30-second high level overview of BVU and how you work with nonprofits?

[Elizabeth Voudouris] Of course. KeyBank actually helped to establish BVU in northeast Ohio back in 1993. And we serve as a bridge between businesses and nonprofits. And for both we connect, we educate and we consult. So for businesses, we help their people find the right nonprofit boards or we get them involved at skill-based volunteers or direct service volunteers. And we train them and prepare them for those positions. And then for the nonprofits, they have access to those volunteers. They have access to lots of educational seminars on governance and management and then we do consulting with them as well. So it's a really special organization, a unique organization nationally and KeyBank was a really, played an important role in helping us get started.

[Tracy Collins] Well, that's great. And I'm sure that that 360-degree view combined with BVU's experience in working with nonprofits becomes especially beneficial when providing guidance around board activities. And some of the things I'm thinking about are, you know overall recruitment, board engagement and maybe even developing maybe a board culture. And I really do wanna jump into today's topic because I think it's an important one but can we just take maybe a little step backwards? You know, we know that there are nonprofit boards and there are for-profit boards, so it might be helpful, you know as we frame out those seven areas of responsibility of nonprofit boards to understand some of the differences between a board that's working on behalf of a for-profit organization versus maybe one that's working for a nonprofit organization. So maybe can you share some of your thoughts?

[Elizabeth Voudouris] Sure, Tracy and I've actually been at BVU since we started and worked with hundreds of nonprofit boards every year. I've never had the privilege of working with a for-profit board, but from my perspective the difference is that nonprofit boards, the mission is the bottom line. So their duty is to the mission of the organization and the board members or the directors of the nonprofit boards are in almost all cases are not paid. In the for-profit, the primary responsibility is to the shareholders. The mission is obviously very important but I think that's the real difference. And the directors usually paid at the for-profit as well. So that's, again from a very high level, there are many other differences, but a very high level perspective on the differences between the two.

[Tracy Collins] Thank you. That that's actually really helpful. And so for nonprofit boards, what are the seven basic areas of responsibility?

[Elizabeth Voudouris] Well, the first, the primary takeaway is that the buck stops with the board. The buck actually stops with the board, not the chief executive or any individual. And so the seven basic responsibilities are to determine the mission, vision, and strategic direction for the organization, to establish and strengthen community relations, to select and support the chief executive, to develop funding resources, to provide financial oversight, to ensure legal and ethical integrity and finally, to develop the board. Those are the seven basic responsibilities of the nonprofit board.

[Tracy Collins] So the title is seven basic responsibilities, but that list hits on some pretty major areas. So I think it might be helpful, let's talk about each one a little bit. And the first one that you mentioned is that the board has a role in determining the mission or vision of an organization. And I'm kind of curious in what way they have that responsibility, you know are they themselves actually establishing that vision or are they more or less supporting an existing vision?

[Elizabeth Voudouris] When as a board member, you get involved, there's a mission and you wanna make sure that the board is responsible to make sure that that mission is still relevant and then to guard against mission drift. And then the board works with, if you have staff, they work with the chief executive and the staff to set a strategic direction because the board needs to make sure that the organization is leveraging its limited resources in the best possible way to achieve that mission. So making sure that that mission's relevant, guarding against mission drift and then making sure that the board has a solid strategic direction to achieve that mission are really the important responsibilities of the board.

[Tracy Collins] And you also mentioned a responsibility around fostering community relations, you know what are some of the ways that a board can do that?

[Elizabeth Voudouris] So your board members are some of the best possible ambassadors for your nonprofit. They're not paid. They're there only because they care. So as a board member, you wanna make sure the you've got that elevator speech. What is that consistent message that if every board member's out there delivering at the community, they're really gonna raise the visibility and credibility of their organization in the community. And then as a board member, once I have that elevator speech, I wanna try to use it twice a week, just, you know in the line at the grocery store, on the golf course, just tell somebody about your organization. And that's just a simple way that everybody can be a great ambassador for their organization.

[Tracy Collins] I like the use of the word ambassador and I think that's a really important word. You know, the word ambassador carries with it a lot of responsibility. And I think that some board members think that by just showing up for that monthly board meeting and maybe providing some input, that fulfills their obligation. So it might be helpful if you could expand a little bit more on the idea of ambassadorship and what that means.

[Elizabeth Voudouris] Yeah. It's just so important for board members to recognize that they're there because they've bring relevant experience and perspective from the community into the organization. And that's why they have a seat at the board table but then also their responsibility is to take the, to be an ambassador, to really bring information about the organization, back out into the community and share it with their networks. So, you know, talking about the, you know being informed about the mission and just what the organization's role is in the community is a really important way that board members can be effective ambassadors and share information about the organization with all of their different networks.

[Tracy Collins] You also mentioned that the board has a responsibility back to the executive office. What exactly do you mean by that?

[Elizabeth Voudouris] Well, for organizations that have staff, having the right chief executive is absolutely critical to first of all, lead and manage the organization, but also to work, to partner with the board, so that the board can be successful. It's important to make sure that that chief executive, sometimes called an executive director, sometimes called a president and CEO, make sure that they've got an annual performance review. And then just knowing that that's the only staff really that the board hires, it's then up to the chief executive to hire and manage and, if necessary, fire their staff without board interference. And the board also wants to make sure that there's a really good succession plan in place for that chief executive. So if something were to happen to them, how do we keep the doors open tomorrow and the organization running. So real important to not only select, but to support that chief executive and also certainly to open doors for them and introduce them to your networks in the community.

[Tracy Collins] Well, I think that that's an important role and I think it's one that ties back into that first area of responsibility that you mentioned, which was helping to determine the organization's mission. You know, how can you help find the right leader or build the right succession plan without an understanding of the bigger picture? Would you agree?

[Elizabeth Voudouris] Oh, absolutely. Yeah. So really, and again, the chief executive is the one who's really representing the mission in the community so often. So making sure that you've got your supporting someone and you've got the right person in that place, very important.

[Tracy Collins] So for the listeners who are keeping track we're gonna move on to the fourth responsibility. And this is the one that I think most board members know that they have to fulfill. And that's the funding piece. And I think of it as the old give or get area of responsibility. So what are some ways board members can fulfill their obligation around finding funding resources?

[Elizabeth Voudouris] Well, there are two concepts here. First, every board member needs to make an annual financial, and 99% of the boards that we work with, every board member's expected to make a personal financial contribution to the organization each year, some cases there's a minimum. And certainly if you're going onto a board, you wanna know what the minimum is before you commit to serving on that board. Many others just ask for a personally significant contribution, but this is in addition to purchasing the tickets for the gala or the golf outing, it's just making a unrestricted contribution to the organization. And then in addition to the making your own personal gift, every board member should help with fundraising in some way. And whether you serve on the fund development committee and you love asking people to make contributions to the organization, or you're just calling donors and thanking them for their contribution, there's a full spectrum of ways that individuals can support the fundraising efforts and activities of an organization. So just find a way that you're comfortable and then learn about how you can do that and get the support that you need so that you can be an effective fundraiser as well.

[Tracy Collins] So let's keep with the topic of money and finances. And let's talk about responsibility number five, which is the board's role in providing financial oversight. What are some of the key responsibilities there?

[Elizabeth Voudouris] Well, the board is ultimately responsible for the financial statements of the organization. So as a board, you wanna make sure that you've got a budget. It's usually, you know, when you have staff, it's developed by the staff and in collaboration with your treasurer, your finance committee and then presented to the board for approval. And then as board members, I would want to see at least quarterly, especially now, quarterly forecast against that budget. And also just making sure that your financial statements are easy to read, digestible, and it's easy for all board members to distill what are the important, you know, kind of that, what's the important information coming out of the financial statements that we really need to understand in order to make important decisions. So I would wanna make sure as a board member, if it's not me, that there's somebody else on that board who's got the financial skills and expertise so that we have trust in the oversight that we're providing for the financials of the organization.

[Tracy Collins] So let's talk about that for just a minute more. You mentioned some pretty specific areas, you know the annual budget review, reviewing of financial statements. And I know from my own personal experience on boards that sometimes we're asked our opinions about investments and capital expenditures. Those are some pretty technical areas of expertise. So what if a board member just doesn't have that skillset? You know, what can they do to fulfill this part of their role?

[Tracy Collins] That's such a good question. And again, I think that's why the board's composition is so important. You wanna make sure depending on the work of your board and what the expertise is that you need on the board. You wanna make sure that you've got people on the board with the relevant skills and expertise and just diverse perspectives to fulfill that responsibility. So that really important. And I would wanna be confident, if it wasn't me, that there were other folks with that expertise on the board and on the board committees.

[Tracy Collins] So we have two more to go. So let's talk about legal and ethical responsibility. Are you talking about this as an area of responsibility or more as an area of awareness or concern for individual board members? 'Cause you know, we sometimes hear about the potential of personal liability when you serve on a nonprofit. Which area are you really talking about?

[Elizabeth Voudouris] Nonprofit board members have the duties of care, loyalty and obedience, and throughout, I mean, in Ohio, there are very specific requirements for board, in all states, there are, but you know, throughout the United States, board members are gonna have the duties of care, loyalty and obedience. And this basically means the duty of care is that you're using good business judgment when you're making decisions, you're getting the expert advice that you need to make the right decisions. The duty of loyalty is to just the conflict of interest and making sure that there's a policy and a procedure in place to avoid conflicts of interest and to really always be working on behalf of the organization and putting the mission first. And then the duty of obedience or compliance is really just why we have our 501 status and making sure that we're fulfilling the mission of the organization. So those are the basic legal and ethical responsibilities for nonprofit boards.

[Tracy Collins] And let's just round out our list of seven with talking about board development. What specifically are you talking about here?

[Elizabeth Voudouris] This is actually, you know, so many instances it's not, this is something that the board really needs to own. Having a good strong board is something that the board is responsible for. And there's so many boards that have a great group of people sitting around the table, but if they don't have the right structure or practices, they don't have an effective and engaged board. And on the same side, you might have the right structure and practices, but if you don't have the right people. So making sure that you've got a governance committee, that's looking, paying really close attention to recruiting folks who bring the right skills and experience and diversity to ensure that your board can really play a strong leadership role for the mission of the organization. And so I think a governance committee is one of the most important committees that you can have on your board and just understanding that the board really needs to own that. It's not a staff role, it's the board's role to make sure that there's a strong and engaged board.

[Tracy Collins] Well, Biz you've certainly demonstrated that there is more to being a board member than just showing up for a meeting or writing your annual check. And I think it's important that both the nonprofit organization, as well as the board members know exactly what those expectations are. So in our last few minutes together, what are some things that our listeners can do today that will help them to communicate these important areas of responsibility, and also ensure that there is a clear understanding and accountability for everyone.

[Elizabeth Voudouris] Thanks, Tracy. I just think our nonprofit sector is on the front lines, in most of our communities, meeting some of our communities most complex and gritty issues. So for board members to understand that it's so much more than coming to meetings, that you wanna bring your skills and expertise and meet your networks, you wanna use every board and committee meeting as an opportunity to really dig into the meaningful issues that matter most to the nonprofit and make sure that you're not leaving your brain at the door but you're really using, you know, your perspective and your experiences when you're in these board meetings to help the nonprofits navigate through the opportunities and challenges that are facing us all right now. So it's so important for boards to understand their responsibilities and make sure that they've got the right people sitting around the table to really partner with the staff to lead the organization.

[Tracy Collins] Well, this has been a very enlightening and helpful discussion, and I can tell we just scratched the surface of this topic. And Biz, I wanna thank you so much for talking with me today. Thank you for joining us.

[Elizabeth Voudouris] Thank you, Tracy. It's again, it's been my pleasure. Appreciate it.

[Tracy Collins] And thank you to our listeners for taking time out of your day to listen in. For more information about the responsibilities of a nonprofit board and its members, we've included several attachments in the show notes for this podcast, along with a link to the Business Volunteers Unlimited website. Additionally, if you have have a specific question, there is also a URL that you can use to submit your question back to our KeyBank team. And if you've enjoyed today's discussion, then please be sure to check out the other podcasts in the Key Wealth Matter series. As always thank you for listening.

[Announcer] The Key Wealth Matters podcast is produced by the Key Wealth Institute. The Key Wealth Institute is comprised of a collection of financial professionals representing Key entities, including Key Private bank, KeyBank Institutional Advisors, and Key Investment Services. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. This material is presented for informational purposes only and should not be construed as individual tax or financial advice. Bank and trust products are offered by KeyBank National Association, Member FDIC and equal housing lender. KeyBank, Private Bank and KeyBank Institutional Advisors are part of KeyBank. Investment products, brokerage and investment advisory services are offered through Key Investment Services, LLC or KIS, a member in FINRA, SIPC, and SEC registered investment advisor. Insurance products are offered through KeyCorp Insurance Agency USA or KIA. KIS and KIA are affiliated with KeyBank. Investment and insurance products are not FDIC insured, not bank guaranteed, may lose value, not a deposit, not insured by any Federal or state government agency. KeyBank and its affiliates do not provide tax or legal advice. Individuals should consult their personal tax advisor before making any tax-related investment decisions. This content is copyrighted by KeyCorp 2021.

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April 29th, 2022

Welcome to the Key Wealth Matters podcast, a series of candid conversations with leading experts about how individuals and organizations can grow and protect their finances, tailored around current events and trends. Here's your host for today's podcast, Brian Pietrangelo.

Welcome to the Key Wealth Matters Weekly podcast, where we casually ramble on about important topics, including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to unlock the mysteries of the markets and investing. Today is Friday, April 29th, 2022, glad to have you with us, I'm Brian Pietrangelo and with me today, I'd like to introduce our investing experts, many consider them two of our top draft picks here at Key Private Bank. George Mateyo, Chief Investment Officer, and Rajeev Sharma had a fixed income. As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our Wealth Institute on many different subjects and especially our key questions article series, addressing a relevant topic for investors each Wednesday. So in terms of a quick recap for the markets and the economy this week, let's give you some information on the markets and then we'll move to an update on the economy. So in terms of the daily fluctuation that we're seeing in the markets, Monday was a really interesting day. The markets started off negative in the morning and then ended up rallying for the afternoon to be ending positive about up 0.5% or 1.29%, whether you're looking at the S&P 500 or the NASDAQ. Tuesday ended up being significantly negative, down about 3% or 4% across the board, Wednesday was flat, and then Thursday, we saw the market rally again, up 2.48% on the S&P and up 3.07% on the NASDAQ. The reason we share this information with you is to, again, exemplify the daily volatility that we experience in the market, but also to note that throughout the week, if we look at just Thursday, at the end of that week, we're up 0.5% across the board, which is positive, but you might not have realized that given the volatility. We've also seen some big earnings releases from large companies during the week. First, we had a couple that were very positive and we saw the market react as well. In addition to that, there were some equally as negative and they offset each other based on some big corporate earnings, so we'll again, follow the suit that earnings releases continue to be mixed for first quarter of 2022. As we transition to the overall economy, there are probably three things that are worth mentioning, the first is on the manufacturing and the production side of the equation, where we still see positive and expansionary numbers as they released by the Chicago and Texas Feds. But the future outlook continues to be slightly weakened. Secondarily we've seen durable goods up 0.8% March, month over month, which continues to be expansionary and is also showing us that that number has increased month over month for the past five outta six months, according to the Census Bureau. The second topic we're sharing is about housing. The numbers continue to be mixed as well. Home prices were up 1.7% month over month and 19.8% year over year. However, if we look at the sales in terms of new residential sales and existing home sales, they start and be tempered. For example, new residential sales were down about 9% month over month in March and existing home sales were down about 3% month over month in March. So we're beginning to see some of that inventory that was under significant pressure because there was significant demand and low supply in housing is now being curtailed a bit, in addition to the effect that rising mortgage rates might have on the overall demand. The third item we're sharing is on real GDP that came out yesterday from the Bureau of Economic Analysis. The annual rate decreased 1.4% for the first quarter of 2022, according to the advance estimate. More detailed data will provide next month, again, from the Bureau of Economic Analysis. What are some of the underlying data that support that decline of 1.4%? Not only inventories were down, but government spending and exports were also down, imports were up a little bit, which is actually a negative, but the positive contributors to GDP were personal consumption and personal income. On the personal consumption side, we're also seeing significant increases in the services economy relative to the goods economy. So what this story is telling us is that when we've had that delay in the services economy due to COVID lockdowns, we're now getting past that, and we're seeing a return to the services economy, which is a very positive site to see. And to some degree, this has been expected. So if we go back six to nine months, when we talked about the fiscal contribution and the fiscal stimulus that the government provided in terms of recovery for COVID-19, there was going to be a time where that was gonna end, that there was gonna be a time that that was gonna be called the fiscal cliff and was gonna drop off in terms of GDP. So we're now beginning to see that, but we look to the future and hope that the next quarters economy continues to be strong to avoid what some might be referring to as a potential recession in 2022. So considering all these numbers, a lot to consider for the week, George, but if you take all that data in consideration, what do you think some of your insights are?

Well Brian, oftentimes we say it's hard to predict the future and understandably so. I mean, the future is always uncertain, but lately it seems like it's equally hard to accurately describe the present. I mean, we're having a difficult time kind of characterizing where things are right now, or even where things have been, 'cause some of this information obviously is reporting with a lag. I think it's fair to say that the numbers are gonna be really noisy for a while. You talked a little bit about the GDP report, which is, you know, again, a bit of a stale number in the sense that it's capturing the activity that happened in the quarter that ended almost a month ago. But I think you can gleam a couple things, again, there's a lot of moving parts there. As you mentioned, inventories were lower, a lot of messy numbers with respect to trade, so that just kinda muddles things up a lot. But the underlying components were no bad to suggest that consumer spending is still coming along in a pretty good clip. Maybe not as strong as it was, that's not surprising. CapEx actually was really quite strong, which often doesn't get as much airplay, but that's something that was also pretty strong. And I think again, we kind of have this situation where maybe the margin inflation start to peak a little bit, it's probably gonna stay elevated. So you talked about some companies. I mean, I think some of the information might be even more important to breathe through at the company level. We don't have to name names, but there's some really high profile companies have talked about the fact that cost pressure, supply chain pressures are really gonna have a pretty big dent in their outlook going forward. And I think the market can eventually look through that, I think it's gonna be kind of a period digestion because we have to reset expectations to some extent, but those things are somewhat analogous to temporary setbacks, things associated with natural disasters and so forth. And this is clearly one of those things. But I think at the margin, what it does suggest to me is that inflation is gonna be coming down a little bit, but it's gonna stay somewhat elevated going forward and that really introduces probably new opportunities and also new risks for the Fed. So let me pull Rajeev into that and get his thoughts on what happens with the Fed next week, given some of these inflation headlines.

Well, thank you, George. Well, once again, we're seeing treasuries react to the Fed meeting next week and the idea that there's gonna be an aggressive meeting, it's gonna be a aggressive rate height next week, which would be the order of 50 basis points, that's what the market is considering right now and expecting. I think that the economic data that you pointed to keeps that theme alive and we've seen it in treasuries as well. We've seen the US yield curve flatten, we see this morning twos and five year yields have jumped nine to 10 basis points. So the market is viewing the economic data as another factor that's going to really enhance the Feds position of, aggressively raising rates to combat inflation. This flattening of the yield curve that we're seeing is already signaling slower growth ahead. The difference between the two year and the 10 year treasury note yield right now is 19 basis points. And we continue to inch closer to that inversion point again. It'll have a lot to do with the pace of the movement and the front end of the curve. And as we know, the front end of the curve is really dictated by Fed policy, So the Fed, and they're focused really on the three month and the 10 year spread. And that's around 200 basis points, that gives the Fed the confidence that the US economy can withstand accelerated rate hikes. The market is pricing it for a greater Fed reaction and that continues to move the front end of the yield curve higher. It also raises the risk that the Fed could get it wrong. They could overshoot. If you look at three years now, the curve is very flat. That's telling you that the market's considering the Fed's going to get it wrong. They won't be able to thread the needle. And even though the Fed does not feel that way, the Fed feels that they can do this and we're gonna get a lot more information at next week's meeting. And that's all that the fixed income market's really focused on right now is next week's meeting, the FMC meeting is gonna happen next week and the attention again is going to be back on the pace of the Federal Reserve rate hikes, how fast they gonna do this? Is it gonna be 50 basis points? Which is very likely. Most likely it's gonna be another great hike that's gonna come in June as well to the same order. So if you look at what the market's pricing, it's almost 250 basis points of hikes priced by December. And if you add the 25 basis points hike that we already had in March, we would end up being at the fastest pace of tightening since 1994. And that's why you really see this two year ready to post their ninth consecutive monthly increase. Again, that's the longest stretch of a two year posting monthly increases since the data's been collected back in 1976. And really it is all central banks that are dealing with inflation right now, even your area inflation is causing a bearish move in global rates, but this is really dictating the fixed income market and I think all attention is really on the Fed meeting for next week.

It's interesting Rajeev that you mentioned 1994 and now many people might not remember that, but the thing that was kind of interesting in that period of time, and I was just kind of getting started in the business then, but, I remember there was a lot of conservation inside the financial market, but the economy stayed pretty strong. And what the Fed's trying to do as you mentioned with this soft landing concept, of try to slow the economy down without causing a recession. You know, that's often how we describe a soft landing and they've kind of baked that into their forecast where I think they've talked about inflation staying high, you mentioned industry is going up to kind of combat that, but they think inflation, I'm sorry, they think unemployment rather will stay somewhat tame and not really rise to the level of concern. So if you look back in '94 though however, even though that did actually happen, I mean, they were successful. You're right to know that their track record isn't the best, so they've had probably a more mixed track record on actually achieving that, but again, '94 was the exception perhaps of that, although in that period in time, you also saw a lot of volatility in terms of the financial markets and some, obviously some high profile kind of financial accidents, if you will. And I'm kind of beginning to wonder if there might be another situation here where even if things can stay somewhat strong from the economic perspective, if the odds of a financial accident happening might occur again, and we have kinda keep your eye on a lot of things to try and figure out what that might be, those things are really hard to predict, nobody knows where they might service next. Some people are pointing to the currency markets and you've seen the dollar, for example, spike significantly higher in the past couple weeks or so, maybe in reflection of some of these tensions, if you will. I don't know Rajeev if you've got any thoughts on that, or if you kind of see anything from your world in terms of where that might surface, but I think we have to keep our eyes open to some bumpiness in the terms of not necessarily economic event, but more of a financial event. What do you think about that?

I would agree with that, George. I think that we definitely have to keep our eyes open for that event that could happen, financial event. We have seen, even in some of the markets that we have within fixed income, we've seen this move towards taking risk off the table in anticipation of an event like that to happen. We're seeing a move for higher quality bonds, higher quality investments, kind of a rotation out of some of the more riskier assets. Even as yields move higher, and maybe some of these valuations are starting to look attractive, there is still this notion that if the Fed doesn't get it right, and we do pull growth down and we do have a recession, what are those securities that you really want in your portfolio at that point? And I think many investors right now are thinking upping quality trades in anticipation of what we may have seen in the past where those were the securities that kind of insulated you against some of these adverse events.

So as we talk about some of that portfolio construction Rajeev, when we talk about stocks versus bonds, I think it's an opportunity for us to share with some of our audience members George, what are your thoughts on the concept of correlation? Where have we seen it? Again, the correlation between different asset classes within portfolio construction, where have we seen it over history and where have we seen it recently? What are the differences and what do you think that means for overall portfolio construction in light of the Fed and in light of correlation?

Yeah, so to break it down, Brian, I think when you construct a portfolio to make it really effective, you really kind of have three big inputs, you think about the return of various asset classes, what do you think stocks or bonds will earn over a long period of time? Secondly, you think about maybe the volatility or the variability of those returns. How volatile are they? And then thirdly, as you mentioned, correlation is a key component too. And that just refers to how the assets are related to each other. Within correlation, there's a couple ways you can think about that. Sometimes things move together, and that's called positive correlation. Sometimes there's no relationship or zero correlation, and then thirdly, we have negative correlation that people kind of focus on. And that's commonly thought as being maybe the best kind of correlation when you build portfolios, when you wanna have asset classes or things in your portfolio, one thing zigs, the other thing zags a little bit to try and minimize the blow in terms of maybe some downside volatility. So I'm glad you brought it up because it's really interesting to us, up until the last year or so, the last couple decades were defined by this situation where we had pretty low and stable inflation, inflation was kinda averaging, called one and a half or so percent, and it was in a pretty narrow range, it didn't really get above, it was maybe plus one or minus one, around that average. And then if you look back even further however, inflation was much higher and is also much more volatile. I mean, inflation in the previous four decades average about 4%, maybe 2X of where it has been less 20 years, but the range was significantly wide. And I bring that up because in that period of time in the first 40 years, and if you will kind of, called 1940s to the 1980s roughly or so, we saw the situation where bond prices and stock prices, essentially kind of didn't always, well, they performed together and they didn't really have that diversification benefit. So what we saw in the last 20 years, however, where inflation was fairly low, essentially there was kind of a built in hedge where people, if they were concerned about equity market risk, they could essentially put some of their money into bonds to provide some diversification benefit. And what we've seen this year however, is that that relationship is flipped again, where just year to date roughly speaking, stocks are down about 10% or so this year, and bond prices, and we can measure this in a couple different ways, but bond prices are down also about 10%. So you haven't seen that diversification benefit play out that we saw in the previous 20 years. And I think people need to be aware of that.

So what do we think we should do when their correlations don't provide the diversification that we might have expected, George, historically, like you just mentioned year to date with stocks and bonds? Are there other things that we can think about from a portfolio perspective that might help?

They can, and again, no one knows if this trend's gonna continue. And I think a lot of it depends on what have happens with inflation next. And you know, again, as we said, some of the data points suggest inflation might be peaking, but stay somewhat elevated. So I think, what you wanna be thinking about is maybe additional tools that you can use to really round out and maybe even enhance the diversification of your portfolio if we're likely to be in this new regime as we kind of think we might be. So there are things like low volatility alternative strategies, there are some liquid alternative strategies that have been somewhat effective, private real estate and real assets are also things that have been added as well. And this environment of high inflation, those things have played out fairly well. And I continue to think that might be a way to hedge some of this uncertainty and also provide some diversification to somebody's portfolio.

So Rajeev, on the fixed income side as yields continue to increase, there may be a time for folks that have cash parked on the sideline to reenter the fixed income markets. What are your thoughts on that area?

That's a great question, Brian. I think that we're talking about correlations and it does seem like those were glory days when they were correlations that made sense between fixed income and equities, and now they both are moving in the same direction. But one of the things I would mention and along the lines of your question is, you look at the high grade index that's down about 4.9% this month alone. That's the worst total return since March, 2020 and the fifth straight month of declines. What happens at this point is you start seeing yields that you haven't seen in this market, especially in corporate bonds that are starting to look attractive. We have not seen attractive valuations in a very long time in fixed income as rates were so low. Now with rates moving higher, you will start seeing those investors that are gonna get interested in taking advantage of some of these rates. Especially as we mentioned before, the high quality trade, if you see some high quality, very well capitalized firms issuers out there with yields that you haven't seen for a while, I could imagine foreign investors getting involved and US domestic investors getting involved as well. That could provide some support, especially for asset classes like high grade and high yield, which could see some evaluations that look attractive.

George and Rajeev, thanks for providing your insights, we appreciate it, and thanks to our listeners for joining us today. Be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app. As always, past performance is no guarantee of future results and we know your financial situation is personal to you. So reach out to your relationship manager, portfolio strategist, or advisor for more information. And we'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you achieve your financial success.

The Key Wealth Matters podcast is produced by the Key Wealth Institute. The Key Wealth Institute is comprised of a collection of financial professionals representing key entities, including key private bank, key bank institutional advisors, and key investment services. And the opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. This material is presented for informational purposes only and should not be construed as individual tax or financial advice. Bank and trust products are offered by Key Bank National Association, member FDIC and Equal Housing Lender. Key Private Bank and Key Bank Institutional advisors are part of Key Bank, investment products, brokerage and investment advisory services are offered through Key Investment Services, LLC or KIS. Remember a FINRA SIPC and SEC registered investment advisor. Insurance products are offered through KeyCorp Insurance Agency USA, or KIA. KIS and KIA are affiliated with Key Bank. Investment and insurance products are not FDIC insured, not bank guaranteed, may lose value, not a deposit, not insured by any Federal or state government agency. KeyBank and its affiliates do not provide tax or legal advice. Individuals should consult their personal tax advisor before making any tax related investment decisions. This content is copyrighted by KeyCorp 2021.

April 22nd, 2022

Welcome to the Key Wealth Matters Podcast, a series of candid conversations with leading experts about how individuals and organizations can grow and protect their finances, tailored around current events and trends. Here's your host for today's podcast, Brian Pietrangelo. 

Welcome to the Key Wealth Matters weekly podcast where we casually ramble on about important topics including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to unlock the mysteries of the markets and investing. Today is Friday, April 22nd, 2022. I'm Brian Pietrangelo, and with me today, I'd like to introduce our dynamic duo of investing experts. Not only are they willing to share their insights with us, but they're also down-to-earth individuals. George Mateyo, our chief investment officer, and Rajeev Sharma, head of fixed income. As a reminder, a lot of great content is available on Key.com/wealthinsights, including updates from our Wealth Institute on many different subjects, and especially our Key Questions article series addressing a relevant topic for investors each Wednesday. So it's been an interesting week, so let's start with a couple recap. The market is relatively flat for the week through Thursday. Housing continues to grow, at least for this month, in spite of what we see as rising mortgage rates. Initial unemployment claims continue to stay low which is great, and then all eyes and ears seem to be on the Fed and what's going on in the general overall market, so George, what are your thoughts and what are your perspectives?

Oh Brian, thanks for that setup. I think you're absolutely right that the Fed really is the main event for sure, and if we take our readers and listeners back to maybe as late as the fall of last year, there were some nascent signs of inflation for sure. I think at the time, the Fed was saying that there are some causes for concerns, but they felt at the time, if I went back and looked at some of the transcripts, that they said, quote unquote, "A tighter monetary policy would be a harmful mistake," so that was kind of summer, maybe late August, early September. Of course, then they famously pivoted in November and started adopting this more hawkish tone, but the Fed is, as you mention, Brian, has really been considerably hawkish, meaning that they're more aggressive with respect to raising interest rates, taking away liquidity, and now they've kind of signaled that they're gonna be doing whatever it takes, frankly, to really try and harness inflation. So we saw that pivot in November. That was really interesting in the sense that it took place around the same time that the Omicron virus was starting to spread, or recently again in January on the heels of the Ukraine situation, the Fed was also suggesting that irrespective of what happens in Ukraine almost, in absence of maybe some short-term price spikes with commodities which we saw, again, the Fed was really standing pat and ready to do more, and that rhetoric has continued, so they've done a little bit so far, but they've said a lot more, and their rhetoric has become increasingly hawkish. Even just this week, I think now the word that people are using is expedious, meaning that they have to move quickly to try and aggressively combat inflation. And even this past Thursday, just yesterday, this call is being recorded on Friday, but just yesterday, the Fed chair was saying that I think they're gonna have to front-load interest rates, meaning they're gonna do more quickly than they, do more quicker than they normally would. So the Fed has done a lot of talking, and they started to suggest that they're gonna be moving more quickly to really try and front-load the tightening cycle here.

Okay, George, that's a great point, and so might be helpful for our listeners to understand, we talk a lot and some of the press talks a lot about a hard landing versus a soft landing, and what do we think is a soft landing, and maybe you can explain how we think it's actually very challenging for the Fed to achieve a soft landing.

It is, Brian, and I think we wrote a Key Question article about this a couple weeks ago if people wanna go back in the library and find that. But the Fed is always trying to make sure that, they're trying to balance two things, right, they're trying to balance the overall employment situation, and at the same time, they're trying to manage price stability which is code word for some degree of inflation, I think the Fed would like to see inflation at a moderate level. That's just kind of how markets work and how the economy functions, frankly, with some gradual rise in prices. But now they've got a situation where inflation is much higher than is comfortable. Frankly, unemployment is very low so the job market is really quite hot right now and quite robust, and so the Fed is trying to kind of cool the economy enough so that they don't see a rise in unemployment, and that's kinda what they refer to as a soft landing. Their track record has been really mixed at doing that, to be honest, and that gives, I think, markets a lot of concern, and it's a legitimate cause for concern because the Fed has only been successful a couple times at doing this in the past, so they are a little bit late to the game here, and I think that's one of the reasons the markets are a bit anxious, particularly the bond market where we've seen some significant rise in short-come interest rates over the past couple weeks, but I think the Fed's gonna need a little bit of luck on their side frankly to pull this one off as they've done in the past.

So George, and with respect to inflation, there's been increases over the last nine months at record levels for the past four decades, and the beginning of the conversation now is turning to whether or not we think inflation is starting to peak. Do you see any underlying data that might indicate that or do you have any thoughts?

We do, and I think that's a really good point, Brian. I think it's peaking, inflation is kind of peaking it seems, but it's staying pretty elevated, and frankly, I don't think anybody can really forecast inflation with a lot of precision. We've talked on these calls about a number of different measures that people employ to try to calculate inflation, and there's a lot of, frankly, probably thousands of economists that think around the clock to solve this problem of how to actually calculate inflation. But the best way I think we can kind of calibrate inflation is just consumer expectations. And so on that front, there are some pretty good surveys that just measure how consumers are thinking about inflation and where they think inflation might be in a year or two from now. The near-term read on inflation is a little bit worrisome in the sense that consumers think that inflation will be about 7% next year, and I think what that's kind of really captured is just where inflation is now, so I don't know if that's really a great signal. But if you ask consumers where you think inflation might be in three years, it's a little bit elevated. The good news, it's started to peak too, but it's kinda higher than where it should be, but it's kinda come down a little bit, so I think two or three months ago, people thought inflation in three years might be four, 4 1/2 percent or so, today that number close to 3 1/2. On a long-term basis, it typically has been around 2 1/2, so we're still kind of a, maybe a point or two above the long-term average, and similarly, we look at other survey data that was released this past week that asked the same question to corporate CFOs and treasurers and the people that run businesses, and asked them, do you expect to be raising wages for your workers, and that number got as high as 85% just a quarter or two ago, so almost 100% of companies were anticipating lifting wages. That number again has also backed off, that number's now at about 70%. A few years ago rather, it was kind of in the 50% range, so again, we've kind of come down a little bit, but a lot of these numbers are staying somewhat elevated, so I guess in our view, it's probably true that inflation's peaking, we've seen some evidence of that, somewhat anecdotally and sometimes a little bit in the numbers in terms of supply chains, freight rates, used car prices and so forth, but at the same time, even if inflation's peaking, it's gonna likely remain elevated for a while given some of these things are just powerful tailwinds that kind of have some long, some persistence to them, meaning that there's likely to be wages going up for a while. The housing market is still quite strong, irrespective of interest rates as you mention. It still seemed like there's a lot of momentum behind some of these price moves that'll probably be with us a bit longer.

So Rajeev, what are you seeing in the fixed income markets, and all eyes and ears are on the Fed, so pretty important topics, what are your thoughts?

Well we continue to see a sell-off in the fixed income markets. It's really been about the Fed messaging. Fed messaging has been very aggressive and it's pointing towards employing monetary policy to combat this multi-decade high inflation. So in the process with the Fed on the move, rates moving higher, we're seeing the aggregate index down 2.77% for the month. So keeping that in perspective, the bond market's having one of the worst total return periods ever in the history of the bond market, year-to-date, at this point in the year. So we all talk about the CPI prints, we all talk about multi-decade high inflation, so we're at a 40-year high in inflation, and that's produced the worst bond performance in 40 years, which makes a lot of sense. Rates are moving higher. And this move that we're seeing is really a move that's reacting to a Fed that the market really feels is behind the curve. I mean, up 'til last year, we were hearing the Fed saying inflation's transitory, and they kept that narrative all the way through November, and then they pivoted, and ever since then, we've been seeing rates move higher. So if you're in any interest-sensitive sector, interest rate-sensitive sector, you are going to feel the pain and that's exactly what's happening in the fixed income markets. Yields are up across the board. This morning, we're seeing a two-year at 2.76%, which is amazing. Where we were and where we are is just a huge surge in yields. We had 90 basis points, a 90 basis point move in the two-year in March alone, and if the two-year hits 3%, I don't think anybody would be that surprised. I mean, the way rates are moving higher, we could see that continue. So really the question is, how aggressive can the Fed get before breaking something? We heard Fed Chair Powell yesterday at the IMF panel endorsing a 50 basis point rate hike in May. We even see Fed members like James Bullard talk about a 75 basis point move in May. We don't think that's gonna happen, but we do really feel that 50 basis points in May is definitely on the table and that's definitely something we can see, the market's reacting to that. If we look at the Fed funds future market, the expectation is that Fed will raise rates nine times by the end of 2022, so just a few months ago, that number was four. So really, people have moved their estimates for how far the Fed will go, and that's had an impact on the fixed income markets that had an impact on all yields across the yield curve. There's currently a 90% probability of a 50 basis point hike in May, and there's a 90% of another 50 basis point rate hike in the June FOMC meeting. So right now, there's about maybe a 50% chance of a third consecutive 50 basis point hike in the July meeting. So there you have, those are your seven rate hikes right into July. So really, what would stop the Fed from continuing its move to raise rates higher, we would have to really see some data points in inflation that show that inflation is actually slowing down, but to be honest, I think if we see an inflation print at 5%, that's not really something the Fed's gonna feel like is good enough, and they're gonna continue moving forward with their plans of raising rates. There's many industry experts that feel that maybe the Fed will slow down because the impact on the markets, on the stock market. I don't think the Fed's done that in the past. I think the Fed will continue to do what it takes to control inflation. They've talked about that being their number one mandate, and I really feel like they're gonna continue to do that. And with all this movement in the market, you're seeing credit spreads in investment grade and high yield, they've been pretty well contained, but again, as I mentioned, if you're in a interest rate-sensitive sector, you're feeling the pain right now and even investor grade and high yield both have very terrible returns for the year so far.

That's great Rajeev, and I know last March, and again most recently there's also been conversation about the Fed reducing its balance sheet at roughly $9 trillion, so for our listeners out there, what does the quantitative tightening or the reduction of the balance sheet actually means, and then more importantly, how do we equate that or what's the equivalent to in an interest rate increment? Is it like another 50 basis point increase when the Fed reduces its balance sheet?

That's a great point. Yes, the Fed reduction of the balance sheet's something that we probably hear more about in the May meeting. It's a reality, I think the Fed's gonna do that. The Fed is looking at the 10-year, the 10-year is not moving as high as the Fed feels like it should, so the curve has been flattening for a while. We did see some steepening in the last two weeks but we have seen a 10-year that's not really reacting as quick as the front end of the curve is, and so when you see a yield curve that's very flat, it points towards an inversion, which we already saw a couple weeks ago that there's an inversion for two days for 2s/10s. So I think the Fed's really looking at the 10-year right now, and by doing quantitative tightening which is a reduction of a Fed balance sheet, as you mention, $9 trillion, if they start to reduce the balance sheet and they give us some real concrete plan on doing that and we expect some more ideas about what that plan is gonna be in the May meeting, you could see the 10-year start to raise, start moving higher. And if the 10-year starts moving higher, then you'll see a steeper curve again, which is something the Fed does want to see. If you look at what a quantitative tightening, the impact of a quantitative tightening is, the market really looks at that as a 25 basis point rate hike, so that's another rate hike that will be the impact of the market.

So George, today being Earth Day might be a good opportunity to share your thoughts with ESG investing and what we see going on with corporations and elsewhere in the world, and again, environmental, social, and governance investing from an ESG perspective on the acronym. What are your thoughts on ESG, George?

Yeah, I think ESG is really here to stay. There's a lot of momentum behind it. Companies are taking it very seriously, and shareholders are responding in kind, meaning that they really are rewarding those companies that are ESG-friendly, ESG-sensitive, and really have adopted some strong ESG principles in the way they run their corporations and businesses. It's interesting also Brian that Europe has been really at the forefront of a lot of this movement for quite some time, and they're frankly ahead of the United States in that regard, and maybe pivoting a little bit, I think it's also worth noting that this weekend, perhaps by the time that many people listen to this podcast we'll know the outcome of this, but this weekend, there's some critical elections taking place, one of which most notably is in France, where we have kind of the rematch if you will between Macron and Le Pen who actually was kinda the front runner last time in the sense that we had an election five or so years ago. Macron ran away with that election. I think he won the vote by 67% which was a pretty wide margin of victory. Today however, I think the polls last time I looked were pretty close, so I think he's got a, maybe about a four or five point lead, so he's still likely to be reelected but the margin on this guy has really shrunken considerably. And I think that's important because as we think about where we are as a country going into the primaries season, I think the election narrative will start becoming more of a force. It's also interesting to see how this plays out in France with respect to what happens in Ukraine, in the sense that there's been a lot of unity, frankly, that's been quite positive around Europe and other countries around the world frankly, really joining forces to really try and combat the situation in Ukraine. And I think there's likely to be some maybe walking back of that if Le Pen is elected, so I think we have to pay close attention to what happens in France this weekend knowing that that's probably a tipping point with respect to the elections here in United States, and also some geopolitical considerations in Ukraine again as well.

So for the fixed income markets, ESG has become a very big focus point as well, and I think we've seen a lot of issuance which is green bond issuance in the last couple of years. The green bond market has moved up, has grown significantly over time. Green bonds are those bonds that basically are earmarked for climate initiatives, whether that be climate initiatives or something in the sense of transmission initiatives, pollution initiatives. We've seen a lot of banks issued green bonds, we've seen a lot of other sectors issue green bonds. These are very highly rated bonds. They've done extremely well over time, which is something to really keep a focus on. The other thing I would mention is that ESG and fixed income, it doesn't have to just be at the issuer level. Many investors are look at ESG and fixed income, they're looking at bonds that are specifically earmarked for ESG initiatives. So we're seeing that market grow as well. So there's two ways to look at in fixed income. Many investors say okay, if the parent level is an issuer that has a very high ESG score, then that's great, that's something good, but if it's earmarked for specific ESG initiatives, there is a whole other market that's looking specifically at those bonds, so that's something we're gonna be focusing on.

Fantastic, thanks Rajeev. George and Rajeev, thanks for providing your insights. We appreciate it, and thanks to our listeners for joining us today. Be sure to subscribe to the Key Wealth Matters Podcast through your favorite podcast app, and as always, past performance is no guarantee of future results. We know your financial situation is personal to you, so reach out to your relationship manager, portfolio strategist, or advisor for more information, and we'll catch up with you next week to see how the world and the markets have changed, and provide those keys to help you achieve your financial success.

The Key Wealth Matters Podcast is produced by the Key Wealth Institute. The Key Wealth Institute is comprised of a collection of financial professionals representing Key entities including Key Private Bank, Key Bank Institutional Advisors, and Key Investment Services. Any opinions, projections, or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. This material is presented for informational purposes only, and should not be construed as individual tax or financial advice. Bank and trust products are offered by Key Bank National Association, member FDIC, and Equal Housing Lender. Key Private Bank and Key Bank Institutional Advisors are part of Key Bank. Investment products, brokerage, and investment advisory services are offered through Key Investment Services, LLC or KIS, member in FINRA, SIPC, and SEC-registered investment advisor. Insurance products are offered through KeyCorp Insurance Agency USA, or KIA. KIS and KIA are affiliated with Key Bank. Investment and insurance products are not FDIC insured, not bank guaranteed, may lose value, not a deposit, not insured by any federal or state government agency. Key Bank and its affiliates do not provide tax or legal advice. Individuals should consult their personal tax advisor before making any tax-related investment decisions. This content is copyrighted by KeyCorp, 2021.

April 8th, 2022

Welcome to the Key Wealth Matters podcast, a series of candid conversations with leading experts about how individuals and organizations can grow and protect their finances, tailored around current events and trends. Here's your host for today's podcast, Brian Pietrangelo.

Welcome to the Key Wealth Matters weekly podcast where we casually ramble on about important topics, including the markets, the economy, human ingenuity and almost anything under the sun, giving you the keys to unlock the mysteries of the markets and investing. Today is Friday, April 8th, 2022. I'm Brian Pietrangelo. And in honor of the incomparable Jim Nantz, I'd like to say, hello friends, and welcome you to today's podcast. And that saying, "Hello friends", has so much more to do with it than just golf. It's actually about a father son relationship and the challenges of dealing with Alzheimer's disease. So I encourage you to learn more about that behind the scenes and that phrase and what a wonderful story. With me today, I'd like to introduce our leaderboard of investing experts. Some might even say there are great foursome and also masters in their own field. George Mateyo, Chief Investment Officer, Steve Hoedt, Head of Equities, Rajeev Sharma, Head of Fixed Income and Cindy Honcharenko, Senior Fixed Income Portfolio Manager. As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our Wealth Institute on many different subjects, and especially our Key Questions article series addressing a relevant topic for investors each Wednesday. So it's been a light week in terms of economic information. We had some PMI data and of course the release of the meeting minutes for the Federal Reserve's meeting back on March 16th, which we will certainly cover. George, let's start with you for your updated outlook. When you look down the fairway of the investing landscape, do you see some sand traps and some water hazards or do you see a clear path to the green?

Well, the sand traps and water hazards is an interesting metaphor, to say the least, given that it's Masters Week, Brian. So I'm glad you mentioned that for all our golf fans out there. Yeah, I think it is a bit of both, honestly. I think this is the best of times, the worst of times kind of environment. Many people are coming back from vacation and spring breaks and so forth. And from what I'm hearing, vacations are really expensive these days. Places are full. Restaurants are not taking reservations, cuz they're facing too much demand. So to some extent it seems like the economy's never been stronger. We had a bit of a weakness at the beginning part of this quarter, in the sense that I think GDP was a little bit soft, probably because of Omicron and some other lingering effects from the virus, but we really are exiting the first quarter and into the second quarter with consider momentum. We've seen unemployment claims this week fall to an all time low, a record low in terms of people filing for unemployment. We've also seen wages start pick up. I noted that a really large retailer announced a 25% increase in wages for their first year hires, which is just remarkable. But on the flip side, you're starting to see, unfortunately food prices rise to their all time high levels as well. There was a survey out that United Nations puts together that talked about inflation running at an a time high from food prices. So a best of times, worst of times. It's interesting to see that interest rates have really risen in the past couple days in spite of this, maybe because of this, more likely. So maybe we should turn it over first of all to Rajeev to get some thoughts on what's happening in fixed income. Rajeev, what do you make of this?

Good morning, George. Yeah, we've had an interesting move and continue to have interesting move higher in rates across the curve. But we had four consecutive days now of steepening. So many times on these calls we've talked about the curve flattening. Today, we're seeing flattening again but this was after four consecutive days of steepening. We started the week with the twos tens curve inverted by 10 basis points and then due to the steepening and some strong cues from the Fed minutes about aggressive monetary policy, we uninverted. So the twos tens moving to a difference of about 20 basis points or so it now. Right now we're seeing the 10 year Treasury note yield at a level of 2.72%. And that's the highest we've seen since March, 2019. So the Fed's messaging is very clear. They're gonna do whatever it takes to defeat inflation and the market continues to see the Fed behind the curve. And that's why you continue to see yields move higher. But it's very interesting to see the fixed income markets and how they're reacting to this. The most interest rate sensitive part of the markets are getting hurt the most. But if you look at corporate credit, for instance, we've seen a four week rally in credit spreads. We're wider on the year but certainly no alarm bells there. And this recession narrative with the headlines we could see spreads come under pressure. But the prudent approach that we're taking is to move into sectors and names that are in higher quality. We did see 25 billion in new issuance in investment grade this week. And this is after a month where we saw 230 billion in new issuance in investment grade corporate credit. So deals are getting done. Demand for investor grade credit is still there. We should see a slow down in new issuance this week, because it's earnings blackout period. However, typically during this time we see the big six US banks announce new bond deals. They're very liquid deals. And I feel like investors are looking for liquidity right now.

So, Rajeev, just to put some terms or maybe provide some definitions to some of these terms. When we talk about curves, of course, and you're talking about inverted curves, we're talking about the situation in which short-term rates are higher than long-term rates. Normally, of course, by taking on additional duration and extending maturities, most of the time investors actually demand more payment and compensation by investing in longer term bonds versus short term bonds. But what you're saying when the curve gets inverted is when short term bonds are yielding higher or more than a long term bond. So I guess we've talked about this from time to time but I thought it'd be helpful just to provide that context again. I think there's a lot of, we talked about this, inversion diversion moment where there's been a lot of ink spilled around the notion of what an inverted yield curve means. And from my perspective, there's four things to know, one of which of course is that not all curves are saying the same thing right now, which is tricky, where sometimes people think there's a signal inside an inverted yield curve that suggests a recession might be looming. But right now a lot of curves are saying different things but it relates to the recession signal. I think curves need to stay inverted for a while before becoming too concerning. And right now you mentioned, it's been an off again, on again thing this past few weeks or so. It is true though, thirdly, that inverted curves have been pretty good forecasters for recessions, but really they've not done a great job with the timing of one, meaning that there can be 6, 12, 18 months before the recession actually occurs once the curve is inverted. So there really is a lot of time between the event itself and the recession starting. And also then lastly, in between that period of time, you've also seen stocks do somewhat well. They've stayed buoyant. Sometimes they've rallied it. The information is not as conclusive but there have been times when the curve actually has inverted and stocks stay somewhat buoyant. So I think it's on point to put that into the context, but you're right, I think, also to suggest that the Fed Reserve has really heated up their rhetoric in terms of what they're thinking they need to do to dampen down some of these inflation pressures. So maybe we could bring Cindy into conversation because there was a significant speaker on the Fed speaker circuit this week that I think sent some mentioning signals about what the Fed might be doing.

Say that three times fast, George.

Yeah, I couldn't get it out, I'm sorry, but in terms of what the Fed might be thinking, Cindy, why don't you give us an update on what you heard this week from Vice-Chair Brainard?

Yes, so the Fed minutes revealed their detailed plan for normalizing the balance sheet. Surprisingly enough, even though Brainard was warned about a rapid balance sheet reduction, with larger caps and a shorter phase in, the details of the minutes were largely in line with what the Fed watchers expected. It was a hawkish minute message, but not aggressively hawkish, which was good. One of the surprises was the T-Bill top off, but other than that, everything was largely in line. And prior to the minutes being released, the consensus was for a hundred billion cap on the monthly runoff, with a two month phase in.

So Cindy, what's the T-Bill top off? I dunno what that means. What is a T-Bill top off?

So they're doing treasuries and mortgages, but then they're also going to decrease the amount of T-Bills that they have in their portfolio as well. And currently the Fed holds 326 billion in T-Bills and that predates the pandemic and initially all Fed watchers thought that that T-Bill portfolio was gonna remain untouched, but apparently that's not the case, as the minutes showed. But the T-Bill top off doesn't really make a huge difference in terms of speed in which the balance sheet is going to shrink. In fact, the T-Bill runoff will increase the supply in bills which I think would be very welcomed by money market funds right now.

So basically, you got the Fed slowly draining liquidity, to put it in real simple terms. Is that a fair summary?

Right.

Okay, so, Steve, over to you now, in terms of what's happening with the ripple effects from the credit markets to the equity markets. And maybe we could even start with a sector that's really front and center of this, which is home building and housing. A lot of consternation, a lot of focus has been on the back up in interest rates and now mortgage rates have crept above 5% for the first time in many, many years. How do you see that playing through some of the things you're watching in the equity market?

Well, when we look at builders, builders are are clearly under a lot of pressure right now. They are a portion of the consumer discretionary sector. And what we see right now with this is classic late cycle dynamics developing. One of the ways that we measure this empirically is to look at the relationship of a group like discretionary, which is, as I said, a consumer cyclical and compare it to something that's more defensive in nature. And the classic defensive growth play is healthcare. And what we've seen since the turn of the year, George, is a really pronounced outperformance of healthcare relative to discretionary. And it's accelerated here as mortgage rates have moved higher. So to us, we see clear late cycle signs right now. And it's certainly concerning for things like the housing stocks. We also think that when you look at banks, banks should be outperforming when you have rates moving higher. They typically move in lockstep with the 10 year yield, especially when you look at banks relative to is something like utilities, which if you think about utilities, they're heavily levered. Higher rates tend to mean that they underperform. So you should see banks massively outperforming utilities in a tape like this, with rates structured the way they are. And they have also come under massive selling pressure since February on a relative basis to utilities. So to us, that's yet another sign that we are clearly late cycle. And if not, the market's starting to at least look at the possibility that the Fed could be making a policy error, quite frankly.

Yeah, I'm glad you mentioned that term "late cycle". And that doesn't mean necessarily, again, a recession is at our doorstep, but it does suggest that things are slowing down. And maybe more importantly, what we're seeing right now our financial conditions getting pretty restrictive And that usually is in the form of interest rates that have risen a lot that can slowly to back us up on demand or other consumption habits going down a little bit. So maybe then getting back over to you, Rajeev, for a second. Where do you see interest rates going from here? We've already seen a pretty big move up in interest rates this year. And if we use the 10-year Treasury as a guide post, today we're roughly at 2.65, 2.70 or so. And just a couple months ago we were certainly well below two. Where do you think we might be going from here?

That's a great question, George. I think that rates continue to move higher from here. And the reason I say that is because you have a Fed right now that's gonna do whatever it takes for combating inflation. That's gonna impact the front end of the yield curve. But now if we introduce the terms of quantitative tightening, which would be in the form of a balance sheet reduction by the Fed, that will make this pressure that we're seeing on the 10-year that's keeping the 10-year pretty anchored. It's gonna move the 10-year up. And so we can continue to see a steeper curve at that point. And we could see the 10-year move higher. We're at 2.72 right now. Many industry experts thought we would be at 2.75 by the end of the year. We're there right now. So I see ourselves moving higher to get us to the end of the year. And I also feel that there's gonna be a point where you'll see the curve start to steepen, you'll start to see the 10-year move higher. And I think at that point you will see investors start to look at the 10-year and look at opportunity to jump in. But right now I see it moving higher.

Hey, Rajeev, I have a question for you. When you think about the way that they're gonna implement this balance sheet reduction, can you talk a little bit about that? Cuz I know a lot of people get worried that, who's gonna be buying these bonds that the Fed is selling off of the balance sheet? I think it's about runoff and managing the runoff, isn't it?

Yes, it's managing the runoff right now. If you look at what they're gonna think about, if you look at the minutes, they suggested a peak asset drop of about 95 billion per month. That would be 60 billion in treasuries and 35 billion in mortgage backed securities. We probably won't start that way. We'll probably start with 40 billion in June and we ramp ourselves up by September to 95 billion. That would be the way it would go. I think that the interesting thing is if you look at the mortgage backed security market, they're already anticipating that there's gonna be not a lot of buyers out there. Banks might pick up some of it, but if you look at mortgage backed securities right now, eventually I think that you see them go wider. Many people thought mortgage backed securities would end the year flat. And now if you look at estimates, you're looking at 30 to 50 basis points wider because of this quantitative tightening or reduction of the balance sheet.

So clearly MBS is the part of the market that we expect to be under the most pressure.

Agreed.

What about earnings, Steve? We're gonna start seeing companies report earnings next week. I think you alluded that briefly, but what's the outlook for corporate earnings for the next couple months?

So corporate earnings should move higher as we head through earnings season, which starts in earnest at the end of next week. The thing to really focus on is gonna be the guidance. Analysts have been very reticent to take guidance up as we've moved through the end of the first quarter, due to all the cross currents that we've had, whether it's Russia Ukraine, whether it's the Fed, everything else. And when I look at the charts, what I see is a market that could go either direction, higher or lower. And I think that the earnings outlook is going to be what determines the near term outcome in terms of direction for the market for the next three to six months. Clearly we always say that earnings season is important, but actually this time it really is.

Excellent information today. So George, Steve, Rajeev, and Cindy, thanks for providing your insights. We appreciate it. And we hope everyone has an enjoyable weekend. Thanks to our listeners for joining us today and be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app. As always, past performance is no guarantee of future results. And we know your financial situation is personal to you. So reach out to your relationship manager, portfolio strategist or advisor for more information. We'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you achieve your financial success.

The Key Wealth Matters podcast is produced by the Key Wealth Institute. The Key Wealth Institute is comprised of a collection of financial professionals representing Key entities including Key Private Bank, KeyBank institutional advisors and Key Investment Services. Any opinions, projections or recommendations contained herein are subject change without notice and are not intended as individual investment advice. This material is presented for informational purposes only and should not be construed as individual tax or financial advice. Bank and trust products are offered by KeyBank National Association, member FDIC, and Equal Housing Lender. Key Private Bank and KeyBank institutional advisors are part of KeyBank. Investment products, brokerage and investment advisory services are offered through Key Investment Services, LLC or KIS, member in FINRA, SIPC and SEC Registered Investment Advisor, Insurance products are offered through KeyCorp Insurance Agency USA or KIA. KIS and KIA are affiliated with KeyBank. Investment and insurance products are not FDIC insured, not bank guaranteed, may lose value, not a deposit, not insured by any federal or state government agency. KeyBank and its affiliates do not provide tax or legal advice. Individuals should consult their personal tax advisor before making any tax related investment decisions. This content is copyrighted by KeyCorp, 2021.

April 1st, 2022

Welcome to the "Key Wealth Matters," podcast. A series of candid conversations with leading experts about how individuals and organizations can grow and protect their finances, tailored around current events and trends. Here's your host for today's podcast. Brian Pietrangelo.

Welcome to the "Key Wealth Matters," weekly podcast where we casually ramble on about important topics including the markets, the economy, human ingenuity and almost anything under the sun. Giving you the keys to unlock the mysteries of the markets and investing. Today is Friday, April 1st, 2022. I'm Brian Pietrangelo. And with me today I'd like to introduce our round table of investing experts. It's always great to have them on the show because they don't fool around when comes to digging into the details of the market and sharing their thoughts with us. Steve Hoedt, head of equities. Rajeev Sharma, head of fixed income and Patrick Grady, senior fixed income portfolio manager. As a reminder, a lot of great content is available on key.com/wealthinsights and including updates from our Wealth Institute on many different subjects and especially our key questions, article series, addressing a relevant topic for investors each Wednesday. So it's been a week full of economic data. So let's start with a quick recap for the first quarter of 2022, just ending yesterday both stock and bond markets were down across the board. The S&P 500 was down around four and a half percent. NASDAQ lost twice that amount just under nine. Small Caps declined seven and a half percent. And also some people might not have realized it because it's a little bit muted in terms of recognition but the aggregate bond index was also down just under 6%. In terms of economic data release for the week, pretty full calendar. So we'll just give you a quick update on each day. On Monday, the Dallas Fed shared that the Texas manufacturing continues to expand and factory activity is on a solid pace. On Tuesday, the Case-Shiller home price index showed housing continues to increase at a clip of 19% year over year. We're gonna need to watch to see how that increases in mortgage rates affect this pattern overall, as we go through time. Also on Tuesday, Department of Labor shared that job openings continue to remain high within this tight labor market at 11.3 million job openings. On Thursday, Bureau of Economic Analysis released the Fed's preferred measure of inflation known as the core personal consumption expenditures index. And it showed a 5.4% increase year over year in February compared to 5.2% in January. Again, illustrating that inflation is a real challenge and has been increasing significantly for the past six months. Finally, earlier this morning, the Bureau of Labor statistics released employment data that included a couple key factors. One addition to non-farm payrolls of 431,000 for March plus an additional upward revision of about 72,000 jobs in February, for a total of just over a half a million jobs this month. Also number two, the unemployment rate at 3.6% improving from 3.8% last month. But again, a reminder for everybody out there, the unemployment rate is a lagging indicator and there have been times where the unemployment rate in history has been extraordinarily low even before a recession unfolds. Lastly, also on the inflation front average hourly earnings increased 5.1% year over year. So when you hear folks talk about a wage price spiral this is part of that equation. Taking all these factors into consideration, what are you seeing in the equity market, Steve?

Well, Brian, good morning. It's really been a interesting week. We've had a rally right back into the resistance zone at 4550 to 4,600 that we have talked about both on these podcasts before and in our key charts this week. The bottom line is right now, the battle is joined between bulls and bears. You know if we were to get a decisive break above this level, then it opens the possibility for a run to new highs to challenge 4,800 again. And if we fail, I think it opens the door for us to go back and retest those February, March lows down around 4,200 on the S&P. So we're really in a key area for the market here. And I think that we're likely gonna spend a little bit of time here as we battle back and forth between the bulls and the bears. There's a push and pull between a number of different factors in the market here right now. You know, we certainly are seeing late cycle dynamics. However, when we look at things that try to get us to think about things more bullishly, we just haven't seen any type of a volume spike in terms of positive skew of up volume versus down volume, same thing in terms of stocks making new 52 week highs or 20 day highs, just a whole number of breadth indicators that would kind of give us an all clear that the market was likely to continue to power higher from here. We haven't gotten any of those. It doesn't mean the market can't work its way higher but you know, really to us, this has all the hallmarks of a really sharp balance off of a severe oversold condition and once we got that correction level hit in March. If you take a look at the fundamentals, I was looking at this just before we got on the call. Since March 14th, we've seen earnings for the S& P 500 grind higher by a grand total of $1.20, it's up to 233 per share for the 500 while at the same time we've seen the multiple on those earnings expand from 18 back to 20. So this whole rally that we've had has all been generated by multiple expansion. This is what we thought this year was gonna be all about, that it wasn't gonna be about earnings. It was gonna be about multiples and that sure is playing out in spades.

Outstanding, Steve. So in the same context Rajeev, when we talk about the fixed income market yields and what's happening with bonds, what are your thoughts as we take all this information into consideration?

Good morning, Brian, and I agree with you what you're saying about the ugly numbers for fixed income this year. If you look at treasurers for March, the loss for treasurers was the biggest in nearly two decades. And overall, the worst quarter on record for government debt. So anything that's interest rate sensitive you had some pain in fixed income so far this year, and that's what happens when you have a Fed that's aggressive, trying to play catch up. You have the fed talking about 50 basis points hikes upcoming in May, possibly in June, as well. With an aggressive Fed, and now the market pricing and at least six more rate hikes this year, you're gonna feel the pain in the treasury market. And we felt it. If you look at the two year, that surge 90 basis points in March up to 2.44%, and that's really just on top of the tenure, which is a 2.4 4%. In fact, it inverted again today. So we have been seeing the yield curve. We've been talking about the yield curve moving flatter and flatter. Now we finally see inversions on the yield curve. We saw the 2s 10s invert. This month, we saw the 5s 30s invert, 3s 10s, 5s 10s, 7s 10s. They all inverted at some point in the month of March. And what happens when you have an inversion you start having a lot of context about is this a signal for a upcoming recession? Some of these signals have been there and they've shown their value over time. Historically speaking 2s 10s have been a great predictor of upcoming recessions, but this time it could be different. And the reason I say that is because you have a Fed that's provided amazing amount of accommodation policy during the COVID crisis. So you have a Fed that was doing a lot of purchasing of bonds. So it's almost artificial. So the 2s 10s being a predictor this time, it might not be the best predictor. We see a lot of context for the three month tenure as being a predictor. And if you look at that curve, that's actually steepening, which could tell you that short term, the market's expecting growth. So this is a very interesting time for fixed income. And I think one thing you have to look at is you look at the yield curve and that tells a picture but then if you look at corporate credit, you see continuing demand for corporate credit. You see issuers coming to market in droves. I mean, we had an anticipation that there would be new issuings for investment grade corporate credit about 135 billion for March. We had 235 billion for March. So these issuers are taking advantage as much as they can before rates really start moving higher. And they're coming to market and doing money grab really and trying to raise cash. But the interesting part is investors are lining up to buy this corporate debt. So they're taking on corporate debt, they're choosing corporate debt over treasuries and that's kind of been our messaging for the year as well. I think it's very interesting to see that the demand continues. And now that you see where yields are whether it be corporate credit, or even now treasuries, if you're looking at a two year note at 2.44%, that's starting to look pretty attractive to a lot of players out there who don't wanna hold cash. I also think that if you look at corporate credit, average yields there are over 3.3%. So also looks attractive. So you're seeing more foreign participants come into the market. If I wanted to extrapolate that, I wanna bring Pat Grady into the conversation here, because we've been talking about valuations and corporate credit not looking attractive especially for investment grade for a while. Now they're starting to look attractive. What's your take pack on the mini market and then seeing any differences that we're seeing this year?

Thanks, Rajeev and good morning. It's been quite a dramatic change in the muni market for the past nine months, especially for an asset class known for its stability and calm. So for the better part of 21, munis were rich compared to treasuries and corporates. And we measure that by the muni ratio to treasury. So last year, the muni five year ratio got as low as 57%. Typically, that relationship is around 80% historically, but despite that low historic ratio, we did see money flowing into mutual funds, roughly 2 billion per week, we're coming into the mutual fund space. So we had low absolute rates. We had low ratios and then strong flows into the market. Fast forward nine months to today, and with the help of the Fed we've now had munis, back to fair value. The five year ratio is now above 83%. The AAA five year absolute rate went from 50 basis points to now, well over 2%. And then now we're seeing outflows. So a complete reversal. We're now seeing $2 billion per week move out of the mutual fund space. So again, complete 180 from last year. So we see munis now looking like fair value but there's no magic number where we'll see a point where money starts flowing back into munis. You look back to the onset of the pandemic back in April of 2020, we saw ratio spike as high as 300% of treasuries. We had massive outflows roughly 17 billion in one week alone, so a complete reversal. But we're certainly glad to see the first quarter behind us. It was the worst quarter in muni performance in over 40 years down over 6% but as Rajeev and Steve mentioned, there's really nowhere to hide, S&P down over 5%, treasuries down over 5.6%, and investment grade corporates down roughly 8%. So we're just looking for the cleanest, dirty shirt in this market. But with this dramatic move, there comes a potential for opportunities for those investors with some money to put to work and this market could use this, certainly as a better entry point.

So Pat given that a lot of our clients are invested in municipal bonds, it's great to have you on the call with us today. Are there any final thoughts or interesting comments you'd like to leave with in terms of a summary comment?

Well, thanks, Brian. The biggest thing is munis are still tax exempt. They're still high quality with low default and credit risk. And most importantly, they're back to fair value.

Fantastic. Well, Steve, Rajeev and Pat, thanks for providing your insights. We always appreciate it. Well, thanks to our listeners for joining us today and be sure to subscribe to the "Key Wealth Matters" podcast through your favorite podcast app. As always, past performance is no guarantee of future results. And we know your financial situation is personal to you. So reach out to your relationship manager, portfolio strategist or advisor for more information, and we'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you achieve your financial success.

The key wealth matters podcast is produced by the Key Wealth Institute. The Key Wealth Institute is comprised of a collection of financial professionals representing key entities including Key Private Bank, KeyBank Institutional Advisors and Key Investment Services. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. This material is presented for informational purposes only and should not be construed as individual tax or financial advice. Bank and trust products are offered by KeyBank National Association, Member FDIC and Equal Housing Lender, Key Private Bank and KeyBank Institutional Advisors are part of KeyBank. Investment products, brokerage and investment advisory services are offered through Key Investment Services LLC or KIS. Member in FINRA SIPC and SEC registered investment advisor. Insurance products are offered through KeyCorp Insurance Agency, USA. or KIA. KIS and KIA are affiliated with KeyBank. Investment and insurance products are not FDIC insured, not bank guaranteed, may lose value, not a deposit, not insured by any federal or state government agency. KeyBank and its affiliates do not provide tax or legal advice. Individuals should consult their personal tax advisor before making any tax related investment decisions. This content is copyrighted by KeyCorp 2021.

March 25th, 2021

Welcome to the "Key Wealth Matters Podcast", a series of candid conversations with leading experts about how individuals and organizations can grow and protect their finances, tailored around current events and trends. Here's your host for today's podcast, Brian Pietrangelo.

Welcome to the "Key Wealth Matters" weekly podcast where we casually ramble on about important topics including the markets, the economy, human ingenuity and almost anything under the sun, giving you the keys to unlock the mysteries of the markets and investing. Today is Friday, March 25th, 2022. I'm Brian Pietrangelo. And with me today, I'd like to introduce our triumvirate of investing experts here to share their wisdom with us. Steve Hoedt, head of equities, Rajeev Sharma, head of fixed income, and Don Saverno, senior lead research analyst focused on international markets. As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our Wealth Institute on many different subjects and especially our key questions article series, addressing a relevant topic for investing each Wednesday. So it's been a fairly positive week for the stock market thus far. So we'll start with a light economic update for the week and then we'll move on to perspectives on the market. So first, leading economic indicators from late last week were still positive for February. Durable goods this week were a little soft for February. And again, note that both these ratings were prior to to some of the downstream effects of the invasion into Ukraine. So we'll look at those numbers as they come in through March. PMI indices for manufacturing and services still were expanding, and unemployment claims on Thursday were at a 52 year low. So the employment market continues to be strong. With those backdrop, Steve, what do you think that means for the perspectives of the markets? How does that translate?

Brian, you know, this week has really been a interesting one from the perspective of we've seen the market rally right up to what I think myself and many others have looked at as important technical resistance between 4550 and 4600. We're heading almost up to the 40 year trend line for the downtrend in the 10 year. So we're reaching some really important points on the chart right now. And it's coming right as we're getting this situation with, you've got obviously the Russia Ukraine situation which is causing a commodity spike. You've got the Fed embarking on a aggressive tightening cycle for the first time in a generation. And from a shorter term perspective, we're right heading into an earning season that could be very in terms of telling us what the market thinks all these things are gonna impact, or actually how all these things are gonna impact companies that make up the market. So, you know, it's been really a week of a lot of cross currents. You know, I'm curious about what Rajeev's perspective is on this spike that we see continuing in the 10 year. You know, it really does concern me that when I look at a chart that goes back to 1980, there have been four times that we've challenged this downtrend line since then. And all of those resulted in significant corrections to the stock market. So it's, you know, Rajeev, what do you think, where are we really headed with this? I mean, the momentum right now looks relentless.

I agree, Steve. I think the fixed income markets are finally taking the Federal Reserve at its word. And because the Fed is really doubling down on their messaging. We saw a Fed that was, you know, as you know, Steve, they've been talking about transitory inflation all of last year. And then all of a sudden they pivoted and now they're really doubling down on it. And they're saying whatever it takes we're gonna bring inflation under control. We saw the FRMC last week, they talked about 25 basis points. They did it, they did the hike of 25 basis points, that's behind us. But this week, Fed chair Powell again, aggressively focused on monetary policy to control inflation. And with that he's not putting 50 base points off the table. So the next meeting, you could see a 50 base point hike and the market really reacted to that. We saw the yield curve, as you mentioned, completely jump across the curve, 10 years getting to levels that we haven't seen in a very long time. And you know, many investors are readjusting their year end targets for the 10 year now. I mean, you saw a lot of people talk about 2% by the end of the year, then 2.25%. And now we're beyond that. So you're talking 2.50%, 2.75%--

Do I hear 2.50%, 2.75%, do I hear 3%?

Yeah, exactly. Exactly, there's no limit. There's really no limit of where the mark to market of your year end adjustments of 10 year is going. And I think really this hawkish stance by the Fed is really gonna resonate through the market. We see yields on treasuries. They're jumping, yields on the two year have surged the biggest quarterly increase in almost four decades. The difference between a five year and a 30 year right now is the narrowest it's been since 2007. We're just at 10 basis points between a five and a 30 year, so why would you go out further in the curve? Why not stay on the five year and stay short? That's really what we've been telling investors is to stay short in this type of environment. And if you just look at the global aggregate index, it's the worst start of a year that we've had, I mean, it's down 6.5%, 5% this year already. So it's ugly right now in fixed income. The only thing I can say is with yields where they are, some investors are using this as a, you know, this is a good time to get involved. And if you have a two year at over 2%, why hold cash? Why not just plan?

Yeah, you know, the thing that I keep looking at though when I look at this, you know, the down trend line for the 10 year is at 285, and, you know, we've been below this downtrend now for 40 years. Like nobody, if we were to reverse that and to break that to the upside, I mean, we would be in a new world, that's a 40 year trend change. And nobody in our investing generation has any real inkling of what happens when you don't have a secular downtrend in rates. I mean, everybody has been trained on this. And it's to me an open question of what the implications are for that. I'll give you one example. I mean, the typical 60-40 portfolio has worked because we've had that down trend in rates as a backdrop. And, you know, this year is a perfect example, you alluded to it, the draw down for global fixed income is the worst that the Global Barclays Aggregate's ever had. Now that index doesn't go back as far as the US Ag, but still, you know, you're looking at the potential death of the 60-40 portfolio. We've got Don Saverno on here with us. Don, I mean, you know, when you think about things from a international perspective, you know, are you seeing things that ask you about that or make you think about the death of the 60-40 portfolio or the, you know, problems with international allocations? I mean, what are your thoughts.

Actually, yes I do Steve, and hello everyone. So I mostly, it makes me think about the Eurozone right now. International allocations, they've been a poor allocation decision for almost a decade now as a part of that 60-40 diversification type portfolio. We're still seeing kind of lower rates in the Eurozone, but even there, we're looking at rate rises as soon as maybe Q4 of this year. They're a little bit late because of some kind of energy issues that they're having right now. You know, came into the year, you know, vaccinations increasing, easing restrictions, higher savings rate in the European Union. It looked like it actually had a chance to begin kind of outperforming. But, you know, with the Russian Ukraine conflict, all those are off the table now.

Can I just say, it always seems like Europe is poised for out performance and then there's something that happens.

Yeah, yeah. It's always, they are the bad luck. It's a comic strip. It's the Charlie Brown, it's a good grief moment. And we're kind of seeing the same thing in EM in general now as well. Here's a dirty little secret, manufacturing PMIs in developed markets over the past decade have actually been higher than manufacturing PMIs in emerging markets. We've been kind of trained over the past decade to think that global growth is going to be driven by emerging economies and things like that. And that's just not the case right now.

Don, you know, one of the things that caught my eye this week was this talk of a lockdown again in China as COVID cases there spiked. I mean, it seems like the rest of the world has gotten over COVID as a potentially market moving issue, but China still is pursuing this zero COVID policy in a time where we've got transmissible if less virulent variants. You know, I I'm concerned that they could do something in terms of trying to lock down their economy that could have knock on implications for the rest of the world in terms of economic growth expectations for the the middle of the year and beyond. What are you hearing about what's going on in China right now?

Sure, sure. So China is actually slightly backing off of their COVID zero policies. In the past over the past two years, if there are, you know, if there were 10 cases, 20 cases in an area everything would get shut down. But we're right now with the BA.2 variants, so kind of the extension of Omicron, what we're seeing is there's a lot of cases in Shenzhen right now, and Shenzhen is a big industrial, there's a lot of manufacturing, there are a lot of factories in Shenzhen. And just yesterday, or I'm sorry, earlier this week, Chinese government announced that they're allowing the Shenzhen factories to reopen. They're not keeping them closed. So we're starting to see a shift away from that COVID zero policy. And China's a little bit different than the rest of the world right now, where we're seeing rate rises. And we're seeing kind of tightening around the rest of the world. We're actually seeing easing in China. And we just had a huge policy shift over the past week where China is actually being more advantageous to the markets in general. So they're cutting, you know, provisions for stock settlement. They're easing lending standards. You know, they're taking measures to weaken the yuan. But they're trying to keep their economy open as much as possible while not appearing to lose face by just coming out and saying directly that they're stopping the COVID zero policy.

You make a good point too about the loosening. And that's one of those things that I think that a lot of people have picked up on over the last say 10 plus years, coming out of the global financial crisis is that every time we've started to see financial conditions in one part of the world tighten, whether it's been in the US or whether it's been in Europe there's always been a countervailing for someplace else in the world that was loosening at the same time. So we've never had a synchronized tightening of conditions across the globe at the same time. And I think that this loosening by China right now is something that we all should pay attention to cause while the Fed is tightening and conditions in Europe are clearly tightening, the Chinese loosening should help to act as a bit of a pressure valve from that tightening cycle here domestically. At least it seems that way to me.

It could be. And just something that goes along with that is China also came out and said that they do find that international listings for their securities is a positive, and that they are going to pursue kind of more foreign listings in the future. It kind of helps kind of globalization trends that are really going the wrong way. You know, we're entering this phase where, you know, globalization 2.0 is really about getting back to your own hemisphere of influence or something like that. So just China being open enough to say that foreign listings are important, could help of alleviate that trend for a little while in the short term.

I was just gonna throw it back to Rajeev real quick, Steve, on that topic of tightening. There's been an increased percentage probability of a 50 basis point hike in May and possibly the month after that. Your quick thoughts on that, then we'll move back to Steve and Don.

Oh, I think the Fed has been very aggressive. I think in their telegraphing of messaging of, you know, how aggressive they need to be, I think 50 basis points is not off the table at all coming May if we don't see any type of slowdown in inflation. And I don't expect that to happen before May. So we could see that. What my eyes are really on is the Fed minutes that we're gonna see coming up. And in those Fed minutes, you're gonna really see, I believe, a Fed membership that's aggressively talking about inflation and what needs to be done. Powell has telegraphed a faster pace of QT. We could see quantitative tightening later this year. We could see some, I know they're gonna be talking about that in the upcoming weeks. We could see some kind of information about how they want to, you know, reduce their balance sheet, reduce the Fed's balance sheet. That would be very interesting, I think that would really impact the market. If you think about the Federal Reserve's plan to shrink its $9 trillion balance sheet, whatever they plan to do, and if it's in the second half of the year, assume the impact of that to be one rate hike. So if we're talking about six more rate hikes this year just reducing the balance sheet itself would be another one. So you're talking seven. So, and the market sees that.

One quick question for you. Something that caught my eye this week and I really don't really know what to make of it is, I know we we've talked an awful lot in these calls about how credit has really become the key tell for the market since the global financial crisis. And you know, we've watched both high yield and IG CDX's move higher. Although this week it seems to me there's been a divergence in the CDX with high yield continuing to improve or at least be, you know, a little bit tighter than it's been. But we saw some weakness in investment grade CDX relative to high yield. I mean, has there been anything, you know, kind of idiosyncratic within the IG market this week that's causing this?

That's a great question, Steve. I think what's really happened here is that new issuance has not slowed down in investment grade, and it's almost a money grab, the last second money grab before rates really start ticking up, which they have, that issuers are saying, you know, let's get in there now because rates are gonna go higher. Let's issue new bonds. They're adding concessions that we haven't seen all of last year. So some of this new issuance that's coming out, it's actually looking really attractive compared to secondary issuance out there. And so investors are getting excited. These deals are getting done. They're getting done at very attractive levels for both the issuer and the investor. But what's happening is it's repricing the secondary market. So now you have your existing issues, they're going wider. And I think CDX is getting impacted by the new issuance that's coming out.

Great, thanks for the comments Rajeev. Steve, one final question for you and then one for Don. Steve, what do you think about the current rally in the last two weeks in the stock market? What would you like our listeners to know? What are your thoughts and where do you see us going?

Well, it's really taken me by a surprise, I won't lie. And you know, we still have not seen a lot of the typical indicators that would confirm that this rally is durable. So, but at the end of the day, you know, price trumps all. And I think that if we get a move through that 4550 to 4600, then you know, then it's game on again for risk assets. I think it's gonna be really telling us, we head into earning season, this is an important earning season. We always say that it is, but this time even more so. We want to continue to see those earnings numbers go up and to the right. And I just don't know that the guidance is gonna meet people's expectations. We'll have to see. We're at a key juncture on the chart though. There's no doubt about that. Feeling a lot better than we were a couple weeks ago for sure, but I still don't think we're outta the woods, to be honest with you.

Great, thanks Steve. And Don for you, just on China US Russia relations any thoughts you want share just in closing on what you think that might mean for us going forward?

Sure, sure. And actually in the US European Union talks yesterday, it came out that there's a warning on sanctions evasion and that's really directed at China. So basically the US is warning China that they're not to increase their help trying to make up the losses that Russia is incurring in basically the global blockade. That China can continue its current trading, but not anything additional. And I think it's just, it's continuing to fracture the relationship between the US and the west and with China. I mean, this is something that can kind of start a bipolarization of the world, that there's going to be the east versus the west. This is maybe the beginning of that as China becomes more and more powerful. But this is something that is years and years and a decade in the future. But it's going to be very interesting over the next six months to a year on how US China relations evolve based on what's happening in Eastern Europe right now. It has the possibility of becoming very bad very quickly but sometimes politics can alleviate the pressures and keep your enemies closer over time.

Steve, Rajeev, and Don, thanks for providing your insights. We appreciate it. And thanks to our listeners for joining us today. And be sure to subscribe to the "Key Wealth Matters" podcast through your favorite podcast app. As always, past performance is no guarantee of future results and we know your financial situation is personal to you. So reach out to your relationship manager, portfolio strategist, or advisor for more information. And we'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you achieve your financial success.

The "Key Wealth Matters" podcast is produced by the Key Wealth Institute. The Key Wealth Institute is comprised of a collection of financial professionals representing Key entities including Key Private Bank, KeyBank Institutional Advisors, and Key Investment Services. Any opinions, projections, or recommendations contained herein are subject to change without notice and are not intended to be individual investment advice. This material is presented for informational purposes only and should not be construed as individual tax or financial advice. Bank and trust products are offered by KeyBank National Association, member FDIC, and equal housing lender. Key Private Bank and KeyBank institutional advisors are part of KeyBank. Investment products, brokerage, and investment advisory services are offered through Key Investment Services LLC or KIS, a member in FINRA, SIPC, and SEC registered investment advisor. Insurance products are offered through KeyCorp Insurance Agency USA or KIA. KIS and KIA are affiliated with KeyBank. Investment and insurance products are not FDIC insured, not bank guaranteed, may lose value, not a deposit, not insured by any Federal or state government agency. KeyBank and its affiliates do not provide tax or legal advice. Individuals should consult their personal tax advisor before making any tax related investment decisions. This content is copyrighted by KeyCorp 2021.

March 18th, 2021

Welcome to the "Key Wealth Matters Podcast," a series of candid conversations with leading experts about how individuals and organizations can grow and protect their finances, tailored around current events and trends. Here's your host for today's podcast, Brian Pietrangelo.

Welcome to the "Key Wealth Matters" weekly podcast, where we casually ramble on about important topics, including the markets, the economy, human ingenuity and almost anything under the sun, giving you the keys to unlock the mysteries of the markets and investing. Today is Friday, March 18th, 2022. I am Brian Pietrangelo, and with me today, I'd like to introduce our starting line up of investment experts. Each has enough skills, wisdom and experience to take our clients deep into the tournament of investing, and also address the madness of the markets. We have George Mateyo, our Chief Investment Officer, Steve Hoedt, Head of Equities, and Rajeev Sharma, Head of Fixed Income. As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our Wealth Institute on many different subjects, and especially, our Key Questions article series, addressing a relevant topic for investors each Wednesday. So, it's been an interesting week. The dominant theme of our conversation today will obviously be about the Fed meeting from March. So, we'll cover that soon. We've also got a couple updates on the market, as well as some commodities thoughts from Steve. Looking at overall economic data that came out for the week, still fairly strong from an economic perspective, retail sales only up about 0.3% month-over-month, but the key is it's still up 15% year-over-year, as well as industrial production up 24% year-over-year. Lastly, unemployment claims still stayed low. The initial amount for the prior week was 214,000 again, significantly below the pre-pandemic levels. So, still healthy growth there in the economy. And with that, we'll turn to you, George, with some initial thoughts on the Fed and then move to Rajeev.

Yeah, you're right, Brian, to signal some of the continued strength in the economy. It really does suggest to me in the near too many way that a recession is, the risk of recession is rather low. The word recession has been bandied about more recently, and probably something we have to pay attention to later this year or next year's outlook. But, for now, when you see housing starts, jobless claims, retail sales, you mentioned was kind of tepid on the month, but it's still really strong year-over-year. And, you know, some of that is just certainly price activity. Well, we're paying more for things, but the overall demand picture is still quite hot in the consumer segment. Housing's going along pretty strong, industrial production, you know, a lot of strength manufacturing wise, as well. And we still have, you know, the Fed printing money and money supply is still increasing. So the overall backdrop, at least from the economic perspective is certainly pretty robust. We'll have to pay attention to what happens later this year, I think, but it does suggest that inflation is gonna be a bit stickier, as we've talked about. And, the Fed's certainly got engaged this week and has been trying to snip that out. So I think, Rajeev, turn to you, first of all. You know, it was an important week. The Fed not only started by raising interest rates for the first time in four years, but they suggested inflation's gonna be a bit hotter than expected. So, what'd you make of the Fed Report this week, Rajeev?

Yeah, you make a very good point there, George. I mean the Fed Report came out. All eyes were on the FOMC. I think pretty much everyone expected the 25 basis point hike. We got that, but I would view the FOMC meeting as a hawkish statement. The statement that came out, what, the reason, though, it's hawkish is because they came out and they said that we estimate seven total rate hikes for 2022. So, this is a departure from where they were last time they had a Fed meeting, and, I think it kind of adds to the sentiment without the Fed actually saying that they were behind the curve. By signaling seven rate hikes for the year, it shows the market that they were behind the curve, and they're gonna do everything it takes to control inflation. 25 basis points might not get them there, but every meeting's gonna be live now. And with every live meeting, you have the chance that maybe a data dependent Fed, they may raise 50 basis points if they need to next time. But this is going to really impact the market. It did. We saw the impact on the market. The yield curve immediately jumped after that. It flattened further. We've seen a flattened yield curve based on the Fed. I think what another interesting point about the FOMC was the new dots. They signal the intention of raising rates to 2.8% in 2023 and 2024. And if you think the neutral rate is 2.4%, so they're gonna be above that for a while. They expect inflation to remain hot, and that target that they have of 2%, you know, that, it's well beyond that, actually, if you look at their summary economic predictions.

Yeah, I think the market seems to, you know, anticipate or probably correctly anticipated the fact that they'd be raising rates pretty actively this year, you know, six or seven times. I know it was, you know, a few months ago that it was clearly seven times. We had the Ukraine situation. So, people thought the Fed might be a little less aggressive and took down those numbers only to raise it back up again. And now the Fed's kind of met them there. The 2023 forecast for interest rates was pretty interesting to me that the market's not buying it. So, the market is looking maybe for some slow down at the end of this year or the next year. But I also thought that they have this interesting forecast for unemployment where they still think unemployment is gonna be low. So they've got a more aggressive forecast for interest rates and a more aggressive forecast for what they need to do to try and take inflation down. But they also think unemployment's gonna stay pretty low. And that doesn't seem like that's gonna be, that's a circle I can't square right now. And how to reconcile that disconnect.

 I mean

Is the Fed right to think that employment's not gonna gotta move? And they won't actually harm the economy to try and take inflation down?

I think the Fed is really trying to soft landing for the economy. I mean, they're trying to thread a needle here. We haven't seen that since the early 1990s. If you tighten too slowly, then you risk inflation going out of control. If you be more aggressive right now with tightening, then you could really tip the economy into a recession. I think they're really trying to really thread the needle here. If you heard Fed chair Powell's presser, he mentioned that the term that the economy can handle it can handle it several times in that presser. Everybody, there were a lot of questions asked to him about what about unemployment. He really feels that unemployment is gonna be steady. We're not gonna have any increases in that level. And, I think that it's kind of wishful thinking because there is going to be some tensions on the economy if you really go aggressive. I mean, seven rate hikes in this year, we haven't seen that kind of rate hiking cycle in a long time. I think the last time we saw that, it actually took two years to get seven rate hikes. So, it's pretty aggressive right now to try to control inflation. And there's no guarantees that they'll be able to do that. I do think there's a sentiment out there that they'll, there's data dependent, so you get to the summer months, see where you are, but there's a lot of moving parts here. And I think that the Fed focusing solely on inflation, I think something else could give at that point.

I mean, the thing that really jumped out to me during the trading this week was that if you go inside the numbers and start to dig into some of the esoteric markets, so, namely, the swaps markets, forward swaps, the market is actually pricing in a policy error right now. Because if you look at the swaps markets, the swaps markets are telling you that, by the end of 2023, the Fed will have reduced the Fed Funds Rate by 50 basis points. And what that means is that you're looking at the market already anticipating that the hiking cycle that they're gonna have now is gonna fail. And they're gonna be cutting in 2023 by the end of the year. So it, to me, it's a fascinating dynamic right now when you look at the, both the rate hikes that people are pricing in upfront, and then the market pricing in the fact that it's likely gonna tank things and they're gonna have to be cutting again by the end of next year.

Well, that's what I was saying, Steve, by the Fed and the market not buying what the Fed was saying, right? So, a policy error is one way to put it, and that could be something to think about for sure. Now, in the meantime, we've seen rates move up. We've seen mortgage rates move up. The housing market, though, has stayed really strong. I mean, what do you see right now, Steve, in the housing sector in particular? I mean, it doesn't seem like it's cooling off to me.

Doesn't seem that way right now, George. I mean, it, you're, even though you're looking at, you know, a couple hundred dollars on the average mortgage higher because of rates, right now, we continue to see demand booming. We'll see if the fact that there's other pressures on family budgets because of higher gas prices, higher food prices, potentially, as we move through the course of the year, if that starts to put a damper on things. But as we head into the spring selling season and buying season for homes, clearly, right now it's a market that has remained hot, even with mortgage rates up 100 basis points year-over-year.

Yeah, so, I think that the stagflation narrative that we talked about on the prior call is something we probably wanna be thinking about. We can't dismiss it, but it's, to me in the near term, anyway, it still seems like we're kind an inflationary boom, right? Where just, there's a lot of demand that's almost price insensitive, where people who want to pay more for goods, almost irrespective of price. Not totally, of course. There are certain people that are not in that situation, but we see prices moving up, despite the fact that it's more expensive to finance a house or a car, more expensive to buy ordinary goods, people are kind of paying that, right? So, you know, you've seen that inflationary boom pick up. I've also seen, Steve, an inflation in earnings. So, earnings growth continues to kind of trend higher. The overall multiple of the market is trending lower, of course, but it seems like earnings growth has also accelerated a bit to the back half of this year.

We saw some positive earnings revisions here in the last week or two, George, and we have seen that number inflect a bit higher. It'll be interesting to watch as we move into first quarter reporting season in the month of April if we continue to see that trend as we go higher here, you know. I think a lot of people thought that the first quarter numbers were gonna see revisions lower, not higher. So, it caught me a bit by surprise. When you take a look at the multiple though, the multiple has really been the thing that has told the tale for the market in terms of performance year to date, 'cause multiple compression has been the key driving factor, not underlying earnings. The thing for people to remember with earnings, though, is that as long as earnings continue to trend up and to the right, it cuts off the fat tail for the market to the downside. And by that, I mean, it really takes that that bear market minus 35 minus 50 type of potential draw down off the table. So, it doesn't mean that the market can't have a 15 to 20% draw down during the course of a year. And, you know, quite frankly, that would be fairly normal, given what we've seen historically, but it cuts that potential for there to be a really bad outcome for equity investors. It still takes that off the table. So, we continue to watch that like a hawk. But for now, up and to the right still is what we see.

Yeah, 2004 was kind of a similar environment. I know, I'm sorry, not 2004, 1994 was a similar environment where the Fed was pretty aggressive. We were kind of coming out of a recovery. That was again, kind of on the back of the Gulf War, of course, in early '90s. '92, '93 were pretty decent years, '93 in particular, but '94 was kind of a tough year, right? Where I think as you might recall, Steve and Rajeev, you know, rates were moving higher, earnings were doing quite well, but the market multiple came in. And I think, you know, there's a lot of volatility in that year, but the returns were kind of flat both for stocks and bonds. And, again, we're kind of getting that this year where I think that the stock market is down roughly 7%. So, we've had a lot of volatility, and it probably feels a lot worse. And many of the companies that are most notable and probably recognizable to many people have fared even a lot worse, but the overall bond index, Rajeev, is down what? 5, 6% this year, too. So, you've got stocks down 7, bonds down 5. You know, I think it's just gonna be a really, you know, difficult year overall to make money, unfortunately, but we're kind of digesting a tightening by the Fed at the same time that inflation is lifting earnings and revenues. So, it's gonna be kind of a push, pull, but I don't know, Rajeev. Do you think the Fed is gonna, are they gonna change their mind end the year? Are they gonna kind of wait and see how things play out? What do you think's gonna happen at the end of the year?

I think at the end of the year, they're probably gonna wait and see how things pan out. But, unfortunately, in the history is a lesson for all of us that the Fed generally overshoots and, you know, there could be a policy error. And I think a lot of the people in the market are estimating that there will be a policy error, and the Fed being aggressive right now is kind of catch up. They're going from an area where they didn't think we'd need even three to four rate hikes this year to seven. I think that they're gonna, they're saying they're data dependent, but you have to realize that data moves very quickly. And I think that the FOMC might not be able to control this once they really get on this Fed hiking cycle. I mean, we've seen it in the yield curve itself. I mean, you see the two year US Treasury note yield. It jumped 160 base points over the last six months, and we're starting this Fed tightening cycle at a point where the yield curve is very flat, and we generally don't have it, a hiking cycle when the yield curve is this flat. So, the chances of an inversion on the, on any point of the yield curve, we could see that. We saw sevens and tens invert already, although that's not really a nice gauge for recession, but you're looking at two tens or about 25 basis points between them. Generally, when you're inside 50 basis points on twos, tens, that's considered a danger zone. We're at 25 basis points. It could be a strong signal for recession in 6 to 18 months, once it inverts, consistently inverts, but that's an important point to look at. And I think three months and 10 years also, a very important part to look at. That has been steepening, but right after the FOMC meeting, we saw flattening of that, as well, just very quickly, but then, the next day, it did steepen. So, I think the Fed is looking at the yield curve. Investors are looking at the yield curve. They're looking for any signal that something will break, and once it does, I think it's gonna be too far.

Yeah, so, just to reset kind of some terms and define some things. When you talk about yield curves, Rajeev, of course, you're talking about the difference between short term rates and long term interest rates. And typically, when things are kind of in a normal environment, long term interest rates or long term bonds have a higher interest rate than a short term bond does, right? Because the investor needs more compensation to take more risk. And as you pointed out, when you start to see the difference between the long term interest rates, long term bonds and short term bonds, start to converge, you have that kind of flattening of the curves, they call it, right?

Right.

The difference between short term bonds and long term bonds kind of normalizes and converges, and that, as you pointed out, it's not, you know, there's a lot of debate on this. It's that, what that means for our recession, but it does suggest that maybe the odds of recession certainly increase going out, as you pointed out, 6 to 12, 18 months. So, it's not the event itself, but it's a process, but it does suggest that things start to slow down a little bit and the odds of recession increase. But, we also, we, you're right to point out that the Fed is doing this at a time where we've already started to see that flattening of the curve. We also have, Steve, a lot of inflationary pressures from the commodity sector. And, of course, the Ukraine situation really propelled that even further. But, you've got a great article out this week that talks about commodities. So, what do you think we should read through with respect to higher commodity prices in general?

Yeah, I mean, I know we've had a week where commodity prices pulled back, and that's to be expected given the parabolic moves that we saw in the week or two prior to that in reaction to the Ukraine situation very clearly. However, what I think the main takeaway is that we're likely headed in the higher direction for a longer period of time as the world readjusts to the situation with Ukrainian and Russian supply coming off the markets in a number of different places. Obviously, crude oil is the one everybody focuses on because of Russia being one of the largest exporters in the world. And, clearly we think that there, that we're gonna seek continued volatility there. We're not at the point where we see demand destruction yet. Frankly, you gotta be above $150 to see that in the current environment, but, clearly, we're gonna be in an area where we have a lot of volatility. I think the thing that most confirm, most concerns us is the impact on food markets, wheat, knock on impact down the food chain to protein sources and things like this. There are areas in the world which get a ton of their food supply from both Russia and Ukraine, the Middle Eastern countries, in particular, could be tinder boxes as we move into the, over the course of the year, if food prices really remain significantly higher. So, it's something to pay attention to. While we have had things come off the boil a little bit this week, believe me, this is not something that's gonna go away in terms of a story. It's likely to be with us through the course of the year, George.

Yeah, I suspect you're right. I think there'll be a lot of stories that unfold this year. And I think that again, it's important to recognize that volatility cuts both ways, and it's important to remain diversified and really focused on the long term, given how much volatility is likely to persist in the near term, for sure. So, thanks for that commentary, Steve.

Well, thanks gentlemen. Taking everything into consideration, some of the listeners like simplicity around our thoughts, and can we put that into a number with where we think a potential recession or policy error sits today based on what we think overall with everything we just discussed today? Is it 15%? Is it 25%? Where do we think? And I know that's dangerous, to give a number, but it's a simplicity factor that helps clients understand. Where do we think we're at right now?

Oh, that is a tough number for sure, and it changes a lot, Brian, but the odds of recession this year? Is that your question?

Yeah, into next year, 6 to 12 months.

Yeah, so, 12 months, hence. I don't know. What do you think, guys? Maybe 25%? 30%? I don't think I'd put it, I, it's not a majority, so I wouldn't put it higher than 50%, but one in three would probably be the worst case, the highest I would go, I should say. But, yeah, I think it's probably, it feels like 25%, might be one in four to me. Rajeev, what do you think?

I also would think 25%, no more than that.

And, Steve, what do you think?

I agree, 20, 25%. You know, it's interesting. We were, I was on a call earlier this week where they talked with a bunch of people like us and surveyed us. And I think the number that people looked at was 20 to 25%. And, I believe your super forecasters, George, were significantly lower than that. I think they were at like 10 or 15%, if I remember correctly. So, we'll see if those folks are right or whether market participants are right. But it definitely does feel like we've had a bit of an increase in terms of the potential for a recession, but we're nowhere near where people think it's a certainty.

Yeah, I think that's right. And even if we say it's, you know, 25%, Brian, that means that there's a 75% chance that we can avoid one, right? So, let's look at that from the half full perspective, as well.

Excellent point. And I know it's always tricky to give a number like that. So, we take it with a grain of salt. So, thanks for entertaining the question, all three of you. George, Steve and Rajeev, thanks for providing your insights. We appreciate it. And thanks to our listeners for joining us today, and be sure to subscribe to the "Key Wealth Matters Podcast" through your favorite podcast app. As always, past performance is no guarantee of future results. And we know your financial situation is personal to you. So, reach out to your relationship manager, portfolio strategist, or advisor for more information, and we'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you achieve your financial success.

The "Key Wealth Matters Podcast" is produced by the Key Wealth Institute. The Key Wealth Institute is comprised of a collection of financial professionals, representing Key entities, including Key Private Bank, Key Bank Institutional Advisors, and Key Investment Services. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. This material is presented for informational purposes only, and should not be construed as individual tax or financial advice. Bank and trust products are offered by Key Bank National Association, member FDIC, an equal housing lender. Key Private Bank and Key Bank Institutional Advisors are part of Key Bank. Investment products, brokerage and investment advisory services are offered through Key Investment Services, LLC, or KIS, member FINRA, SIPC and SEC registered investment advisor. Insurance products are offered through KeyCorp Insurance Agency, USA or KIA. KIS and KIA are affiliated with Key Bank. Investment and insurance products are not FDIC insured, not bank guaranteed, may lose value, not a deposit, not insured by any federal or state government agency. KeyBank and its affiliates do not provide tax or legal advice. Individuals should consult their personal tax advisor before making any tax related investment decisions. This content is copyrighted by KeyCorp 2021.

March 11th, 2022

Welcome to the Key Wealth Matters Podcast, a series of candid conversations with leading experts about how individuals and organizations can grow and protect their finances tailored around current events and trends. Here's your host for today's podcast, Brian Pietrangelo.

Welcome to the Key Wealth Matters weekly podcast where we casually ramble on about important topics including the markets, the economy, human ingenuity and almost anything under the sun giving you the keys to unlock the mysteries of the markets and investing. Today is Friday, March 11th, 2022. I am Brian Pietrangelo, and with me today, I'd like to introduce our panel of investing experts allowing us to take advantage of their forward thinking approach. George Mateyo, our chief investment officer, Steve Hoedt, our head of equities, and Cindy Honcharenko, senior fixed income portfolio manager. As a reminder, a lot of great content is available on Key.com/wealthinsights including updates from our Wealth Institute on many different subjects and especially our Key Questions article series addressing a relevant topic for investors each Wednesday. So, it's been an up and down week, not only with oil prices, the stock market, also with yields. So, we'll cover a couple of those topics with our dialogue today starting off with what the economic updates were for the week. Basically only one topic to discuss. CPI print that came out yesterday. 7.9% year over year, up from 7.5% last month as well as a number of indicators have popped from a month to month increase as well. Main drivers, gas, shelter, food, so on and so forth. Core, excluding food and energy, up 6.4%. Again, we're talking about numbers that are going back to the early 1980s. So, from that perspective, we'll cover inflation with our panel, also talk about Ukraine and Russia, look at the Fed, and also talk about some movements in the stock market. So, with that in mind, George, how are you thoughts on what's happening in inflation and the overall economy?

Yeah, good morning Brian. It's been quite interesting a week for sure. It always seems to be an issue. It's one of these times I think we're living right now that the pace of change is just accelerating almost minute by minute, but I think it's been a pretty interesting week from the perspective that we started this week with looking at our screens and reacting to some really horrific images. That again, the crisis in Ukraine is just a terrible, terrible tragedy. And, it seems to be getting worse, not better. And, Monday was a particularly grim day, it seemed like. The market also really, I think, had a tough time processing that on Monday in the sense that over the weekend, the price of oil shot up to, you know, well over $100 a barrel, which I think was kind of a threshold that people were looking at as maybe a sign of risk off. And, that certainly took the market, I think, back quite a bit, and the market fell pretty hard on Monday, but thereafter it did rally. It seemed like it kind of stabilized a little bit. So, I think there's still a lot of things to be concerned with Ukraine. And, I'm not trying to dismiss the terrible tragedy that it is, but the market now seems to have kind of shifted its focus a little bit away from Ukraine, perhaps, and is more focused on things here at home. And, now we have our Fed meeting coming out next week. As you mentioned, Brian, there's inflation that's really out there. And, I think it's really kind of put that into context in terms of where we're at in the business cycle as well. But, let me just, before we talk about inflation, maybe I could pull Steve into the conversation and talk about his reaction to the market activity this week. Steve, what do you think of this week's market action?

Yeah, George. You know, when you look at it, the market really has just gone down and sideways for the most part this week after the rough day on Monday. And, you know, the market has adjusted to the new reality which is, you know, news flow that on a daily basis from Eastern Europe is not good. And, the economic impacts of the sanctions regime, whether it's on Russia directly, or potentially, you know, knock on impacts of additional things with China or supply chains, what have you for commodities. The market's adjusted to this new reality. So, I think that we're gonna see as time moves on that the further we get away from the date of the invasion, the less important to the market the news flow out of Ukraine's gonna be. I'm sure we're gonna continue to see it. I just don't think it's gonna be market impacting. And really, the focus now is shifting back to what is the Fed gonna do about inflation and given the fact that we're gonna have an even higher impulse from commodity price inflation or increases on these inflation numbers as we move through the next say three to six months for sure. It behooves the question, you know, is the Fed gonna be more aggressive with quantitative tightening and with their tightening than what maybe they had planned? And, given the fact that we look at this commodity price impulse or shock is potentially something that could slow growth, you know, do we get into what people would call more of a stagflationary environment? I think that's really what's on the market's mind right now, irrespective of the terrible images that we're seeing on our television screens.

Yeah, so in terms of the CPI, inflation and the Fed, I think it was really telling that as you mentioned earlier, Brian, that inflation rose at a year over year rate of almost eight percent, and my guess is that that number is gonna have to come up when we get the next reader for inflation in March. You know, many of these increases around inflation did not capture the latest spike in oil that I referenced earlier. So, I would suspect that the next time we talk about CPI and inflation, the Consumer Price Index, it'll start with an eight if not even, you know, mid-eights, like eight and a half or something like that. We've been talking about inflation for much of this year and thinking that there were things like higher energy prices, of course, that are really front and center, but home prices are also continue to rise. And, wages are also going up. In fact, I think I saw something from the Atlanta Fed Reserve that has a wage tracker and it's closing on a six percent year over year increase. So, that's pretty hot in terms of wage increases as well. So, the thing again, in the CPI report though, the Federal Reserve has a target of around two percent. That's kind of their official target or maybe unofficial target for inflation at around two percent. And, interestingly, if you look at all the components in that CPI Report, about 10% of them, not even quite 10% of the overall components of that report were at or below two percent. So, in other words, not only is inflation accelerating, but it's broadening out. And, I think that really complicates the job even further for the Fed. So, Cindy, you've been following this very closely as well. What was your takeaway from the CPI Report, and what do you think we're gonna hear from the Fed next week?

Well, I agree with you George. It is officially broad. It offered no respite from many of the warring trends that we've all noted. Most centrally, the report just confirmed that the US inflation is taking a more broad-based form like you mentioned. Median CPI category rose .52% month over month. It was just a shade below January's .57% month over month. It was in line with expectations as Brian mentioned, rising to .8% on the headline, .5% on core prices. Headline of CPI inflation picked up 7.9% year over year from 7.5% year over year while core CPI increased 6.4% from six percent. But, if we note that over the last three months, the annualized headline and core CPI inflation rates are actually faster than their year over year gains, 8.4% and 6.8% respectively. So, short term trends are even worse than the year over year trends which doesn't bode very well for expectations of a rapidly slowing towards the Fed's inflation target. Food and energy, George, as you mentioned, those prices surged within the core shelter costs picked up. The rent of shelter was up six percent, fastest monthly gain in 18 years. Again, gains were broadly based with prices increasing for recreation, household furnishings and operations. Vehicle insurance, personal care and airfares also added to the core CPI gain. All in all, it was expected, but it's another ugly inflation report.

So, one thing that's important to note, I think, is that if you look at inflation, Cindy, in the context of earnings, right, what people are actually taking home, the rate of change of people's salaries and wages also increased, but not at the same level of overall inflation. So, on an inflation adjusted basis, people aren't really taking as much of their income home, because they've got to spend more on groceries and gas and other things. It's still elevated, but, you know, it's somewhat concerning that that trend is flipping a little bit. Do you think there's a case for the Fed to actually raise rates by more than 25 basis points next week?

I do. I actually expect in the near term that the surging gasoline prices are gonna further shift the CPI, and that's gonna really push Jay Powell and FOMC's hand. Right now, they're gonna move 25 basis points next week, but Powell in his testimony last week, he did put on the table that 50 basis point moves are there. And, if inflation doesn't come down, they will pull that trigger. And, right now, I'm seeing on the immediate short end of the curve that we've already pricing in in some cases that 50 basis point move, especially in commercial paper. So, I think that the May 4th FOMC meeting, we can definitely see the Fed moving 50 basis points, and I think the market is starting to readjust. As of today, the market's priced in seven solid rate hikes for 2022. Those are 25 basis points apiece, but again, I think after this report and the next CPI reports coming out aren't gonna look an prettier, because of the increase in gasoline prices. That is gonna push the Fed's hand.

So, I'm just curious, you know, when you think about this, the Atlanta Fed's GDP Now forecast has dropped all the way to 50 basis points for the quarter. And, you know, with this impulse from commodity prices, this kind of shock that we've got to the system, frankly, it wouldn't surprise me one bit if over the next month, we saw that GDP Now forecast for the first quarter growth fall into negative territory. So, negative growth, and then, the Fed's gonna be hiking 50 basis points at a time? To me, that just seems like something that is a recipe for problems.

Yeah, I think you're right, 'cause started thinking about that. I mean, we don't think, or at least a couple months ago, when we talked about our outlook for this year, we didn't think a recession was the base case. And, I still think we can avoid one this year, but the outlook for next year gets a lot cloudier to your point, Steve. And so, I'm not going to raise the per session risk too high just yet, but I think it's something we have to be mindful of. What type of sectors or industries do you think are really best positioned in this environment, Steve, from an equity perspective?

Well, we're still looking at energy and metals and mining being the primary beneficiaries of what we've seen. The real problem that the market has been navigating is that as you move into a period of time where growth looks to be slowing, the typical quote unquote late cycle playbook is to rotate toward quality and growth. But, the issue is that quality and growth have been bid up in the last 12 to 18 months as the market rocketed out of the post-COVID period. So, we have multiple compression occurring in those areas where you would typically see market money rotating in terms of defensive stocks. So, that I think is part and parcel of why we've had so much churn in the market here where you've got leadership, clearly with energy, metals and mining, but elsewhere, it's been a real struggle for the market to find its footing, because things that people would typically be buying, they're not buying, because they're under valuation pressure right now.

And, when you say defensive, what kind of sectors or industries are you really most interested?

Typically, you're looking at healthcare, you're looking at more stable tech. You're looking at things like staples. So, staples has had a bid for sure here lately, but healthcare and the more stable portions of technology have not been performing as people would expect in a defensive take, whatsoever. In fact, they've been under pressure.

Cindy, back to you for a second. What are you thinking about with respect to the yield curve? We've talked about that from time to time, too, where it's getting a little flat. And, historically when you see the difference between short term and long term mixed traits converge, that suggests again that the odds of recession might start rising. Are we gonna see an inverted curve next week?

I hope not, but the yield curve does continue to flatten. The twos, 10s, they're hovering around 27, 28 basis points on that spread. And, threes, fives are right around four and a half. That has dipped below four, late yesterday after the CPI, and then early this morning. So, we're definitely keeping an eye on those. But, corporate issuance. That was pretty, you know, we're not seeing anything that would give us cause for concern. Investment grade and high yield spreads are wider. But, not showing any type of distress. Corporate balance sheets are very strong. Now, if we do see a slow down in issuance, that could cause spreads to tighten. We had five deals priced in on Thursday, and one company sold new bonds last Friday. We didn't have any overnight trades. We did have 67 billion priced in this week, and we do have five companies that plan on issuing today. They were in the market yesterday and ended up pulling back. So, we could see, you know, some more issuance today.

I'm glad you brought up the point that the corporate balance sheets are in really great shape. I think that's an understated positive, right. Because I think corporations have really done a great job of managing their cashflow, managing their balance sheets, you know, and done a great job of really kind of providing that level of support when things do get rough. I think consumer's balance sheets are also in pretty decent shape too. I mean, I don't think it's maybe as uniform as it is in the corporate sector, right? Because I think there's certain differences amongst different income stratus, but I do think that right now the overall excess savings amongst all consumers is something close to two trillion dollars. So again, there's a lot of liquidity, and balance sheets on the consumer side are also in pretty good shape, particularly as they've seen rising home prices and up until recently anyway, rising stock prices boosting their savings up a little bit too. But, we do have a reopening trade. We haven't talked about COVID in a couple weeks, but the COVID trends continue to be favorable. That suggests that the economy can continue to reopen. Housing, again, we talked about, is booming. And really, I think, some of the stimulus that has been put forth up until the last couple months or so, I think takes some time for that to really work itself through the economy. So, again, thereto, even though the stimulus is starting to be pulled back a little bit, it's still a net positive overall. So, I think those are things to keep in mind amidst this really challenging backdrop overall.

Steve, let's throw the last question to you. We had a good conversation yesterday. What do you think from a technical perspective in the market? Any closing thoughts that you have with what you're seeing and observations that our audience might wanna hear?

Yeah. I'll tell you first the clear positive from a technical perspective is that sentiment is extremely negative as you might expect where we're over the 90th percentile in terms of sentiment on the negative side. And, that is across the board. It doesn't matter which sentiment indicator you use whether it's survey based or market based. Typically, the best time to use sentiment in its pure form is when you hit 100th percentile. When you're above 90, you're really, it tells you things are stretched, but you just can't use it in a vacuum, because things can go worse from price. Price dominates. When I take a look at what I'm looking for for an all-clear, couple things. First, we mentioned these credit indicators. I don't like the fact that investment grade and high-yield CDXs continue to move higher. Yes, levels are low, but trend and rate of change is what people that wear my hat look at. And, trend and rate of change are not good for credit right now. And then, when I look at the market internals, things like breadth and volume, we have not seen anything that resembles what we would see an all clear signal. So, typically, for example, I'd love to see a nine to one or 10 to one up volume versus down volume day on the New York Stock Exchange. I'd like to see at least a four to one or five to one advancing versus declining issues day on a similar volume day. I'd love to see a huge flushed or on a negative, I'd love to see a huge flush in the market which drove the volatility index to 36 or to 40 or 44, which would signify that we had a washout. But, we haven't had any of those things. Selling has been too orderly. Participation has just been anemic. So, from my chair, I just think we still have more work to do here before we can say the bottom is in. I think a bottom is in, but we may undercut it yet again. So, I think that here in the near term, we still have some work to do, and we need to keep our helmets on.

Yeah, those are really great indicators to watch. The last thing I'll throw out there, too, Brian is that similar to the theme we've talked about it being really selective, and Steve gave us some great things to watch for potential turns or catalysts. The other thing we've talked about once in a while is this notion of the VIX, this volatility index. And, historically when that reaches a certain threshold in kind of the mid to upper 30s or low 40s, you know, that usually is typically a good time to put capital to work. It doesn't mean that the market is bottom, to Steve's point. It's a process, not an event. But, I do think that's another thing that people can look at as maybe a sign to put capital to work.

Yeah, great point George. Thanks, for adding that at the end. So, George, Steve, Cindy, thanks as always for providing your insights. We certainly appreciate it. And, thanks to our listeners for joining us today, and be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app. As always, past performance is no guarantee of future results, and we know your financial situation is personal to you. So, reach out to your relationship manager, portfolio strategist, or advisor for more information. And, we'll catch up to you next week to see how the world and markets have changed and provide those keys to help you achieve your financial success.

The Key Wealth Matters podcast is produced by the Key Wealth Institute. The Key Wealth Institute is comprised of a collection of financial professionals representing Key entities including Key Private Bank, Key Bank Institutional Advisors and Key Investment Services. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. This material is presented for informational purposes only, and should not be construed as individual tax or financial advise. Bank and trust products are offered by Key Bank National Association, member FDIC and Equal Housing Lender. Key Private Bank and Key Bank Institutional Advisors are part of Key Bank. Investment products, brokerage, and investment advisory services are offered through Key Investment Services, LLC or KIS. Member in FINRA, SIPC and SEC registered investment advisor. Insurance products are offered through Key Corp Insurance Agency USA or KIA. KIS and KIA are affiliated with Key Bank. Investment in insurance products are not FDIC insured, not bank guaranteed, may lose value, not a deposit, not insured by any federal or state government agency. Key Bank and its affiliates do not provide tax or legal advise. Individuals should consult their personal tax advisor before making any tax related investment decisions. This content is copyrighted by Key Corp, 2021.

March 4th, 2022

Welcome to the Key Wealth Matters Podcast, a series of candid conversations with leading experts about how individuals and organizations can grow and protect their finances tailored around current events and trends. Here's your host for today's podcast, Brian Pietrangelo.

Welcome to the Key Wealth Matters weekly podcast, where we casually ramble on about important topics, including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to unlock the mysteries of the markets and investing.

Today is Friday, March 4th, 2022. I'm Brian Pietrangelo, with me today, I'd like to introduce our panel of investing experts, George Mateyo, Chief Investment Officer, Steve Hoedt, Head of Equities, and Rajeev Sharma, Head of Fixed Income. As a reminder, a lot of great content is available on key.com/wealth insights, including updates from our Wealth Institute on many different subjects and especially our Key Questions Article series, addressing a relevant topic for investors each Wednesday.

Okay, everybody, good morning. It's been a difficult week so far for obvious reason. So, let's start with a quick recap of economic data, how that leads into probably the most informative Fed commentary that we've had that's been outside of an official Open Market Committee meeting. For clarity purposes, we'll revisit that, and then we'll obviously have a pretty lengthy dialogue on what's going on with Ukraine and Russia, because it's fairly important for obvious reasons.

So first and foremost, nonfarm payrolls came out up 678,000 for February, including revisions of 92,000 for December and January. So that was very positive. The unemployment rate overall at about 3.8%, down a little bit from previous readings and also closer to the 3.5% pre-pandemic level that we've been watching all along and that certainly labor force participation rate was pretty healthy.

Initial claims from Thursday, 215,000, again, still very low and continue to be below the pre-pandemic level of an average of about 256,000. So overall, pretty strong, and I think that's why it's important from an economic data perspective that J Powell feels very comfortable with his comments on the direction that the Fed is going to take next month. When we talk about the March 16th, actually it's this month, March 16th, Federal Open Market Committee meeting, but we also had some really good commentary from his congressional testimony. So panel, what do you think from the perspective of what that all means in terms of where the Fed is heading and the under underlying strength of the economy in the US? George, we'll start with you.

Sure, Brian. I think it's important to note that these numbers obviously came out or maybe capture period just prior to the invasion in Ukraine, so we might have to take them with a little bit of grain of salt but it can't be denied that the US economy in a way is really exhibiting a ton of momentum right now. You mentioned that employment gains have been really strong the last couple months, I think averaging a couple 100,000 and we've now got the unemployment rate close to a new, not a new low, but a new cycle low at just under 4%. Incomes are rising along with that. You mentioned wages, I think wages were up 5% or so year over year and we've seen other parts of the economy doing quite well also. Housing continues to be really very robust despite the fact that mortgage rates have ticked up a little bit. You're even seeing pick-up demand in some of the airline and travel sectors.

So you're really starting to see pretty much of a reopening of the economy that are probably carryovers from the Omicron situation at the end of last year into the first part of 2022. So not withstanding a really terrible humanitarian crisis that we're all having to watch every day and certainly react to. The economy is really exhibiting a ton of momentum and that's also broad based. There's a survey we often don't talk about called ISM. It's kind of an indicator of just general economic activity and essentially anything above 50 suggests that economies are expanding, anything below 50 suggests the economies are contracting. I think I saw someone that suggested that at 93% of the world's economies are expanding right now. So there's going to be some slow down in growth because of the Ukraine situation.

Of course it's a terrible humanitarian crisis, but I think economically at least in the United States, I think we're kind of weathering the storm so far, but it's early days, I'd love to say that plays out. In terms of what it means for the Fed we'll have to get Rajeev to talk in a second but I was really struck by the fact that he was very forthright about his testimony, I think it was the first time I can remember ever that a Fed chairman came out and said what he's going to do. He pretty much told us he's going to support a move and I think he said, I'm inclined to raise rates by 25 basis points or one quarter of 1%. That's someone with characteristic that he would show his cards that cleanly, but it's clear that the Fed needs to raise interest rates and they're willing to do so, but that was my take on it, Rajeev What'd you think of it?

Very interesting take George and I agree. I think that on Wednesday when Director Powell came out and delivered his testimony, all eyes are we're on is he going to signal something? I think he did beyond signaling something, he fairly stated it clearly that he was supporting 25 base point rate hike in March. It pretty much took off the table right then and there the 50 basis point camp, the probability that we've seen that 50 basis points that went down from 55% to practically nothing. So people are looking for a 25 base point hike in March, Fed power pointed to inflation over 2%, he pointed to strong labor markets. So all of these fit the narrative that we should do something and the Fed should do something. The point is clear, the Fed is focused on inflation, they did give a nod to the conflict in Ukraine, it's definitely on the Feds radar.

They look at geopolitical tensions, but they don't think that the tensions there should support the Fed kind of easing off or not removing some of this accommodative policy that they have. It's going to keep them steady and go forward but they did say that they will be nimble and the Ukraine conflict definitely feeds into the nimbleness that they want to act with going forward. We immediately saw a yield curve reaction to it too. Some very big moves on the yield curve, right during the testimony and then after. This week has been a tremendous week if you look at the yield curve, we saw steepening halfway through the week, then we saw flattening yesterday and today we're seeing steepening again on the yield curve. If you just look at the two year alone, we ended last week on the two year at 1.6%, by midweek this week, we were dipped down to below 1.3% and now we're back at 1.5%.

So you're looking at swings in the two year, which we haven't seen these kind of swings in a very long time. You're dropping 30 basis points and then picking up 20 basis points, you don't see moves like that in the front end of the curve. That is why geopolitical tensions matter. Safe Haven plays are still in supporting the US treasury market. If we look at the 10 year, again, we dipped below 1.7, went back to 1.9%, now we're back at 1.7%. I would think that the treasurers are likely to keep a bid today, given all this escalation of the invasion of Ukraine by Russia. I think that there's going to be a lot of movement in the treasury market, there's going to be a supportive bid of the treasury markets in that Safe Haven asset, but investors are still anticipating a flattening of the yield curve because the Fed is in motion and we expect rate hikes this year.

I'm glad you really mentioned some of the volatility. We often talk about stock market volatility because I think most investors are pretty accustomed to seeing stocks behave somewhat a volatile fashion from time to time but we got that in spades in the bond market this past week, which really was quite remarkable as far as I could tell. In terms of volatility, I guess Steve I'll turn it over you. One thing that we should probably remember is that Leonard London once said that there are decades when nothing happens and there are weeks when decades happen and we probably got that in spades again, this past week as well. Particularly in the commodities market, we don't open talking about commodities, but certainly a ton of volatility was experienced in commodities, more so on the upside. What was your take on that?

Well, I agree with you, George, when you look at the volatility, it's funny, but bond market volatility has actually jumped more than equity market volatility has in the last week. It's been interesting to watch. Then when we see what's going on in the commodities markets, really the moves are unprecedented. I know we've used that word a lot in the last couple of years to describe market events it seems like, but truly what's going on right now has no comparable. When we look at what's going on, basically across the board in every commodity market, the world is having to price in levels that destroy demand in order to rebalance the less available supply of having to remove Russia from the global market, at least temporarily.

Whether they're able to come back in and sell if we get some type of a resolution to the conflict, or we get a reorienting of global supply chains with Russian supply heading east to China and other things being reoriented back to the west. All that takes time and there are costs involved to it and we're pricing in that demand destruction now. The really interesting thing to me here this week with these economic numbers you talked about is clearly heading into the Ukraine Russia crisis. We were in an inflationary boom, whether it's just here in the US or on a global basis, that to me was the clear signal of the numbers that we saw. The employment numbers fantastic, inflation numbers are running hot, inflationary boom and my question going forward is be whether this commodity price shock tips over the growth piece of that into a more of a stagflationary environment where we lose the growth, but we still keep the inflation?

That would not be a good outcome and I think it remains be seen if that could be persistent, you've seen some of these spikes higher in commodity prices makes me wonder if at some point they just collapse into their own weight. We're probably a bit away from that, but you're right to point out the fact that growth is slowing. In fact I think there's a survey that the Atlanta Federal reserve puts out that tries to calculate where economic growth is at one time and it's falling. It's not contracting, but again, the momentum as you point out, has really started to slip a little bit.

The other thing too, that really caught my eye this week and I'd love to hear what Rajeev has to say about this is we've seen equity markets kind of stabilize a little bit, although they're a little weaker this morning, really what we've seen, that's caught my eyes to move higher in CDX and I don't just mean high yield CDX, but all investment grade. It's been grinding higher this week, even as equity markets had bounced, so it's kind of sending a contrary signal right now. Rajeev, what do you think about what's going on in CDX?

Great question there, Steve. I've been looking at that as well, and it is giving a contrary signal to the equity market. Any stability that we see in the equity market, we don't see that relay in the CDX market. The CDX market seems to be going in one direction and that's higher, which is unsettling because it's a signal towards risk markets. So there is a difference in signaling there. I'm trying to see whether that type of reaction is being seen in our corporate bond spread market, which is cash markets and we're not seeing the same level of movement there either. So something's being signaled there and generally, I think that's associated with the volatility that we're seeing in the market.

It's beyond the range that we've been looking at, Steve, you and I have seen charts before and that's very unsettling as well. So that's going to be something that's going to really be important going forward. It's been important, I think we've got accustomed to looking at CDX as not a leading indicator because default rates have been so low, but I think it's a leading indicator again and we've got to keep an eye on that one.

Steve, maybe a question for you and with all due respect to the significant tragedy for the Ukrainian citizens, obviously that's paramount, from an investment perspective, for exposure to Russian stocks and those that might be investing in emerging markets. There was a recent article or news update that the index providers were going to write down their positionsin Russian stocks which represents approximately 3% of the emerging markets index. What are your thoughts from the perspective of what you're seeing from the individual stocks and or overall trends with what's happening with the stock market, as well as how it might affect investors here in the US?

Well, it's really hard to say, at the end of the day index providers are doing what they're doing. It's kind of like an additional a sanction because they're removing the Russian stocks from global indices at 0% or zero weights. They're essentially marketing the market to zero. I think that effectively, what you'll have is anybody who owns Russian stocks is going to be stuck in stasis until this situation fixes itself. That includes ETF holders, institutional investors here that own international equities that have an allocation to Russian stocks. We'll just have to wait and see how it plays out. Essentially you have a call option that has been marked to zero, it doesn't cost you anything it's already a sunk cost and we'll see how it goes. To me, the real interesting thing about this is when you look at how we're going to see things evolve for equity investors going forward, the biggest impact of this whole situation to me, as I think about it is the potential to see equity multiples compress a bit more than what we've seen here lately.

Obviously we've been under pressure because rates have been rising, but if you look structurally, we really collected a premium over the last 20 to 30 years from having the US be the preeminent global superpower. It was a unipolar world, that's a less risky environment when you're in a unipolar world and it seems to me that the real knock on impact from what we're seeing here is that whether it's China and Russia or China alone, we're clearly moving back to either a multipolar or a bipolar world, and that increases risk. If you increase risk, that means multiples need to compress. So I think that there's going to be a bit of pressure on equities, irrespective of a simple or a quick resolution to the situation that's going on right now in Ukraine.

George, do you have any other thoughts from an overall economic perspective globally and what we're thinking about from an investment strategy perspective?

Well, I think it's important to recognize what Steve talked about in terms of the longer term forecast and longer term outlook in terms of maybe where rates are kind of moving higher, interest moving higher, at the same time, uncertainty is really escalated. So with those two things combined, again, it's not unreasonable to say that stock prices and valuations need to be rerated lower. So that's certainly the case and that's kind of where I think the stock market is trying to figure out where to go. There are some things that could still turn out to be, for lack, a better term, optimistic or bullish in terms of the fact that earnings have stayed pretty strong so far. Then longer term, I think it's interesting to see. I've read a couple articles that I've talked about how this conflict might end and some scenarios are somewhat dire that we probably need not talk about, but I think one thing that would surprise people on the positive side of a ledger is just how much unity there's been.

Not only on the ground amongst Ukrainian nationals and the heroism that they have actually displayed and try to keep their country intact has been nothing truly remarkable. I think it's surprised Russian troops to some extent, but also you've seen a tremendous amount of unity with respect to sanctions and the NATO countries as well. I think a few years ago, that relationship seemed a bit freight, but I think the result is actually strengthened a bit and so I think for that reason, not to say that it ends well, but it think it does suggest that maybe there's some cooperation that could come from this, that could be good over time. So we have to see how that plays out that's a longer term, perhaps half full kind of outlook, but I don't think we can dismiss it either.

Makes sense George, thanks a lot for ending on a positive note and I think that's a good opportunity for us to end a call for today. Thanks to always George you, Rajeev and Steve for your wisdom and sharing it with our audiences today. So we'll take a wrap.

Thanks to our listeners for joining us today and be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app. As always past performance is no guarantee of future results and we know your financial situation is personal to you. So reach out to your relationship manager, portfolio strategist or advisor for more information. We'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you achieve your financial success.

The Key Wealth Matters podcast is produced by the Key Wealth Institute. The Key Wealth Institute is comprised of a collection of financial professionals representing key entities, including key private bank, key bank institutional advisors, and key investments services and the opinions, projections or recommendations contained here in are subject change without notice and are not intended as individual investment advice. This material is presented for informational purposes only and should not be construed as individual tax or financial advice. Bank and trust products are offered by key bank national association, member FDIC and equal housing lender. Key private bank and key bank institutional advisors are part of key bank. Investment products, brokerage and investment advisory services are offered through key investment services, LLC or kiss. Member FINRA, SIPC and SCC registered investment advisor.

Insurance products are offered through Key Corp insurance agency USA or KIA, KIS and KIA are affiliated with key bank. Investment and insurance products are not FDIC insured, not bank guaranteed, may lose value, not a deposit, not insured by any Federal or state government agency. Key bank in its affiliates do not provide tax or legal advice. Individuals should consult their personal tax advisor before making any tax related investment decisions. This content is copyrighted by Key Corp 2021.

February 25th, 2022

Welcome to the "Key Wealth Matters Podcast," a series of candid conversations with leading experts about how individuals and organizations can grow and protect their finances, tailored around current events and trends. Here's your host for today's podcast, Brian Peter Angelo.

Welcome to the "Key Wealth Matters Podcast," where we casually ramble on about important topics, including the markets, the economy, human ingenuity and almost anything under the sun, giving you the keys to unlock the mysteries of the markets and investing. Today is Friday, February 25th, 2022. I'm Brian Peter Angelo and with me today, we have our experts, as always, in key wealth management, George Mateo, our Chief Investment Officer, Steve Hate, Head of Equities and Rajiv Sharma, Head of Fixed Income. As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our Wealth Institute on many different subjects and especially our Key Questions Article Series, addressing a relevant topic for investors each Wednesday. So it's been a very challenging week in the markets for obvious reasons, so let's start with our discussion today. So it's been a pretty interesting week with everything going on in Ukraine and Russia, but we'll start with a recap of the quick economic news, give our partners an opportunity to share their thoughts on what's going on from an economic perspective, and certainly then, we'll rotate back to the Ukraine, Russia situation for their opinions and thoughts and insights. But, at the end of the day, econ data that came out this week, personal consumption expenditures were up 2.1%, month over month in January, which was a little better than expected. Inflation came along with that to some degree. The Personal Consumption Expenditure Inflation Index was up 0.6% month over month and 6.1% year over year, but if we exclude food and energy, it's only up 0.5% month over month and and 5.2% for year over year, so at the end of the day, certainly energy prices were up. Food prices were up. That's causing the overall inflation to be up, which is not a surprise. At the end of the day though, unemployment claims were still low from the perspective of the pre pandemic levels, so that's always good news as we continue to see our our economy has underlying solid footing. And last but not least, the second estimate for fourth quarter GDP 2021 came out, and that number was 7.0%, which was actually up from the first estimate last month at 6.9%. So all in all, some pretty decent numbers from an economic perspective to continue to show that the underlying economy is strong and continues to be so. So George, do you have anything you wanna add on that?

Not too much, Brian. I mean, I think you summarized it pretty well. I mean, the GDP number of 7% needs to also be taken in novel terms, right? So if you take that 7% number, you add inflation to that, that gets you, gosh, something close to 14 or 15% that the economy is growing at, and that directly translates to revenues and sales and ultimately earns potentially too. So, you've got that strong momentum of double digit nominal GDP growth. Wages are really running pretty high and very robust. Continued claims, you mentioned, I think they're at a 52 year low, so the employment sector is really quite strong, and it seems to be accelerating, honestly, because the auto con cases, we haven't talked about the pandemic in a while, but you've got cases that are down some 90% from their peak, nine, zero. That's kind of starting to kind of translate to broadening of economic activity, but we'll have to see what Ukraine brings to this calculus in the next couple weeks, but restaurant activity's up, chartering jets and travel and things like that are up. And so it seems like the economy, by all accounts, just in the last few weeks or so have started to accelerate a little bit. So, that's all good news on the employment situation. The economy situation will get new employment numbers next Friday, and those will be interesting to watch. We were expecting last month to be a little bit weak, but they actually were quite strong, so it does seem that the economy is actually in pretty good shape.

Great, George, thanks for that context. So I think the dominant story this week, obviously, is the Ukraine, Russia situation. So we've got three of our investment experts on the call as usual to give us their opinions on what it really means from a market perspective, the economy, overall risks, overall balance of equations, and then certainly, we'll talk about a good discussion with what it means for a potential Fed action next month relative to the potential rate hike increase schedule that has been discussed for many months now. So, why don't we just open up the conversation to get some thoughts from everybody in their respective area and what we think Russia Ukraine means for what's happening here in the United States stock market and bond market.

Yeah, I can kick it off, Brian, and then maybe flip it over to Steve to talk about energy, 'cause I think, at the end of the day, I think this is a story about energy. I mean, obviously it's a story about geopolitical dynamics and certainly a very serious humanitarian issue that needs to be addressed too at some point. But economically speaking, I think, again, the story might revolve around energy a lot, energy policy more specifically, but I guess what happened this week kind of takes away some of the ambiguity, if nothing else. I mean, there was a time when we didn't know exactly what might have happen or how things might evolve, and now, sadly, it seems like there's an emphasis on really regime change within inside Ukraine. And I think there's probably some more uncertainty about how this plays out, knowing that there aren't too many resolutions here in terms of really trying to maybe see these tensions deescalate a little bit in the near term. I think some people have written that this is a change in the new world order or maybe kind of a regime change too in terms of how we've been thinking about the Axis of power for the last several decades. That seems to be changed. Maybe that's a bit of an overstatement, but I think it's something we have to be thinking about. It probably does do set up some new dividing lines within inside Europe and NATO particularly, and I think, the information I've read, suggests that NATO's gonna have a line in the sand. Russia will have their line in the sand too, and so, that might be a way of coexisting once things normalize and settle down a little bit, but that could take some time. Economically, this is kind of a a stagflation or kind of outcome, which is the one thing that probably the central banks didn't need right now on top of everything. We've talked about inflation for a while, spiking higher and now that likely seems poised to continue with energy prices continue to move higher, and at the same time near term, anyway, economic activity would start to decelerate a little bit. So, it will make the Fed's job very difficult to think about all those things going forward. But economically, Steve, again, I want to get your thoughts on the energy situation, 'cause at the end of the day, it seems to me like this is a a story about energy more than anything else. Would you agree?

Yeah, energy and commodities in general, George, I mean, I think that's the one thing that has come home really hard to everybody in this, and that's just how, while Russia is maybe not that important in terms of overall global GDP contribution, in terms of the overall size of its economy, it's very important in terms of commodity production, whether it's crude oil, natural gas, platinum, palladium, wheat, all of these kind of things. And the fact that they do produce as much of these commodities as they do and sell into the global market, that it's given them maybe a bit out-sized the influence and possibly even helped embolden the actions of their government. So, I think we came into the year calling for crude oil prices to head for triple digits. We didn't think it would take a war to get them there. We've been in a situation where spare capacity had been very tight on a global basis for crude coming into the year. We've under invested in maintenance CapEx and new CapEx to the tune of $200 billion a year each of the last two years. Typically, it takes half a trillion on a global basis just to maintain capacity and then produce a little bit more crude oil to meet demand every year, and we fell short of that for a whole host of reasons, whether it was COVID, whether it was the ESG, climate change, all this stuff. We didn't spend enough money on crude production globally, and we're paying the price for that now. And it didn't take much, and I didn't know what it was gonna take. All I knew was we were in a very precarious position coming into the year, and this is what we see happen when you're in a precarious position like that. So, sad to say, George, but I think we still have even further upside in crude, and that still obtains, in my view, even if we get a favorable resolution and a short situation between Russia and Ukraine.

Yeah, so definitely a complicated situation for commodity prices and for inflation, no doubt, no doubt for sure. Rajiv, what do you think this means for the Fed? I mean, they've got a key meeting coming up and coming into this, there was a lot of emphasis placed on the fact that the Fed might raise rates more aggressively than they otherwise would like to. Does that calculus change given what's happened in the last couple days?

Yeah, I think really, I mean, I agree with you, George, as far as the long-term inflation and perhaps stagflation effects are there and some of the uncertainty surrounding that with the impact of the Ukraine situation is there. The Fed is obviously looking at geopolitical risk, but really their focus continues to be inflation, and I think that's gonna remain the case. The Fed may react a little less aggressively than some of the probabilities that we saw last week where we saw many people calling for a 50 basis point hike in March. I think with everything happening right now that probability is much less now. I think that come March, we'll see the Fed react with the 25 basis point move rather than a 50 basis point move higher. If you look at the yield curve, the yield curve itself is, again, very flat, even with the invasion of Ukraine. It's hard to think that the Fed would be overly aggressive. In other words, last week we were seeing some calls for seven, eight maybe nine consecutive rate hikes. That, right now, where we are right now, the geopolitical risk that we see right now, seven, eight, nine consecutive rate hikes is very aggressive. I think right now the probability for six rate hikes are there in the market right now, and you see the Fed gonna focus on their March 10th CPI print. I think that's gonna be very telling for the Fed, and I think that the Fed is gonna go moderately with the 25 base point hike, and I think that's probably the right thing to do at this point. Inflation is definitely front and center for the Fed. We had a couple of Fed speakers as well talk about if we have a strong CPI report, maybe we can go 50 basis points in March, but it's not getting as much reception as we saw a couple weeks ago.

Rajiv, were you surprised that we didn't see a stronger flight-to-quality bid in the 10 year treasury during the trading? I mean that was one thing yesterday that really caught my eye was that there really didn't seem to be a flight-to-quality bid in the 10 year.

Yes, I was gonna talk to you about that too, Steve, because it was interesting. As we led up to the Ukraine, Russia conflict, we didn't see a lot of movement in the flight-to-quality bid. We didn't see the treasury yields really react where a safe haven type bid was going there, and I think that had a lot to do with the Fed still being in play. Everybody knows the Fed's gonna do something in March. Inflation is there. It's something that needs to be controlled. But then when the invasion actually happened, I expected a bigger flight-to-quality, and we actually saw it. We saw it for half a day yesterday, and then it immediately came back, and my question--

It disappeared! It was crazy!

It disappeared. Yes, my question was gonna be that. We see rising stocks at the end of the day and modestly lower treasury yields, so one of them is right, and is there too much optimism out there? It's hard to tell, but I think if the Fed wasn't in play, if we didn't have this telegraph that the Fed is gonna do something in March, perhaps we'd see a greater run to a safe haven pass.

So it's funny that you mentioned that, but if you look at the intraday trading yesterday and even the continuation that we've had this morning, so literally the low print of the day yesterday was on the open, and we trended higher all through the trading session, and we're up another 30 points on the S&P 500 today. And a lot of it, in my view, it goes down to two things. One, the sanctions package that was revealed yesterday afternoon or yesterday morning, really didn't go any... it was less than a worst case scenario. I think that a worst case scenario sanctions package would've been something that included maybe barring Russia from SWIFT, and then that could have some serious economic implications across both the US and Europe, Europe in particular, and I think that the market would've taken that much worse than what it did, but even then, we saw a tremendous amount of short covering yesterday. I mean, some of the numbers inside the market, there was a lot of put selling in going into this. This was pretty well telegraphed ahead of time. There was a lot of hedging that had already gone on going into it, so when you got the downdraft, it seemed like everybody decided to take their hedges off at the same time, and that's been what's been driving trading over the last day and a half. It makes me question whether it's really sustainable. There has been technical damaged done to the market, but clearly we've had a tremendous amount of short covering that's gone on based on the amount of hedging that had gone on heading into this crisis.

Yeah, you're right, Steve. I mean, if you look at the range on the two year, we're talking about the yield curve, we were at 160 before the news came out. We went all the way down to 145. Today we're at 160 again, so nothing happened. You look at the tenure, we were at 199. We went down to 184 when the news came out on Ukraine, and we're back up to 197 right now.

I mean, I look at those five year high yield CDX's, which is high yield credit default swaps. Intraday yesterday we got to 397. Today, we're at 358. That's the same level we were at on February 17th. So, I think that there has been a lot of... there had been a lot of hedging going on, a lot of de-risking going into this. We got that spike yesterday and seems like we've really had people take some of those hedges off the table right now.

I think the bigger thing too, to keep in mind is that as typical, as the historical playbook goes, when you have these big duplicatable events, and we've had, gosh, probably 30 of them or so in the last 60, 70 years or so, is that yeah, the knee-jerk reaction is pretty brutal and volatile, but as things play out over time, stock prices tend to recover, and I went back and looked at these episodes and saw that about 85% of the time, one year later, stock prices are higher. I mean, that's not 100% and no guarantee and there's all kinds of things that could make this situation different. But, for long-term investors who are patient and maybe opportunities to get by when things are really on sale, but being patient usually pays off. Of course, again, this could be a different situation that's worth noting, but I think historically, people or maybe markets do tend to revert towards a positive outlook based on the economic growth, and at the end of the day, it still seems to me that this is still a story about inflation, maybe once some of this attention within Ukraine starts to simmer down a little bit.

That's fantastic, gentlemen. I appreciate you going into the details of what's happening in both stock and bond markets, and, George, thanks for concluding with a big picture perspective on what's happening long-term for our listeners. So, George, Steve and Rajiv, thanks for providing your insights. As always, we appreciate your wisdom, especially on such a difficult topic of the Ukraine, Russia conflict, and thanks to our listeners for joining us today, and be sure to subscribe to the "Key Wealth Matters Podcast" through your favorite podcast app. As always, past performance is no guarantee of future results, and we know your financial situation is personal to you. So reach out to your relationship manager, portfolio strategist or advisor for more information, and we'll catch up with ya next week to see how the world and the markets have changed and provide those keys to help you achieve your financial success.

The "Key Wealth Matters Podcast" is produced by the Key Wealth Institute. The Key Wealth Institute is comprised of a collection of financial professionals representing Key entities, including Key Private Bank, Key Bank Institutional Advisors and Key Investment Services. Any opinions, projections or recommendations contained here-in are subject change without notice and are not intended as individual investment advice. This material is presented for informational purposes only and should not be construed as individual tax or financial advice. Bank and trust products are offered by Key Bank National Association, member FDIC and Equal Housing Lender, Key Bank Private Bank and Key Bank Institutional Advisors are part of Key Bank. Investment products, brokerage and investment advisory services are offered through Key Investment Services, LLC, or KIS, member Infinra, SIPC and SEC registered investment advisor. Insurance products are offered through KeyCorp Insurance Agency USA, or KIA, and KIS and KIA are affiliated with Key Bank. Investment and insurance products are not FDIC insured, not bank guaranteed, may lose value, not a deposit, not insured by any federal or state government agency. Key Bank and its affiliates do not provide tax or legal advice. Individuals should consult their personal tax advisor before making any tax related investment decisions. This content is copyrighted by KeyCorp 2021.

February 23rd, 2022

Welcome to the Key Wealth Matters podcast, a series of candid conversations with leading experts about how individuals and organizations can grow and protect their finances tailored around current events and trends. Here's your host, Tracy Collins.

Welcome to the Key Wealth Matters podcast, entitled Cybersecurity for Nonprofits, what you need to know to protect your data. Today's discussion will focus on providing an understanding of cybersecurity and what you can do to protect both donor and organizational information. Addressing this important and timely topic is Tammy Gadexas. Tammy is a senior information security manager with KeyBank, and she's been with KeyBank for almost 25 years. In her current role, she focuses on cybersecurity and education awareness, not only for Key's employees, but also for consumer and business clients, welcome Tammy.

Thank you so much for having me today.

It's a pleasure to have you, and I know this is gonna be an interesting subject for everyone so let's jump right in. Cybersecurity, let's start with the most basic element of the topic. What exactly is cybersecurity? I mean, what's a good definition of it and who really needs to know about it?

Well, yeah, to jump right in, honestly everyone needs to know about it. If we think about the way all of our lives are both personally and professionally, our lives are so digital. Everything from how we do our banking to shopping, especially post the COVID pandemic, where we really changed the way that we do things and we're more digital than ever. So at the very basic element of it, cybersecurity is really how you're protecting against cyber attacks and really in that practical sense, it's really the combination of the different technologies that we're using, whether it's your phone, whether it's your computer and how you're interacting to protect basically your data and ultimately your finances. So financially all the funds in your accounts or your business accounts.

Well, I think we've all heard of cyber attacks. So can you give us an idea of what someone might be trying to accomplish when initiating these attacks?

It falls down to some very basic things. So really what we see are when these cyber attacks are happening, it's really threat actors that are trying to gain access to information or data or funds. So they're trying to get into your accounts, get access to money, or they're trying to get access to data or information, anything from personally identifiable information to potentially company secrets and what assets your company has.

I mean, that's pretty concerning. I mean, so whether you're a business or individual, the thought of someone poking around in your computer or your computer files or anything like that is pretty scary. So what are the more prevalent types of attacks that you're seeing now that are targeting businesses? And I guess my next question would be, how obvious are they? I mean, would you know right away if you're under attack or would I be able to identify if I'm under attack? Talk a little bit about that.

Yeah, those are great questions. So really some of the basic attacks that we're seeing right now that are most prevalent, there's three that I'll talk about and I think these are the three that we see that are most common and they actually interact with each other, which is scary to think about. So one of the first ones is really something that we call social engineering and it could have a couple of different aspects to it. So social engineering really is the art of manipulation. So they're using different trust factors to try to get you to do something. So when we think about social engineering, most commonly you'll hear phishing. There's also smishing and vishing, but fishing is really where you would get an email from someone that's pretending to be someone else and what they're trying to do is within that email, there could be links or attachments that could have malware or bad software that are within them. Oftentimes within these emails, they have some type of sense of urgency. They're trying to really trigger human emotions to get you to do something. So they're trying to have you click on that link. You need to do something immediately or something bad might happen. If I think back to COVID, we saw this running rampant because they're using that time of turmoil along with human emotion. We were all very emotional during that time. There was that sense of unease and they use that against us in order to gain access to things, things like romance scams, where they would prey on people because they were isolated and alone. So within those different, so they could be sending you an email. You could be getting a SMS or a text message on your phone, or even somebody could be calling you. And again, they're trying to get you to click on those links, provide information over email, or also open up some type of attachment that would then put malware on your computer and then they would be able to gain access into your file. So all it really takes is one click from someone not recognizing the signs within those phishing emails. To further go into that, a very specific type of phishing email attack is something called business email compromise and we've seen this a lot lately and this, and you could hear it also called BEC sometimes in short so in case you hear that in the news as well, and it really targets businesses of all sizes from the smallest Mom and Pop up to the largest of corporations. And what they do is they use that trust factor, as I mentioned, and oftentimes what they're doing is imitating vendor emails that you could be working with and either they compromise the vendor's email, or they're sending you something like false invoices, asking you to change payment information. And what you want to look for in those business email compromises is again, it's usually they're after funds. So they're trying to get you to change information to send them a wire or an ACH. It could be the smallest thing, meaning they could be spoofing an email account, there could be slight misspellings of the vendor name. If you hover over links, you'll see that hey, it's saying that it's going to key.com, but then you hover over it and it's sending you to somewhere totally different. And again, it's using that established trust in that brand or vendor name to try to lure you into believing that it is in fact coming from that vendor or that company we've seen different phishing emails that are even different government agencies like the IRS and unemployment emails that are coming through where they're trying to get you to then click on or provide information. The third big attack type that we've been seeing is ransomware. And this is where once they gain access into your systems, they basically compromise your system and then they lock your data or encrypt your files so that you don't have access to any of your information and then they demand some type of payment to get your files or data unlocked. And really the breach within your system could have happened days, weeks, or even months ahead of time. Oftentimes again through a phishing link where they gain access to it and then they're searching around within your systems to find the data that's most valuable that they want to lock in hopes that you'll pay that ransom to get it back open. So these attacks could be vary in sophistication. Some of them are easier to spot than others in those instances of kind of the phishing emails, some of the questions I would have you ask yourself is really trust your gut or sometimes I say, trust your spidey senses. Do you feel them tingling? Does the request not make sense? Do you notice a sense of urgency, are they asking you to act quickly not wanting you to have time to think about it before you react? Are they asking you to do something that's outside of your normal policy or even are they trying to target those emotions for a quick reaction?

Well, we're all moving as you said at break neck speed right now. And since we are working more remotely than ever, many of us are communicating more and more by email. We're rushing, so what if I make a mistake? What if I click on that link and after I click on it, I go oops, maybe I shouldn't have done that. What steps should I take?

If you notice that you have clicked on an email, what I would do is immediately contact your IT department. Your IT department is going to have steps. They can then take a look at the PCs to understand what has been compromised and determine what those next steps should be. Also in the case of financial impact, I would also suggest reaching out to your bank to let them know if it has something to do with bank accounts, letting them know that you were perhaps compromised so that they can let you know if there's further steps that they would want you to take as well.

Great information, so you talked about the types of attacks. Let's talk about potential targets. And when I think about this from a non-profits point of view, I think that there are multiple targets that a hacker might be interested in. They might want donor information or employee information, which would include name, addresses, and social security numbers. They might try to break into an online giving or fundraising site where clients are providing personal information, as well as potentially credit card or bank account information. So on a broad scale, how can an organization ensure that they're protected? What are the measures they should take? Are we talking about a software fix? Is this a user awareness issue or is this a combination of both?

It's really a combination of both. It's important to do simple things like making sure that your software is up to date. So that includes things like your browsers, your operating systems, really any type of software that you have on any of your computers, you need to make sure that you're constantly keeping that updated. If you think about something like your browsers, or even on your phones, you'll see that popular brands like Apple will constantly show you when there's an update. The reason why you want to keep those patches updated is because they could find a security vulnerability and that's why they're providing an update. And those threat actors know about those vulnerabilities so what they want to do is take advantage of them. So one simple thing is making sure that you're keeping those updates happening so that you're closing any of those security vulnerabilities. Human risk as well is a real danger. Like I said, phishing is one of the biggest ways that we're seeing systems getting compromised so making sure that your employees, or even your volunteers, if you're a nonprofit and you have volunteers that have access to your data or your systems are aware of those dangers of social engineering of what they should be looking out for, because all it takes is that one click on a malicious website and malware could be giving access to the bad guys in your systems.

So I'm gonna take a minute and talk about passwords versus passphrases. I think we're all familiar with the term passwords, but lately we're hearing more about this concept of passphrases. Can you talk a little bit about the differences between the two and why one might be better than the other?

Yeah absolutely, so passwords are traditionally what we think about. And those are usually shorter and often times they're less than 15 characters and they're common dictionary words. the trouble with that is all of us know that we have many passwords that we're using today and so when we're creating passwords, we're often using things that are simple for us to remember. The problem with that is that if they're simple for us to remember, they're also simple for these threat actors to guess, or even they have software that they use that can crack passwords in a matter of seconds. And so that's why having something like a passphrase, which is longer and stronger, it's typically 15 characters or more is what would be recommended. And you're using more... They could still be potentially dictionary words, but it's four random words put together potentially, or think of something like song lyrics. And one thing that I like to mention to people is that spaces are valid characters, a lot of people don't realize that. So if you're using four random words, donkey strong peanut, some other random word combination, that's gonna be a lot harder for a system to guess. And actually you're looking at years versus seconds. So making sure that again, you're using a passphrase versus a password, but also making sure that you're not using the same password or passphrase across sites, because oftentimes what we see is there could be a breach in a system and then those passwords and user IDs are then put on the dark web and they're purchased and it's not very expensive, unfortunately, for them to purchase those things. And then what they do is they use those credentials to then try to push them into different websites to see if they can find a match. So if you're using the same password on a social media site, as well as on your banking website, once they get access to one, they now potentially have access to the other one.

You've hit on something that's really near and dear to my heart and you mentioned not reusing passwords or passphrases. Now I can't speak for everyone, but I know as I'm getting older, memorizing all these passwords is getting more challenging. In fact, I find myself clicking on that forgot my password link more often than ever. And I'm not a cybersecurity expert, but I'm guessing writing them all down on a piece of paper and keeping it under my mouse pad is probably not the best way to keep track of them. So what do you recommend?

Yeah, no, please don't put it underneath your keyboard, but yeah, actually there are great tools that are available. So there's something called a password vault and that password vault allows you to store all of your passwords or passphrases all in one place and will actually help you even create them. And so you can create that strong passphrase and not have to cause that's the other thing. You then are like, great. I thought a really good one, but now I need to think of 25 more. How am I gonna do that? And there's actually free versions of that. Two examples would be LastPass and KeyPass, but there's others out there. And there's also notes sections within those where you could actually keep track of things like the answers to your security questions and an expert to peer is that when you're answering things like security questions, lie about the answers because oftentimes we end up putting things on social media, like answering things like quizzes that may give away answers so if it's asking for your mother's maiden name, don't really enter your mother's maiden name because that can be found in public records. I'm a huge Disney fan, maybe put Baby Yoda as your mother's maiden name, but putting those things out there and you could put those all in the password vault so that it's all nice and secure for you.

Well, Tammy, I'm sure we could continue on this subject for much, much longer and I want to thank you for this information. This has been very enlightening for me and I'm sure for our listeners. In fact, I'm sure we all want to run back to our home or office and begin taking steps to protect ourselves, but can you just share a couple of steps that organizations can take right now to improve their day-to-day security?

Yeah, absolutely, so one thing, educate your employees around the dangers of things like phishing and also the different things we talked about from a password policy perspective. Utilize different tools like multi-factor authentication because it's really about providing those layers of protection instead of just having that one factor such as something like a password and those multi-factor authentications are things like one time pass codes where it sends you that six digit code, and you could set those up in various systems. Limit the access of your users to only the need to know. So really reducing that risk and exposure that's out there. Creating some processes around things like vendor payments and having those segregation of duties, so having more than one person needed to send a payment out the door and really in the instance of business email compromise developing procedures around those vendor onboarding and payment instructions so how are you going to add the payment instructions? How are those going to be changed? And then finally having a playbook that's established. In case something were to happen, do you know what processes that you need to incorporate and who are the people you need to reach out for? And there are some great free resources that some government agencies have put together. One of them is at stopransomware.gov, and there are things like ransomware response checklists and different guides that are available for you.

Tammy, I want to thank you for joining us today and sharing your insight and expertise on this really important topic. And I want to thank our listeners for taking time out of their day to listen in. For those listening in, if you'd like more information about cybersecurity and data protection, we've included several attachments in the show notes for this podcast and if you do have a specific question, there's also a URL you can use to submit your question back to the KeyBank team. And as always, if you've enjoyed today's discussion, then please be sure to check out the other podcasts in the Key Wealth Matters series. Again, thank you for listening.

The Key Wealth Matters podcast is produced by the Key Wealth Institute. The Key Wealth Institute is comprised of a collection of financial professionals representing key entities, including Key private bank, KeyBank institutional advisors, and Key investment services. Any opinions, projections or recommendations contained here in are subject to change without notice and are not intended as individual investment advice. This material is presented for informational purposes only and should not be construed as individual tax or financial advice. Bank and trust products are offered by KeyBank National Association, Member FAIC and Equal Housing Lender. KeyBank private bank and KeyBank institutional advisors are part of KeyBank. Investment products, brokerage and investment advisory services are offered through Key Investment Services LLC or KIS. Member of FINRA SIPC and SEC registered investment advisor. Insurance products are offered through Key Corp insurance agency USA or KIA. KIS and KIA are affiliated with KeyBank. Investment and insurance products are not FBIC insured, not bank guaranteed may lose value, not a deposit, non-insured by any federal or state government agency. KeyBank and its affiliates do not provide tax or legal advice. Individuals should consult their personal tax advisor before making any tax-related investment decisions. This content is copyrighted by KeyCorp 2021.

February 18th, 2022

Welcome to the "Key Wealth Matters" podcast, a series of candid conversations with leading experts about how individuals and organizations can grow and protect their finances, tailored around current events and trends. Here's your host for today's podcast, Brian Peter Angelo.

Welcome to the "Key Wealth Matters" weekly podcast, where we casually ramble on about important topics including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to unlock the mysteries of the markets and investing. Today is Friday, February 18th, 2022. I'm Brian Peter Angelo. I'd like to introduce our starting lineup of investing experts. Some might consider them all-stars just like this weekend in Cleveland, where we're excited to host the NBA All Star Game. George Mateyo, our Chief Investment Officer, Steve Hoedt, Head of Equities, and Rajeev Sharma, Head of Fixed Income. As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our Wealth Institute on many different subjects and especially our Key Questions article series, addressing a relevant topic for investors each Wednesday. So it's been a challenging week in the markets, so let's start with what's going on with Russia and Ukraine conflict. What does this mean for the economy? What does it mean for the markets? What does this mean in general? George, what are your thoughts?

Oh, good morning, Brian, I think you're right. I think everybody's crystal ball is really quite hazy these days, given the geopolitical backdrop you talked about. I think that there's a lot we don't know. There's a lot of game theory that could be applied to this situation. Really, nobody knows exactly what the end game is here for Putin and Russia in general, but I think there is maybe some concerns, obviously, brewing around a major incursion of Ukraine. I think Putin is getting what he wants, he's getting some attention, I think we're also seeing oil prices rally, which I think he also benefits, and maybe he's actually seeing some concessions around Ukraine's entry into NATO, but at the same time, it does seem like the forces within NATO are coming closer together, and I think that probably bodes a little bit poorly for him, and maybe a miscalculation of some kind, but there is a lot at stake here. There's roughly 40% of gas that actually flows into Europe comes from Russia, so it's strategically important, it's a complicated relationship. I think there's, again, a lot of things we just have to wait and see how they play out. We've seen these moments of uncertainty in the past, there's been untold number of military conflicts over the last 70 years or so in the markets. Usually the market takes that in stride, there's always a situation or two that maybe something more prolonged might ensue from this, but if we look back at history, sometimes the market does shrug this off eventually. I think maybe one parallel could be what happened in 1990, rather, when Iraq essentially invaded Kuwait and we saw the market sell off some 15% or so, which seems pretty painful, but it did recover. It took about four or five months for that to come back to where it was, but it does prove to be somewhat of a short-lived kind of phenomenon, and we hope that nothing doesn't escalate further from here, but again, it's a complicated situation. So I know, Steve, you've got a view on Russia, and have a really strong sense of insights there. How do you see this playing out?

I gotta say, George, I don't know that I agree with the consensus view here in the US, very much so. The Russians have clear interests in their near abroad, as they call it, and they clearly view the Ukraine as part of their sphere of influence for obvious historical reasons, and when you look at the way that Putin has played this game in the past, I don't believe that his intention ever was to invade Ukraine, I don't think it ever, I don't think it still is. In fact, I think that if you look at, historically, how they've played this both in Crimea and in Georgia back in 2008, essentially what he does is he tries to set up the quarry to make a mistake, and if the quarry makes a mistake, then he's ready to pounce. And I think that's exactly what he did last year and exactly what he did this year because, make no mistake, the 80% Russian-speaking Donbas is something that the Russians would like to have be not part of Ukraine anymore, but they're not going to do it in a way that causes causes a massive hit to both their economy and to geopolitical situations. So, I think it's very nuanced, as you said, there's also some game theory being applied here in order to try to get the Germans to approve the Nord Stream 2, over American objections, and there's this desire to split NATO or to have NATO respect Russian interests in their near abroad, and I think that that is really what the game is. And when I think about who benefits most from having this story be in the front pages, it's not Putin at all, it's actually the administration here in the US, because you can make the case that, with inflation doing what it's doing here, and I'm sure Rajeev will have some comments on that, distractions via foreign situations that could potentially cause a quote unquote victory for us helps the administration tremendously. So if the Russians back off, that's viewed as a win for the administration, even though they may have never had any intention of doing anything anyways.

How do you think that falls into oil and inflation and other characteristics that we're facing in the economy with respect to overall inflation, George? We've got some reads this past week on PPI and CPI, but what's the fix?

Yeah, that's a good question, Brian, and you're right to point out about those things, but maybe to pick up what Steve was talking about too, I do think the administration probably is looking for a win somewhere, because the inflation numbers continue to be really quite hot, and I would guess we've probably got at least another month or two of those hot inflation readings before we might start to see some of these inflation pressures come down a little bit. I think it was kind of interesting, I think, just this morning as a matter of fact, that the market does seem to be accepting or maybe getting a little bit optimistic about the fact that at least people are still talking. So back on the Ukraine situation, at least, I guess there's a conversation to be held next week between the administration and some Russian officials that markets are kind of hanging their head on as a small sign of optimism, but to be true, again, a lot of uncertainty there. Although, speaking of uncertainty, Rajeev, I thought it was kind of telling that the Federal Reserve actually started to comment about the Ukraine situation, and maybe that has some influence on their output too, which is probably the other big risk that people are trying to grapple with, which is what the Fed's gonna do this year. So how did you interpret that from the Fed this week?

That's a very good point, George, and I agree with your comments and Steve's comments that this is a very complicated situation. And we did have the FOMC minutes released this week midweek, and what's interesting is they did mention Russian and Ukraine tensions, and that was back in January. These minutes were from January, so this has been on their radar as well for the FOMC, the Fed is looking at this. The conflict in this region could really send energy prices higher, we could see inflation rise further. That's obviously the biggest thing on the radar for the Fed right now is how to combat inflation, so anything that pushes inflation higher is going to have to be noticed by the Fed, and if you extrapolate that further out, we could see an impact on growth as well. So all of this did play into the conversation in the FOMC minutes, we had a Fed speaker in the minutes actually specifically mention Ukraine, Russia. Also mentioned geopolitical tension as a reason to proceed more cautiously when it came to Fed tightening, so geopolitical risk is certainly something the Fed is going to keep an eye on, and it's gonna really impact the decision of how aggressively to tighten, how aggressively to raise rates, so all of this comes all together in the radar of the Fed.

So where are we right now, Rajeev? I think we came into this year thinking the Fed might be raising rates four or so times this year. Consensus was I think, at the time, maybe two times, and now the consensus has flung well past our thinking and thinking maybe the Fed needs to raise rates seven or eight or even nine times I think I've seen in some cases. Do you think the economy can withstand that level of tightening, or do you think that it's gone too far? How do you view where the market is with respect to pricing, Fed rate hikes this year?

I think it's very interesting, the fact that the market itself, we had reached a peak of seven hikes expectations from the market, seven 25 basis points hikes for 2022. We were there earlier this week, St. Louis Fed President Jim Bullard was very aggressive on his comments about supporting a hundred basis point tightening by the summer, and starting off in March with a 50 basis point tightening, had inter-meetings and had these rate hikes during those meetings, and so it became a very hawkish statement and the market just took to it and started pricing in seven rate hikes this year. We're down to about six right now. This market expectations are too high, given where the FOMC appears to be. The majority of the FOMC is still favoring and commenting on moderate paces of rate hikes. They're still looking at 25 basis points in March. I think we're also in the camp of 25 basis points in March as a starting point. It's gonna be very interesting because I think all the central banks right now are gonna be data dependent. The Fed itself is talking about, they're looking at inflation to drop to 2.6% by year end. So if you look at that, you would not see as aggressive a posture by the Fed, you would not see these inter-meeting tightenings happening, you would not see rate hikes at seven rate hikes for the year if we did get down to 2.6%. But again that is all dependent on data, they're gonna have to continue to look at that CPI print. We actually have a CPI print coming up March 10th, six days before the FOMC meeting, so that's gonna also be very telling.

Yeah, it's interesting to talk about those forecasts. I mean, again, I still see some forecasts out there that think inflation's gonna fall towards, I don't know, 1% or so by the end of this year, maybe one and a half percent, and that seems a bit optimistic to me. This does have some spill over to the equity market too, and for the moment, we're probably caught in a bit of a vacuum in the sense, as you mentioned, Rajeev, there's a good four plus weeks or three plus weeks or so until the Fed actually convenes and we actually hear what they're really thinking, and the market's probably just gonna be stuck in no man's land for a while it seems. But in terms of the equity readthrough, this does have some implications for multiples, we've seen valuations come down quite considerably, but earnings are also quite strong, so Steve, I'm not sure if you've got a current view on that, but it does seem to me that we're in this tug of war now within the equity market, would you agree?

Yeah, the tug of war, it continues. There's just this battle raging in the market right now as we continue to hug the 200 day moving average, and we've seen two-way trading in the last week on both sides of that, generally based on geopolitics, but it's not lost that the rate market continues to put pressure on on valuation multiples. Earnings have continued to come in above expectations as we've moved through the end of earning season, we're 88% reported now, so the numbers are almost a hundred percent done, and the trend to me continues to be higher there. It's hard for the market to have a 50% drawdown year, like 2008 or 2000, when you have earnings on an upwards trajectory, so I think it cuts off the fat tail to the downside, but make no mistake, even if we get four to six, pick your winner, interest rate increases during the course of the year, if you look historically, there hasn't been a Fed tightening cycle back to 1980 that did not see multiple compressions, so I think that we're gonna have a difficult row to hoe this year in terms of seeing the equity market have a bang up year, and we continue to apply the template that we probably can see positive return for the year. I wouldn't be surprised by 15 to 20% drawdown at any time as the market digests this higher discount rate structure that we're definitely looks like we're gonna have.

With regard to some economic data for the week, unemployment claims are fairly steady, there's no new news there, but it is a good news story. The good news, a little bit of a burst on retail sales. Up 3.8% seasonally, adjusted month over month, and 13% year over year. Somewhat a consumer spending story, somewhat of maybe an inflationary story. George, what are your thoughts?

Yeah, the number was, I think, a little ahead of expectations as you mentioned, Brian, on retail sales, and again, it was kind of interesting that it came in the face of surging Omicron cases, so I took that as a pretty strong positive. If you look at the overall strength of the consumer, look at their balance sheet, look at the fact that wages are rising, we definitely have inflation and that's for sure, but we also have a lot of economic activity on the positive side of the ledger too, so some of these inflationary impulses are rippling their way through the economy in a positive way that we probably shouldn't discount either. So I think they bode well for the growth outlook, at least in the near term, we'll have to see how the rest of the year plays out, 'cause some of these trends will probably fade off a little bit as we go through the back half of this year, just given how much spending took place at the end of last year, where people were double or triple over in many things it seemed like, in hindsight. But for now I think the growth story is pretty strong, so in one level, while inflation is certainly elevated, it's coming at the benefit of some really strong economic growth too.

Great. And Steve, I'll give you the last word for today's call, and your thoughts on oil, and or some sector rotation that we're seeing happening in the market.

Well, I think higher energy prices remain on tap for us as we move through the balance of the year, and it continues to be a wild card. There's just been a massive disconnect between the amount of money invested on a global basis necessary to sustain supply, and we've eaten through spare capacity, and we're at a place where things are very vulnerable. So, I think triple digit numbers are in the cards for oil, the question is how far into the triple digits they go. If we get some kind of geopolitical thing, we could see numbers that we've never seen before, and I think the economy would have a hard time digesting that. Sector rotation, look, leadership remains within the deep cyclicals, energy, we've seen metals and mining within the material sector break out to new highs this week. Clearly to us, this inflationary boom scenario, it is auguring well for those industry groups, and market participants have glommed on to that very, very hard, so we see that continuing as we move through at least into the middle of the year, Brian.

Well, thank you, gentlemen, George, Steve, Rajeev, as always, thanks for providing your insights, we appreciate it, and thanks to our listeners for joining us today, and be sure to subscribe to the "Key Wealth Matters" podcast through your favorite podcast app. As always, past performance is no guarantee of future results, and we know your financial situation is personal to you, so reach out to your relationship manager, portfolio strategist, or advisor for more information, and we'll catch up with you next week to see how the world and the markets have changed, and provide those keys to help you achieve your financial success.

The "Key Wealth Matters" podcast is produced by the Key Wealth Institute. The Key Wealth Institute is comprised of a collection of financial professionals representing Key entities, including Key Private Bank, Key Bank Institutional Advisors, and Key Investment Services. Any opinions, projections, or recommendations contained herein are subject change without notice, and are not intended as individual investment advice. This material is presented for informational purposes only, and should not be construed as individual tax or financial advice. Bank and trust products are offered by Key Bank National Association, member FDIC and Equal Housing Lender. Key Bank Private Bank and Key Bank Institutional Advisors are part of Key Bank. Investment products, brokerage, and investment advisory services are offered through Key Investment Services, LLC, or KIS, member at FINRA, SIPC, and SEC registered investment advisor. Insurance products are offered through KeyCorp Insurance Agency USA, or KIA. KIS and KIA are affiliated with Key Bank. Investment and insurance products are not FDIC insured, not bank guaranteed, may lose value, not a deposit, not insured by any federal or state government agency. Key Bank and its affiliates do not provide tax or legal advice. Individuals should consult their personal tax advisor before making any tax related investment decisions. This content is copyrighted by KeyCorp 2021.

February 11th, 2022

Welcome to the Key Wealth Matters podcast, a series of candid conversations with leading experts about how individuals and organizations can grow and protect their finances, tailored around current events and trends. Here's your host for today's podcast, Brian Peter Angelo.

Welcome to the Key Wealth Matters weekly podcast where we casually ramble on about import and topics, including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to unlock the mysteries of the markets and investing. Today is Friday, February 11th, 2022. I'm Brian Peter Angelo. With me today, I'd like to introduce our roster of investing experts. Some might even say they're super, just like this weekend. We've got Steve Hate, our head of equities. Rajiv Sharma, head of fixed income, and Justin Tantalo, senior lead research analyst. Gonna give us an update and some thoughts on the cryptocurrency market. As a reminder, a lot of great content is available on our key.com/wealthinsights including updates from our Wealth Institute on many different subjects, and especially our Key Questions article series, addressing a relevant topic for investors each Wednesday. It's been an interesting week in that there were not many major economic releases during the week other than the heavily followed consumer price index inflation print yesterday. We'll talk more about that at length today, but first we'd like to turn to Steve to get an update on his thoughts on what's going on with the market, the breadth, the volatility, and some earnings that continue to roll in, and just your overall seat from your perspective. Steve.

Thanks, Brian. Good morning, everybody. And you know, you look at this week and it feels like it's been a lot longer than five trading days since we had one of these conversations. You look at this, it's been a back and forth, lots of churning. And you know, the market's really been coming to terms with what the Fed is likely going to have to do in terms of its level of aggressiveness. The things that have really caught my attention though, is we've continued to trade below the 50 day moving average, we've recaptured the 200 day about 10 trading days ago, but we haven't been able to punch through the 50. And to me, that says that there's still a tug of war going on between the bulls and the bears in the market. If we had been able to retake that 50 day moving average, I'd say, okay, the bulls are back in control. We've adjusted to the expectations of what the Fed's gonna do and all that. And we just haven't been able to do it yet. Breadth has been okay, but we've definitely had this two way market activity. And you know, there's two things that have really concerned me, and I wanna get Rajiv's perspectives on this. First is we've continued to see high yield CDX spreads widen during the course of the week. We've moved to multi month highs. We've taken out the highs that we saw last December. That to me remains a point of concern. And then the second thing is, my goodness, take a look at the yield curves. And it doesn't matter what yield curve you pick, they are collapsing right now. And literally, we're at the point where the Fed could hike two times or one 50 basis point hike, and they would be inverting yield curves across the board. And to me, that's a real concern. And that's where I think they're in a box, you know? They clearly have to do something about inflation, my goodness, seven and a half percent. We haven't seen that since the 1970s, or if you think the early 1980s numbers were were legit. And you know, that doesn't even get into the computing of those numbers, where if we had equivalent numbers today, the number would be running 10. So Rajiv, what are you thinking right now?

Good morning, Steve, and good morning to everyone. It's a great point you make there about the yield curve collapsing. That's something that I'm keeping my eye on. We really have seen those twos and tens collapsed about 50 basis points. We haven't been that tight, we haven't been that low for a while, and I think that's gonna continue. Even if the Fed starts to raise rates, we could still see the back end of the yield curve continue to be stubborn. And if that happens, you're gonna see that yield curve flatten even more and inversions are likely. And better than any economics major out there, we all know that when there's an inversion of the yield curve, that's a really strong signal for recession. I think they've predicted that at eight times in the past whenever the yield curve has inverted. As you mentioned--

I'm sure this time will be different though, Rajiv. I'm sure it'll be different.

Yeah, it's always different. It's always different. As you had mentioned about the CPI print though, I mean, that 7.5% print was the hottest read since the early 80s, late 70s. And the impact a bond market at that point was really quick. We saw that two year treasury note yield. It surged to 1.54%. We saw the 10 year go past that 2% mark. That's some kind of psychological resistance point. People wanted to see if we would make it beyond 2% on the 10 year, we did it immediately almost. That's the first time we've seen that since 2019. And now what does the Fed do here? I mean, the Fed's got some big problems right now because you're looking at the yield curve. They wanna look at that as a measurement of what to do as far as how flat we can go. And you look at the Fed and you know that the March meeting is coming up in about five weeks. The probabilities of a Fed rate hike increased, right now, the probably is around three hikes by June and six total hikes by the end of the year. So, I mean, there's a lot going on here. I think that one of the important things to look at is the big question of does the Fed raise rates 25 basis points in March, or do they raise them by 50 basis points? And before that CPI print, the probability of a 50 basis point was around 34%. After that CPI print, the odds on the 50 basis point lift in March has rises to 62%.

The only thing gating us from a 50 basis point raise, Rajiv, really is this historical idea of historical precedent, right? 'Cause they've never kicked off, at least in my investing career, a tightening cycle with a 50 basis point hike, but that doesn't mean they can't.

Correct, correct. They've never done it, there's no precedence, and I think the market would be lost if they did it. They wouldn't know exactly how to handle that. 50 base point hike, if they were to do it, it could send a really strong statement from the Fed that hey, we're here to control inflation. We're gonna do whatever it takes. But I think the market sentiment will be more about the Fed must really be behind the curve if they're taking this big measure right now.

Exactly. It'd be a sign of panic, right? I mean, that's the way I would take it as a equity market guy. I would see it as a sign of panic that they're so far behind the curve that they're gonna do something that's gonna cause stuff to break, you know? They're gonna be so aggressive that they're gonna break something, and that that's really the fear on our side, on the equity side.

That is a big fear. And you have the, I don't know if you caught those comments late yesterday, St. Louis Fed president Bullard came out and said that we need to remove accommodations as fast as we added them. And that's pretty scary when you say something like that because they've added accommodations in about a week. So it was like, how fast is the Fed gonna move?

Well that was, I was going through my news screen on Bloomberg last night, and for goodness sake, there was talk of an intermeeting cut coming today after those comments last night, which to me was mind-boggling. I mean, I've literally seen one intermeeting move in my career, and that was during a crisis. This is not a crisis. This is a Fed that has been behind the curve, but there are reasons for it. I mean, obviously the COVID situation, they were gonna be as accommodated as possible. But you know, this talk of this intermeeting move stuff to me is just mind-boggling at this point.

Yeah, to have an emergency meeting just makes very little sense and causes more panic, as you mentioned, in the market. But the Fed officials, other Fed officials came out immediately this morning and said, no, we don't really believe in the intermediate or emergency rate rate hikes. We wanna push back. Let's have a more measured approach. But we've got five weeks before the March meeting and you're gonna have so many more talking heads coming out and causing even more volatility in this market.

You know, historically you're right, Steve. You mentioned it earlier, in the last four rate height cycles in 1990 to 2000 present, 2021 present day '22, I should say, the Fed has never started with a 50 basis point cycle. But the key here difference is that '94 to '95, '99 to 2000, 2004 to 2006, and then 2016 to 2019 being the four prior rate height cycles, inflation at that time was in the two to three and three quarters percentage range. So now we've got 7.5, big difference. It almost begs the question to go 50 instead of 25, other than the Fed trying to be cautious about over rotating too quickly, but they're a little bit behind the curve. What are your thoughts on that move?

Well, I completely agree, Brian. I mean, at the end of the day, they let the inflation genie outta the bottle a year ago. And transitory was always, well, there are words to describe what the transitory argument was, but I'm not gonna use them on this call. At the end of the day though, the real issue that we've gotta deal with here is what is gonna happen when they get deeper into this cycle and how far they go with the market being willing to accept it? You know, when I look at earnings, earnings continue to trend up, and we continue to hear good things from companies in terms of what they're seeing. Yeah, there are supply chain issues, and that has clearly contributed to the inflation numbers, no doubt.

What about the argument that, because this would be the first rate hike at 50 basis points if they did it, I think pretty much everybody in consensus agrees that the cycle will, the hiking cycle will go far further than 50 basis points in totality, so that doing 50 basis points in the first step is, I mean, maybe surprising to some 'cause it hasn't happened in a while, but doesn't necessarily mean that rate rises will be higher than we all initially expected, it just kind of means a little bit faster than was originally expected. Is that something that we may get to an equilibrium or will it necessarily sort of spook the market that they did 50 at once?

I think you're gonna need to make sure that inflation does not, you have to make sure inflation actually starts to slow down. If you do a 50 base point hike and still have no impact on inflation or we don't see a second half a year turnaround story, then we're gonna have some major volatility in this market and you're gonna see inverted yield curves as well. 50 basic point hike is going to get us dangerously close to the inversion point. I think with the inflation where it is right now, you even have buyers stepping in right now on the longer end of the curve, so that's keeping it flat as well.

Interesting.

I mean, to me, the real question is gonna be, how long is this cycle gonna be, and are they gonna be, you know, where is the terminal rate? I've heard a number of different arguments here in the last week or two, including from a couple really smart guys, Stanley Druck and Miller Larry Lindsay, they're talking about inflation running multiple years in the 7 to 10% range and talking about Fed funds rates of being 5 to 7%, and I can't fathom that. Not in a situation where we've got federal budgets where they're at. I mean, can you imagine what the interest expense is gonna be on the debt at that point? We're gonna have real, real serious issues in terms of financial flexibility if they do tighten that much. Which begs the question, you know, maybe we can't go that far. Maybe if we go 50 basis points, there's really only another 50 to 100, 150 basis points they can go before you see really significant economic repercussions from higher rates. And the fact is, we're just gonna rip with inflation at 400 basis points or for the rest of this decade and we better get used to it. But if that's the case, then there's gonna be a whole host of things we're gonna have to deal with, including lower multiples for stocks, commodities outperforming like we haven't seen for 50 years, all kinds of stuff. I mean, to me, this is really, this is the year of the Fed if there was ever a year of the Fed.

Rajiv, let me ask you this question based on what we just heard from Steve. Would it be strategically advantageous to then, in the first raise, shock and awe the market to try and prick the inflation level knowing what Steve had just said is that the terminal rate doesn't have much upward flexibility, so maybe we can get the job done with an initial shock so that we don't have to raise rates beyond that 200 or 250 basis points sort of ceiling that Steve alluded to. If you were the chairman of the Fed, would you consider that strategy?

Well, definitely the Fed has that option now. The Fed I don't think wanted to get the probabilities of 50 basis point hike as high as they are right now. They also didn't wanna telegraph the 50 basis point hike in any way either. I think it makes a lot of sense if the Fed, they could take the opportunity to prick the bubble, as you said, and raise 50 basis points. The issue would then be after that that where do we stop that? I mean, are we gonna immediately see an impact by raising 50 basis points? If we don't, then does every meeting become a live meeting where we have to continue to raise rates in that kind of magnitude? And not having precedence for 50 basis points, again, adds to much more volatility in the market. If it's truly about controlling inflation, and I think that it is, they're gonna have to come up with some kind of way of not only just raising rates, but they have to also, raising rates is somewhat of a blunt tool, if you ask me. There's other ways to do this. I think they have to really consider the quantitative tightening. That's something that could be a little more nuanced, and that could help us with a lot in this situation, especially with the yield curve. If they start using quantitative tightening, you could see the back end of the yield curve start to rise. That would definitely help a lot more than just simply--

How crazy is it that we're having these conversations and they're still buying bonds for goodness sake?

Exactly. The taper program isn't even over.

It's not even over!

It's not even over and they're talking about emergency meetings.

Exactly!

It's not gonna happen. It's just not gonna happen.

It's over in March, so we'll see what happens, gentlemen. That's a great way to end the conversation on inflation for today's super robust opportunity. And we'll rotate now to Justin, as we have him on the call to talk a little bit about cryptocurrencies for our audience. Justin, what are your thoughts at a very high level in terms of defining crypto for our audience, and what are your thoughts in the next couple minutes?

Sure. No, thank you. I mean, I guess first I'd say that we should remember that crypto is a relatively new asset class, right? Started less than 15 years ago with Bitcoin. And although it's growing like wildfire, that's really a short history when you think that investors have been buying and selling corporate equity for the past 400 years. We know corporate equity inside and out. We know less about crypto, given the short history. And so, if we start with the, let's say broadest definition, and this is gonna be a little bit rich, so bear with me, is that I would suggest that crypto represents decentralized property rights for scarce digital goods. And let me unpack that just a little bit. So when I talk about decentralized property rights, that really refers to the fact that custody and control of crypto assets takes place on a globally distributed peer-to-peer network. So if we think about Bitcoin, for example, ownership records of who owns Bitcoin are maintained concurrently on a network that has, right now, approximately 15,000 nodes distributed globally. Those nodes can come and go without disrupting the collective record. So property rights have never been stored like that in history. It's always been a sort of down at City Hall, they'll tell all you who owns this property. But this is a case where there are 15,000 copies of the same collective record and no one entity is sort of in control of that. And so, if we go to the second part of the definition, which is that these property rights, they cover scarce digital goods, right? And until now, that's been kind of a misnomer. Until Bitcoin, the concept of digital scarcity didn't really exist, right? You could copy an MP3, for those of us old enough to remember what that was, or JPEGs as many times as you wanted. No one really owned it, right? Crypto assets are different, and they introduce this difference that each Bitcoin has an owner. And importantly, there will only ever really be 21 million Bitcoins outstanding. So I think that's how I think about the definition of crypto and how it's different and soft what's the, what does it actually bring that's new to our world?

Okay, that's great definition and a backdrop for our listeners, and we may have the opportunity to talk for hours on this because it's such a great topic, but I'll ask you one final question, Justin, that I think will really help our listeners understand, and that is, given all the volatility, given all the buzz, given all the potential risks and potential rewards, how do we think of crypto from an investment perspective inside of somebody's portfolio? What are your quick thoughts on that?

Sure. No, I mean, yeah. When you think about investments, the two dimensions that come to mind are your risk and your return. If you think about the potential return, it boils down to how do you value these assets. And I've been down that rabbit hole, and what I can tell you is that some of the most prominent valuation models in the crypto community are, to be honest, they're pretty unimpressive. They're vague about how they define value. It's not necessarily in dollar terms. And most of them at some, at some level, mistake correlation for causation. And so, for me, the best analogy here, and it may be cliche, but I think it's apt is that you should think about Bitcoin as digital gold. Both of them have verifiable scarcity, both yield nothing, and both have relatively low correlations to traditional assets, like stocks and bonds. And so, we should remember that investors have been struggling to model gold's fair value for hundreds of years. And I expect that, on the return side for Bitcoin, we will struggle for many years to come. And so, I guess, and the last thing to say on the risk side, and this is probably not news to anybody, but crypto assets are exceptionally volatile. right? In the last 10 years when you think about Bitcoin, it's declined by 80% from its recent highs three separate times. So each time the price is recovered, but you know, the volatility of some of these digital assets is certifiably in a league of its own. I mean, a decline of 80% three times in 10 years tells me that crypto owners, you should not be surprised if that happens again. And so, I'll end it here, but I'll say that crypto assets are exceptionally interesting, but they're certainly not suitable for all investors.

Excellent. Steve, Rajiv, Justin, thanks for providing your insights. We always appreciate it. And thanks to our listeners for joining us today, and be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app. As always, past performance is no guarantee of future results, and we know your financial situation is personal to you. So reach out to your relationship manager, portfolio strategist, or advisor for more information, and we'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you achieve your financial success.

The Key Wealth Matters podcast is produced by the Key Wealth Institute. The Key Wealth Institute is comprised of a collection of financial professional representing Key entities, including Key Private Bank, KeyBank Institutional Advisors, and Key Investment Services. Any opinions, projections, or recommendations contained herein are subject change without notice and are not intended as individual investment advice. This material is presented for informational purposes only, and should not be construed as individual tax or financial advice. Bank and trust products are all offered by KeyBank National Association, member FDIC, and Equal Housing Lender. Key Private Bank and KeyBank Institutional Advisors are part of KeyBank. Investment products, brokerage, and investment advisory services are offered through Key Investment Services LLC, or KIS. Member FINRA, SIPC, and SEC registered investment advisor. Insurance products are all offered through KeyCorp Insurance Agency USA, or KIA. KIS and KIA are affiliated with KeyBank. Investment and insurance products are not FDIC insured, not bank guaranteed, may lose value, not a deposit, not insured by any federal or state government agency. KeyBank its affiliates do not provide tax or legal advice. Individuals should consult their personal tax advisor before making any tax related investment decisions. This content is copyrighted by KeyCorp 2021.

February 4th, 2022

Welcome to the Key Wealth Matters podcast, a series of candid conversations with leading experts about how individuals and organizations can grow and protect their finances, tailored around current events and trends. Here's your host for today's podcast, Brian Pietrangelo.

Welcome to the Key Wealth Matters weekly podcast, where we casually ramble on about important topics, including the markets, the economy, human ingenuity, and almost anything under the sun. Giving you the keys to unlock the mysteries of the markets and investing. It's Friday, February 4th, 2022. I'm Brian Pietrangelo. And with me today, we have three of our gold medal caliber investment experts; George Mateyo, our Chief Investment Officer, Steve Hoedt, Head of Equities, Rajeev Sharma, Head of Fixed Income. As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our Wealth Institute on many different subjects, and especially our Key Questions article series, addressing a relevant topic for investors each Wednesday. Well, gentlemen, as always, thanks for joining us for another session of our weekly podcast, and there's been a ton of data that came out economically. We'll cover that in a minute, but first, let's go over Groundhog Day, where Punxsutawney Phil has predicted six more weeks of winter, but at the end, maybe he's predicting six more weeks of market volatility or more. Steve, what are your thoughts on that?

Well you know, it's 108 times now that Punxsutawney Phil has predicted more winter, which is the safest pick when you're in mid-February or early February, isn't it? So, not a great surprise there. I do have to admit though, it is one of my favorite days of the year, I love the kitsch. But more volatility sure does look untapped to us here. We're back retesting the 200 day moving averages. We look at the market today, we've seen bear sentiment skyrocket, so we've got fuel for both the bulls and the bears right now. And we have a two way market for the first time in probably a good year and a half, so more volatility ahead, to be sure.

Looking to some of the economic data that came out, especially this morning regarding jobs, we've got a pretty favorable number in terms of the report of 467,000 plus revisions from prior month, in addition to the labor force participation rate. George, you've looked at a lot of these numbers. What are your of thoughts in terms of the strength of the economy due to the jobs reports, as well as some of the other data that you're looking at with the forecast for the Fed?

Well, the employment report just really blew the doors off. I think a lot of people were thinking that we'd have some weakness associated with Omicron and to be clear, there are certainly a lot of people that are not able to get to work because maybe they might be sick or they're caring for somebody in their family who's sick, but the numbers really would suggest that, as you mentioned Brian, numbers were really strong with revisions for the prior month. So sometimes they do a bit of a catch up and it's just amazing to see these numbers. I think they're close to 700,000 or so jobs. Really remarkable strength for sure. Wages, as you mentioned, accelerated as well. I think they're up some five and a half percent year over year. Labor force actually increased a lot. And so you have more people coming back into the labor market as well. I'll suggest that again, I think this is kind of a new era of, you know, robust growth and along with it higher inflation as well. So we're still a couple million short in terms of where the overall employment situation was prior to the pandemic. So it's been, you know, two years now and we're still kind of below where we were just prior to that. But by all accounts, it seems like the employment situation is really quite robust and it's staying that way and I think it's gonna continue for a while. There's still a backlog of demand for more labor supply in many parts of the economy. And for that reason alone, I think you're gonna continue to see wage pressures rise a bit. You're gonna continue to see really strong inflation numbers. I think we're gonna get key inflation numbers next week. So by this time next week we'll have another report from the Consumer Price Index. Last time we talked about that it was 7% year over year. Historically it's been in the 3% range, so we're kind of two to two and a half times higher than where we normally are. And that's gonna continue to probably look a little bit hot as we see it. So inflation is definitely here and that really puts the Fed and central banks in the spotlight. So I think it's probably really important to kind of think about what the Fed is thinking. And with the days report, it seems like we've now got a chance that the Fed might be even more aggressive than once thought. So I think that's starting to kind of price its way through the markets, but Rajeev, what are you seeing in fixed income right now?

Well, I agree George. That job number came in very hot this morning. We saw a yield surge, six basis points in the 10 year. We hit 190 this morning. That's the highest that we've been in two years. And there is that bigger probability now that the Fed could do a 50 basis point hike in March. We see the two year, which is very influenced by Fed policy around 1.3%, really big moves there in the front end. Everything you said is absolutely true as far as the jobs number goes. Despite all the COVID 19 cases and business closures, that kind of number that we saw today puts the pressure on the Fed to raise interest rates. And I think that's gonna be reinforcing that this number reinforces Powell's characterization of the labor market that he said in his press conference that it's strong and the intention is really, to raise rates come March to tackle inflation. If you just look at as you mentioned, labor participation rate, it's increased to 62.2%. And so these are all very strong numbers. It points towards tighter monetary policy. So do we see a 50 basis point hike or do we see a 25 basis point hike in March? I still think we're gonna see 25 basis points, but the odds of the 50 basis points jumped this morning. We were at around 23% odds of a 50 basis point hike in March and now we're about 34%. So that's still on the table. It's gonna be very interesting to see what happens.

Yeah, I don't think the Fed, I don't have the numbers in front of me, maybe you do Rajeev, or Brian, you've talked about this too from time to time. The odds, or maybe the frequency with which the Fed has actually moved more aggressively. In other words, they've been in this kind of typical incremental policy changes where they raise interest rates by 25 basis points, typically in a tightening cycle. You acknowledge that maybe they would do a bit more, maybe 50 basis points. Do you know how many times they've actually done that in the past? I think it's pretty small, right?

Yeah, I don't believe they've done it for the last 22 years.

So it's over 20 years where they actually were doing that and kind of causing rates to move up more quickly than people thought. So that's kind of interesting. I think it, again, it is interesting that we're even having the conversation that they might need to do that. But then again, beyond that, I still think there's a lot of uncertainty with how much tightening they need to actually put forth this year. And when we spoke last, I think the numbers that we heard were, well, I guess we started the year thinking that that they might raise rates three or four times, maybe five, but we were kind of, I think around the three to four range. The consensus now has moved up to maybe closer to five. And there's, again, people on the street that suggest that rates need to be raised as much as seven times this year. Have you altered your forecast or your outlook for the overall year, Rajeev?

No, we're still maintaining our forecast for hikes this year. I think that's the camp that we're in, and looking at the tenure, probably ending the year around 225 to 250, we're still sticking to that.

And so I know you've said a few things about this too, Steve, where you think maybe the Fed might be, you know, kind of prone to do a few things early in the year and then pause a little bit. Is that still your outlook as well?

Yeah, you know, I think that they know they're behind the curve and they have to go aggressively, but I don't know that we aren't gonna get a pause because of the way that this balance sheet runoff is being integrated into their thought process. You know, the last time they ran the balance sheet off was in late 2018, the market had all kinds of problems. And to keep in mind during that time period, we had the tariff situation that was going on from the Trump administration with China. So I think that market participants really don't have to clear read on the impact of balance sheet contraction or quantitative tightening, QT. And I don't know that the Fed really thinks that it has a great handle on what the impact is too. So, you know, I think that we're likely gonna see some type of pause while they start that process so that they can get an assessment of what the market impact is of QT irrespective of hiking rates at the exact same time.

That phrase you just used, clear read, I think is really telling. I don't think anybody has a real clear read and just looking this week, Rajeev, you and I have to update this chart that we show from time to time that show just the forecast for inflation at the end of this year. So again, if you think of where our inflation is right now we mentioned it's around 7% or so measured by CPI. And we'll probably tick higher a little bit when we get the reading the next week. But then in terms of what people think might happen for the rest of year, the range is enormous. I mean, there's just so much uncertainty right now. There are some people that think inflation will fall back close to 1% or even maybe below 1%. And then there are people that still think inflation's gonna be stuck at, you know, five or 6%. And that dispersion is just enormous in terms of trying to think about where the economy's heading. So I think it's gonna be a lot of uncertainty, and you pointed earlier Brian, a lot of volatility. In terms of dispersion though, and thinking about widening of outcomes. You know, there were a couple stocks in the news this week. We don't have to name names necessarily, but a couple really high profile companies that historically traded in lockstep with each other and were all kind of clustered together as kind of a unified group it seemed like. You know, some of those divergencies really started to emerge this week where a few companies who missed earnings or reported weak results saw their stocks just get hammered, obliterated almost. And then there were a couple companies that actually provided some upside surprises. So to me, Steve, it seems like we're kind of in a market environment where the micro matters as much as the macro. What do you think about that?

Yeah, you know, I think that there's a couple points there first, you know, when you look at the earning season that we've had, there's been a definite difference between the winners and losers. So companies that are beating on both revenue and EPS are outperforming the market by 70 basis points on those days and ones that miss are clearly underperforming by minus one and a half percent. However, if you look historically, those returns are muted compared to what they've been in the past. The average return for companies that both beat is plus 1.8%, and the ones that miss, it's minus 3.1. So, you know, while we've had really huge moves in some of these mega cap tech names, in particular, the rest of the earnings beat and miss cycle this quarter has been incredibly muted while we are seeing that bifurcation between winners and losers. You know, when you look at the mega cap tech names, I think for a while now, there's been this attitude in the market from investment managers managing their own career risk, as opposed to trying to manage to make money because it's like, you can't get fired for owning those names, right? Well, you know what? You can get fired for owning those names now. Because there's huge performance gaps between two or three of them in particular. You know, we think that that that is likely to persist. There are differences between these companies and differences in their business models and you just can't en masse buy all of them and profit anymore. It's definitely moved to being a stock picker's market, if it's not always been a stock picker's market, George.

Well said Steve, well said. And I think that that does speak to the fact that despite the fact that there's a lot of volatility overriding the macro environment, there's certainly a lot of things to do at the micro level in terms of actually how you express views in a portfolio, how you gain exposures and what we've been saying for quite some time I think remains the case, which is maybe you wan to de-emphasize some of the really mega cap heavy exposure and be more selective around how you actually build an equity portfolio to your point Steve, around trying to discern winners versus losers and companies that have really durable businesses versus those that might be a little bit more fragile or susceptible to competition. But at the fixed income level Rajeev, moving over to you, there's been a lot of movements as well with inside fixed income. We haven't heard much from the muni market of late. So what's been happening in munies these days?

Well, finally we're starting to see muni yields start to rise. I mean, for the last year or so, we've been saying that munies are not very attractive with the yields that they were at. And we finally see munies look a little more attractive this year with this move-in rates. Treasury yields, as you know, rose across the curve. But with that movement mostly was concentrated on the front end. Same thing with muni yields. They've also risen almost 31 basis points on the front end. So munies at the front end look attractive. And I think that they're gonna continue to find some interest in munies. Right now you're seeing bank and insurance companies, they're finding some value. They're finding tax exempts to be compelling. They've come in and they started buying munies. And I think the equivalent tax advantage on munies for 30 years are around 3% for AA bonds. So I think there is attraction there. And I think you see banks and property casualty buyers stepping in. We also see new issuance start to pick up a little bit too, January a lighter month for muni issuance. Now we expect next week around 9.2 billion to be issued in the five year space of munies. And we think tax exempt supply should be around 7.8 billion. So there's gonna be more muni interest, I think, with the yields where they are now, for a very long time investors are getting a little more excited about munies.

And in terms of investors getting excited about fixed income, are people getting excited about the state of the credit markets? We've talked about that from time to time with these calls to Rajeev where the credit markets can somewhat be and really tell in terms of the outlook of the economy. So what do you see in the credit markets more specifically today?

Spreads have been very contained. I mean, it's very interesting with all this movement in this recent equity volatility, you would expect that perhaps spreads would also start to see some wider levels now, but we haven't seen that. We came into this year with spreads at tight levels. We came into this year with almost 140 billing and new issue supply in January for investment grade credit. And it still really didn't move spreads out to levels that would be uncomfortable for their credit markets. The credit markets right now are focused on what the Fed's gonna do, what the policy statement's gonna be in March. Is this finally gonna put an end to where we are in the credit cycle? We're very late in the credit cycle. We've been late in the credit cycle for a while now. And will this move finally put an end to that? In other words, will issuers decide that, okay, rates are higher now, we don't need to come to market too often anymore. We've already raised as much cash as we could with low rates. Perhaps we'll cool that down a little bit. If the new issue story cools down, you could see spreads move tighter. Generally in a market where you see higher yields, you expect tighter spreads. This is a very different market because of the volatility that we're seeing in the market. We've got a Fed in action. We've got equity, volatility. History points to credit spreads not being able to tighten against equity volatility and spread tightening could happen if that new issue supply story slows down or foreign investors get involved with the credit markets, the U.S. credit markets. Yields look attractive right now and you could see foreign investors start to come in, which could also bring spreads tighter.

You know, George, we haven't talked about it in a number of weeks for good reason, but maybe we can close out with a recap on where you see COVID and Omicron going since it's a positive story.

Yeah, to be sure, it is a positive story, although I'm sure there are a lot of people that are unfortunately still affected by this in a very personal way. And there obviously is a state of concern for healthcare in general, but in terms of what's driving the market, it does seem as if the Omicron situation has receded to the back pages. The cases have reported have actually fallen tremendously. So we saw a spike in early January of some, gosh, I think it was close to almost a million cases per day. The numbers when I last looked were well below 400,000. So we've kind of collapsed it by more than half in just, you know, call it a month's time or so. And again, there's a lot of uncertainty, a lot of things we don't know, but it does seem like from what the market's trying to digest, Omicron is less of a risk right now. Of course, that could change any minute, I guess, we've been proven wrong, but it does seem as if this is the story, Omicron is fading. In this Friday's job report, there were a large number of people, as I mentioned earlier, that hadn't been able to get to work because of healthcare concerns, whether, again, they were affected personally or someone in their family is and they're caring for that person, that's preventing them from getting to work. So I still think that if these trends continue and these cases continue to recede, as we hope and think they will, again, maybe that augers for some more support in the labor market which could relieve some of those inflationary pressures but love to see how that plays out. But as you mentioned, Brian, a lot of good news there on the COVID side. I think vaccinations are actually increasing a little bit, at a small, but higher rate. And so overall, it seems like from the healthcare perspective, in terms of its bleed through the economy, those seem to be abating and we hope to keep our fingers crossed to see how that plays out going forward.

So thanks to our listeners for joining us today and be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app. As always, past performance is no guarantee of future results. And we know your financial situation is personal to you. So reach out to your relationship manager, portfolio strategist or advisor for more information. We'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you achieve your financial success.

The Key Wealth Matters podcast is produced by the Key Wealth Institute. The Key Wealth Institute is comprised of a collection of financial professionals representing key entities, including Key Private Bank, Key Bank Institutional Advisors, and Key Investment Services. Any opinions, projections, or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. This material is presented for informational purposes only and should not be construed as individual tax or financial advice. Bank and trust products are offered by Key Bank National Association, Member FDIC and Equal Housing Lender. Key Bank Private Bank and Key Bank Institutional advisors are part of Key Bank. Investment products, brokerage and investment advisory services are offered through Key Investment Services LLC or KIS. Member FINRA/SIPC and SEC registered investment advisor. Insurance products are offered through KeyCorp Insurance Agency USA or KIA. KIS and KIA are affiliated with Key Bank. Investment and insurance products are not FDIC insured, not bank guaranteed, may lose value, not a deposit, not insured by any federal or state government agency. Key Bank its affiliates do not provide tax or legal advice. Individuals should consult their personal tax advisor before making any tax related investment decisions. This content is copyrighted by KeyCorp 2021.

January 28th, 2022

Welcome to the Key Wealth Matters Podcast, a series of candid conversations with leading experts about how individuals and organizations can grow and protect their finances, tailored around current events and trends. Here's your host for today's podcast, Brian Peter Angelo.

Welcome to the Key Wealth Matters weekly podcast, where we casually ramble on about important topics, including the markets, the economy, human ingenuity and almost anything under the sun, giving you the keys to unlock the mysteries of the markets and investing. It's Friday, January 28th, 2022, I'm Brian Peter Angelo, and with me today, we have a full house, not only a great hand in poker, but also because we have four of our investment experts instead of the usual three. Georgia Mateyo, our Chief Investment Officer, Steve Hoedt, Head of Equities, Rajeev Sharma, Head of Fixed Income, and Cindy Honcharenko, Fixed Income Portfolio Manager, here with us to provide some additional thoughts on the FOMC meeting this week. As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our Wealth Institute on many different subjects and especially our Key Questions Article series, addressing a relevant topic for investors each Wednesday. So it's been a volatile week in the markets. There's been some economic data that came out, most recently this morning on ECI as well as PCE, including elevated levels on inflation. GDP was pretty good, finished the year at 6.9% for the fourth quarter, but the full year GDP was at 5.7%. So these are pretty good indicators into what the FOMC and Jay Powell are thinking. So with that, we'll go directly to Cindy. If you wanna give us a recap on what you think FOMC meeting entailed, we'd be glad to hear some of your thoughts, Cindy.

Thanks Brian, quite a meeting. First off, I think the highlight is Powell saying we're in a different economy and we have a resilient labor market. So while the statement did not contain any meaningful surprises, it merely rubber stamped the expectations for an imminent rate hike at the March meeting. The press conference sent an unequivocal signal that the Fed's view has continued to evolve in a hawkish direction. And two remarks from the Chair stood out in my view. The first is that the economy is in a very different place than it was at the onset of the last hiking cycle. As the economy is on a stronger footing, the labor market is healthier and inflation is more elevated. Powell reiterated his comment several times throughout the press conference, and crucially said that these differences are likely to have important implications for the appropriate pace of policy adjustments. The second that really stuck out to me is that the U.S. economy and labor market can therefore withstand a fair amount of tightening, with quite a bit of room to raise interest rates without threatening the labor market. That is by so many measures, historically tight. To me, that's a remarkable comment given Powell's typical cautious predisposition. So he didn't say whether they're going 25 or 50 basis points. He left the door open. Chair Powell refused to be dragged in a debate on the likely pace and extent of rate hikes. But I read those comments as an indication that the Fed's biases for more frequent hikes than we had originally anticipated. Right now, we're looking at four hikes. Those are already priced in for 2022, and those hikes are gonna start in March and should occur quarterly. Now, there are some shops that have been starting to price in six. I was on a call earlier this morning with another shop that is now pulling forward seven, 25 basis point rate hikes for 2022. It's changing by the minute. So we continue to move toward March. There is some talk about 50 basis points. Right now, the market's not pricing that in. If anything, there's possibly a 15 to 20% chance of that happening at March. But again, I think that Powell's gonna stick with the 25 and then just hike more frequently. So we're looking at just about almost every meeting in 2022, as a rate hike. Some other comments from the press conference, Powell mentioned that the Fed will remain humble and nimble. And that to me indicates that they have some uncertainty and that the market, especially the front end, is going to be able to drive them into the direction of how many hikes, how large those hikes will be. So the front end right now is dictating what's gonna happen. They seem to be challenging the equity market, basically asking the equity market, how much can you front load on these hikes? And can you handle six hikes, can you handle seven hikes? We don't know how much the equity market is gonna be able to handle here, but I would assume that if we have another 10% drop in the equity market, that the Fed's gonna have to pause and reassess the path.

Cindy, I think that's really interesting, and when you talk about the front end, you're talking about the front end of the yield curve are really short, I guess, short term-

Yeah, they are very short, yeah.

So one thing that I think people need to be mindful of is that when we look at interest rates, there's a lot of ways to look at interest rates, which is why we've got experts like you paying attention to these things. But the short end as you pointed out, the two-year treasury, for example, has just skyrocketed the last couple of months, whereas the long-term rates have moved up but not nearly as much. So you've got short-term interest rates moving up rapidly, long-term rates moving up a little bit, but not nearly as rapidly. And so the difference between those two short-term and long-term interest rates are what we call the yield curve, right? The difference between short-term and long-term rates, and that yield curve now has gotten pretty flat, hasn't it? It's gotten really pretty narrow.

It has.

And typically I think, if history is any guide, that typically suggests that maybe, well, we have to talk about it, a recession might be coming at us at some point. So I think it's a definitely a transition, but I think the backup is kind of interesting right now too, in a sense that inflation is pretty hot, but the economy is really quite hot too. We ran you through a lot of great acronyms at the beginning; ECI, PCE, FOMC, GDP, to me, the takeaway was inflation is really quite hot, but the overall economy is so pretty hot too. So we've got four-year highs inflation, we also have four-year highs in economic growth. And so something's gotta give, and I think what Cindy said, it was really important around, maybe can the market let the Fed do what it thinks it need to do or will the market revulse? And we'll have to see how that plays out. But I think we're at a really interesting time right now with all of these cross-currents going on. I'm not really ready to put the flag in the ground that says inflation, I'm sorry that a recession is upon us, but I think we have to be visioned around how much of a transition are we going through right now? So maybe another way to look at this, I think is through the lens of what's happening with the corporate sector, and Steve, maybe you've got a couple of things you could kind of point us to to think about with respect to Q4 earnings. So far, it seems like there've been kind of mixed. I mean, we've seen some companies do quite well, some companies struggle to navigate this inflation situation some companies on the other hand, are not. So what are you seeing probably at your level from the corporate profit side of things?

Yes, George, I mean , what you said is exactly correct, it's a mixed earning season so far, and clearly it hasn't been enough in order to help offset the increase in rate expectations. We've seen some companies come in and not have any issues whatsoever, dealing with the supply chain problems. And then we've had quite a few that have had supply chain issues. And so it's not across the board that people are being able to monetize this "inflationary impulse" that we've seen. So I think the real story coming out of earnings continues to be the compression that the market is putting on price to earnings multiples. We've seen that accelerate here during this market sell off, were down to just a little over 19 times forward earnings. We entered the year at around 21 and a half. So we've taken two and a half almost full term, multiple turns off of the market since the turn of the year. And that trend is one which was what we expect, what we see when we get into a tightening cycle, multiples compress in tightening cycles. The issue that we're dealing with really on the equity market side, is the fact that there's been so much froth in certain areas of the market, that it seems like there's this rollover factor as those sectors, for lack of a better word, implode, as their valuations collapse, and think of things like concept finance, concept healthcare like biotech, stuff like this, unprofitable technology companies. These things have just really gotten whacked and there seems to be collateral damage.

Yeah, I think we've done a reasonably good job of sidestepping a lot of that damage. I mean, you're right, there has been some aftershocks at the margin, but I went back and looked at what we were a couple of years ago and some of these unprofitable companies that you talked about, these concept finance companies were really getting going. And I know we've avoided pretty much all of those names, all of those themes, if you will, as well. So our bias towards quality, I think has been really helpful in this environment. Maybe there's been some damages you mentioned here. There has been some selling pressure beyond the really speculum name to the market. But I think by having a quality bias, we've been able to minimize the impact so to speak. But let me move over to Rajeev for a second, Cindy did a great job of talking about the treasury market and really what the Fed is thinking. And we have to be very careful now about what the yield curve is telling us, but I think there's another indicator we could watch Rajeev, with respect to corporate spreads and really the corporate bond market. I think that's oftentimes an indicator we could look towards in terms of the overall feeling towards about the economy. So maybe you could talk a bit about the health of the corporate bond market and what you're seeing there too.

Well, I'll tell you that we're seeing in the market, and we're seeing a lot of volatility in the equity market. We're seeing, as you mentioned, the yield curve spiking in the front end, a very aggressive posturing by the Fed. You would expect credit spreads to really be blowing out and moving wider, but they aren't. I mean, they have moved wider over the last couple of couple of weeks into the year. We started the year off with corporate spreads at a very tight levels. The expectation was that, if you have an aggressive Fed and you have an equity market that's not liking that, you'll see corporate spreads also start moving wider. We did see widening but very contained, very manageable if you will. So if you turn our attention from investment grade spreads and high yield spreads, high yield spreads have obviously moved in tandem with the equity market and moved wider, but again, not aggressive. And it's very interesting to me because we've had almost 140 billion in new issuance in January in the investment grade market. And you would think that that's a number, that's the third largest January on record, you would think that would cause some strain in the corporate credit market where you'd see spreads start to move wider. It really has not really gone that far. I think that the market's digested those new deals. We can look at credit default swap index to try to get some indication there. Yes, there's been movement wider there, but still we're in line with where we were in 2020. So I'm really impressed by how manageable the market is as far as credit spreads go, but I'm also concerned that there's gonna be a point where if you go to February and you have another really pronounced month of new issuance, how much this market can digest and without concessions? I don't know if investors are gonna line up for these new deals either. So if the new deals come with concessions that we price as the entire secondary market, and you see spreads moving wider. Certain sectors obviously have not kept up with this manageable credit spread. I think the more riskier the sectors, they've come in to come under pressure. We've talked about this before George, that crybabies make up almost 54% of the investor grade market right now, they've come under pressure. I think the posturing really from investors right now in our stance as well is to look at higher quality issues, move up in quality and kind of weather the storm a little bit.

Well, I think that's a somewhat reassuring note to think about the fact that the overall corporate market is still pretty healthy. And the corporate sector, I think is also quite healthy as well. I mean, despite the fact that earnings are on our bitter pressure, given some of the wage issues we talked about, given some of the energy prices and raw material prices, that we've also talked about, are crimping margins a little bit. I think the financial health of the corporate sector is in quite good shape. Similarly, the financial health of the consumer sector, consumer balance sheets for example, are also in the aggregate, in pretty good shape too. And then thirdly, financial institutions, their balance sheets are also quite strong as well. So I think we've got a few things that are still positive, but we are definitely going to this period of transition. One last thing to say to kind of zero back on though, I think Brian, you wanted to mention one more thing about the overall difference of twos versus tens or again, the yield curve. I think you wanted to mention something about that, if I'm not mistaken.

George, you opened up the door with the R word on recession, I don't think we're there yet but as we often do, let's try to prognosticate for the future. So going back to Rajeev, we talked about the 210-spread and we've got the two-year at about 1.2% and the 10-year at about 1.8. So that's about a 0.65 difference, Rajeev. If the Fed hikes a couple times, that number could get to being even which again, in the past, has portended a flat yield curve into a recession. What are your thoughts about the buffer of that 65 basis points lead?

Well, there's a lot of talk right now about yield curve flattening and we've seen the flattening. The difference as you mentioned Brian, between twos and 10s is about 65 basis points right now. The Fed is looking at this relationship. There is that fear in the market that the curve could invert, we're not there right now. 65 basis points is enough buffer right now where I don't think anybody's gonna panic at this point. But like you mentioned, if we start seeing three rate hikes, let's say three, that buffer is gone at that point if the tenure stays where it is. So the Fed is gonna look at that relationship, they're gonna see what do we do to make a longer-term rates being the tenure, how do we make that move higher? As you know, the two-year is very much dictated by Fed policy. So that's why you're seeing the spike in the two-year. I mean, we're seeing a two-year at 1.2% and we've gone up this week, 30 basis points in just two days this week. We've seen front end of the curve spike up while the long anguishes, the tenures kind of stayed pretty much contained around 1.8 or so. So what can Fed do to raise rates and not have this curve invert? Because as we've mentioned, once the curve inverts, and it has to stay inverted for a while, it can't just invert and then revert. It's gotta invert and stay there for awhile. That's a strong signal of recession. So what the Fed can do is think about this quantitative tightening, reduce their balance sheet. That impacts the tenure at that point. That we can see the tenures start to rise at that point. And I think that's why QT is on the table for the Fed for the second half of this year. They realized that the fact that the curve is getting very flat, they do not wanna see the inversion happened there. And if they can somehow start with the quantitative tightening program, which is the reduction of the Fed balance sheet, you could see that tenure start to rise up and we go back to a positively-sloped yield curve.

Fantastic Rajeev, great insights from you as well as from George, Steve and Cindy today. Always great to have everybody on the call to share insights for our audience. And so thanks to everybody for joining the call today. We appreciate our listeners for joining us as well, and be sure to subscribe to the Key Wealth Matters Podcast through your favorite podcast app. As always, past performance is no guarantee of future results, and we know your financial situation is personal to you. So reach out to your relationship manager, portfolio strategist or advisor for more information, and we'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you achieve your financial success.

The Key Wealth Matters Podcast is produced by the Key Wealth Institute. The Key Wealth Institute is the prize of a collection of financial professionals representing Key entities, including Key Private Bank, KeyBank Institutional Advisors and Key Investment Services. In the opinions, projections or recommendations can take you in, are subject to change without notice and are not intended as individual investment advice. This material is presented for informational purposes only, and should not be construed as individual tax or financial advice. Bank and trust products are offered by KeyBank National Association, member FDIC and equal housing lender. Key Private Bank and KeyBank Institutional Advisors are part of KeyBank. Investment products, brokerage and investment advisory services are offered through Key Investment Services LLC, or KIS. Member of FINRA, SIPC and SEC-registered investment advisor. Insurance products are offered through Key Corp Insurance Agency USA, or KIA. KIS and KIA are affiliated with KeyBank. Investment and insurance products are not FBIC-insured, not bank-guaranteed, may lose value, not a deposit, non-insured by any federal or state government agency. KeyBank and its affiliates do not provide tax or legal advice. Individuals should consult their personal tax advisor before making any tax-related investment decisions. This content is copyrighted by KeyCorp, 2021.

January 21st, 2022

Welcome to the "Key Wealth Matters" podcast. A series of candid conversations with leading experts about how individuals and organizations can grow and protect their finances, tailored around current events and trends. Here's your host for today's podcast, Brian Pietrangelo.

Welcome to "Key Wealth Matters" weekly podcast, where we casually ramble on about important topics, including the markets, the economy, human ingenuity, and almost anything under the sun; giving you the keys to unlock the mysteries of the markets and investing. It's Friday, January 21st, 2022. I'm Brian Pietrangelo, and with me today, we have three of our in-house investment experts, George Mateyo, our Chief Investment Officer, Steve Hoedt, our Head of Equities, and Rajeev Sharma, Head of Fixed Income. As a reminder, a lotta great content is available on key.com/wealthinsights, including updates from our Wealth Institute on many different subjects and especially our key questions article series, addressing a relevant topic for investors each Wednesday. So it's been an interesting week. To start with the economic data, we've got unemployment claims ticking up a little bit, but housing's still strong. Let's take a look at that from George's perspective in terms of where we think the economy is headed based on some of the news that came out. George?

Sure Brian, good morning and thanks everybody for joining. I think this week was really a mixed bag in many respects. As you pointed out, jobless claims rose, which suggest that the employment situation may be faltering a little bit. I think there's, again, some flukiness with those numbers that often needs to get disentangled a little bit. I think when we look behind the curtain, we can still see a pretty robust job market right now. And we talked about this previously, wages are moving and sharply higher across many saturates the economy, and that really is a pretty positive back-drop for employment overall. So I think there's maybe a little bit soft patch in some of those numbers, but I think they're probably gonna be smoothed over over time. I think the housing numbers were extraordinarily robust. The housing sector continues to be really white hot, and when you kind of put those things together, strong job market, strong labor market, a robust housing market, you've got, again, this brew for inflation pressures building and inflation really is here, and it's not just here in United States, it's everywhere, really pronounced in Europe and other parts of the globe as well. So you've got that backdrop I think it's gonna set the stage now that we've talked about the Fed getting more aggressive, a lot of concerns about that. It seemed to kind of really become the focal point for the market this past week. Quantitative tightening is also something that people are being concerned with, which is really the Fed draining liquidity from their balance sheet and from the system overall. So we've got this potent mix of higher inflation, a more restrictive Fed , a less accommodated Fed , higher interest rates and inflation, I don't kinda think is actually probably a good news, bad news story in the sense that it's probably started to peak it a little bit. And that's actually probably good in the sense it's also adding some inflation pressures, but it's also starting to hit some earnings reports as well. I'm sure we'll talk about that this morning too, but maybe first just on the macro really quickly, let me ask Rajeev to kind of comment on what he thinks the Fed is likely to do with some of these inflation numbers. And I guess, Rajeev, we've got a key meeting with the Fed next week, don't we?

We do George, and good morning to everyone. Yeah, I mean, the bond market has really taken a lot of bad news this year. I mean, it's only week three, we've had a consensus of four rate hikes, we saw the two year go above 1%. We saw 7% inflation readings, and then the Fed claimed to drain liquidity by reducing their balance sheet. So some of the things that I'm looking at are, will inflation peak out this year at some point, obviously we're gonna talk about the yield curve on this call as well. Will that first move by the Fed be 50 basis points? We've got a Fed meeting next week. Are they gonna give us any hints? There's some percentage out there of probability that there could be a Fed, an FOMC rate hike next week. I'm not part of that camp, but I do think that some of that fear is there. So if you think about quantitative tightening, as you mentioned, anytime the Fed shrinks it's balance sheet and tapers, the market does get very jittery about that. And Powell, for the first time, has to deal with inflation. For the first time he's dealing with some of this political pressure too, to do something. So, the bond market's really goin' through a lot in the first three weeks of the year and I think that as you reduce the Fed balance sheet, we've seen this story before, it's almost in itself a rate hike. If you think about quantitative tightening and what the Fed could possibly do in the second half of this year, you're talking about one to two rate hikes impact from what they can do in quantitative tightening. So it's very interesting right now to see what happens. If the Fed makes a mistake, they've done it in the past. You could see a drop in investor optimism, could see a rush to sell risk assets. So I turn the call to Steve here and think that, and get his perspectives on what he thinks about risk assets if the Fed starts to really get aggressive here.

I'll tell ya, when you looked at the charts, you're seeing a lot of key things for the market starting to turn to the negative. And as I stare at my Bloomberg terminal this morning, I see the S&P 500 taking out its 200 day moving average, I see the S&P 500 making a new 65 day low for the first time in quite a very, very long time. We're entering this period of time clearly where, because of the taper and tightening that the Fed is talking about, that we expected an increase in volatility heading into this year, but man have we got a spade. And then maybe even a little bit more concerning to me is it really does look like high yield CDS spread sets a indicator of stress, and the credit markets do seem to be starting to resolve themselves to the upside. So we've been in a trading range there where credit has been a very supportive thing for the market for well over a year. And it now looks like that's gonna be a headwind, at least near term here. So, I think we're at a place where it does look like the market at least wants to head lower here in near term, maybe in the intermediate to longer term, as long as earnings come through, we'll see things resolve to the upside, but near term pressure is definitely to the downside. And it looks to me like we're headed lower.

So Steve, what I was curious to know, and as I think about this, it seems like, initially, and again, we can kind of change this narrative anytime perhaps, or see the narrative change perhaps is a better way to say it. But in the near term it seems to me like this is a really a sediment driven sell-off, right, where people have really been kind of piling out and fleeing the real speculum parts of the market, SPACs, and crypto assets, and other things like that. And, the sentiment is really very fickle and it seems like it's really running quickly against it. So to me it seems at the moment, this is not systemic, but this is sentiment driven selling. Would you agree with that?

In part I do George. If you take a look at things like the index that tracks unprofitable technology companies for example, that index is sold off incredibly hard. IPO's, SPACs, they've sold off incredibly hard. So things that I would label concept finance, concept tech, this kind of thing, they've been under pressure for a while. What's been different in market tone so far here in 2022 is that the market has taken the generals out and shot them too. And that's when you start to see problems. Things like leadership stocks, GOOGL, for example, Alphabet, I should say, tickers GOOGL, that name had been a market leader for the better part of last year. It's rolled over. Microsoft has been rolling over Apple, all these names, big mega cap tech names, have come under pressure and I think the investment community is reevaluating what they think in terms of earnings outlook, and they're also reevaluating the multiple in light of the likelihood of higher rates that they're willing to put on those. So not only have we seen these more speculative things get taken out, we've seen a change in tone so far here year to date. One thing that does give me a little bit of optimism is that sentiment, as you said George, has gotten a bit extended to the downside here as the market has sold off in early 2022. So we might be due for a bounce here near term, but it definitely does seem like we've had a definite change in tone.

Hey Steve, on that theme, where do you think Q4 earnings season takes us relative to that volatility?

So I think earnings are likely to come in ahead of expectations, but I don't think that they're gonna come in as far ahead of expectations as we've seen over the last two or three quarters. And quite frankly, going back to the Omicron discussion before, I think it's likely that we could see growth numbers disappoint for the fourth quarter due to Omicron. So, we'll see. It'll be interesting to see what the managements have to say as we go through earning season, which starts in earnest here in the next few days. But I really don't know that we're gonna get earnings support for the market going through this earning season.

Fantastic. Rajeev, what do you think about the 10-year where it's been at, it kinda got up to a high level this week, it's pared back a little bit, but what are your thoughts on that?

Great question Brian, I mean, we did hit 1.9% this week on the 10-year and that was a pretty rapid rise in the 10-year, we started the year below 1.7, so we've had quite a move there. We did see the 5s/30s curve flatten towards levels we haven't seen since March, 2020. Curve is really being impacted by more rate increases getting priced into the front end. And we're talking about four rate hikes that the consensus is now, and some are even calling for 50 basis points in March. But there are bets about a Fed policy mistake, and that's really what's dictating the 10-year. And I think that's gonna be the important part to look. Charting patterns right now show that there's little nearby support for the 10-year. That means that we could test the next level on the 10-year, which is 2.14%. That's the high that we had in July of 2019. So we may get there quicker than expected. We did see a pullback. We did see those fall down a little bit today and yesterday, and we did see Asian buyers step in. So Asian investors are stepping in, they're finding value in the 10-year at 1.9%. So now we're back down below 1.8, and I think we're gonna keep seeing some of that support from Asian buyers. I think it's a very strong area to be in right now if you look at global rates right now, so still the 10-year looks attractive at these levels, but I don't really see any reason why we don't continue to move higher in the 10-year. We're really starting the year off with the Fed playing catch up. When you have a sentiment that the Fed is trying to catch up with market sentiment, you could see the 10-year finally start to move higher. We didn't see last year at all. Right now, basically 25 basis points priced in for March hike. And some investors are thinking about maybe 50 basis points in March. And that really shows the market is really concerned about the Fed being behind the curve. We haven't seen the Fed raise rates more than 25 basis points in almost 22 years. So that would be a very big jolt to the market.

What are you seeing in terms of credit and flows? This has been a credit driven bull market on the equity side. It's been driven by liquidity there in the high yield markets and the investment grade markets, tremendous demand. Have you seen any change in the tenor in terms of liquidity, getting deals done, that kind of anecdotal evidence across your desk?

We have seen, this year we started with a bang as far as credit issuers coming to market with their new deals. We expected about 125 billion in new issuance this year. I think with the whole notion that the Fed is on the move, we're gonna see rate hikes. Many issuers are trying to take advantage before that happens. So we've seen quite a big push in issuance. These deals are getting done. Investors are lining up to buy these deals, liquidity on some of the bank deals that we saw this week I think was tremendous. And we saw those deals do extremely well. Concessions, I expect better concessions than we're seeing. We're not seeing those concessions right now on the new deals. So, issuers are coming to market, they're getting the deals done. Investors are lining up to lock-in some new issuance and liquidity. I think we see that continuing, but I believe that when rates start to move up, we're gonna see a slowdown in issuance. And I think it's gonna be harder to get these deals done without some kind of concession compared to the secondary markets.

But you haven't seen anything right now that gives you really a lot of cause for concern about the health of the credit markets.

No, I haven't. I mean the credit markets right now, they seem to be very, very orderly, if you wanna call it that. I think spreads have not blown out. I'm keeping my eyes on CDX to try to see the spread move there. Your point about high yield is a very good one, I think high yield gets impacted like the equity markets. We start to see movement in the high yield spreads a lot sooner than we see in high grade, but really the leader right now that I'm looking at is CDX and I saw a little bit of widening in CDX this week, but nothing to be alarmed about. And I think this continues. What really is gonna dictate spreads right now, in my opinion, is if there's an economic slowdown, obviously that's gonna be a big impact. But if we start seeing January type numbers in new issuance, I think investors are gonna have indigestion at that point, and you're gonna start seeing these spreads start to move wider.

Yeah, I'm really watching that high in the CDXs from December on the high yield. And if we break above that, I think it's gonna, it has the potential to take the market on another leg lower. I don't know that we really see this get too, too nefarious in terms of weakness, because of the stuff you said in terms of the flows. It just seems like the credit appetite is just so strong, but I think near term here, we definitely are at very key levels on that CDX.

I agree Steve, I've seen flows, if you look at the flows going to investment grade funds, they've been positive this year, quite robust. Even with starting the year off with spreads at these tight levels, you're still seeing a lot of money flowing into these investment grade funds. I did see treasury funds start to lose flows, which makes a lot of sense considering where we are and where we expect to be.

So, Steve, I wanna circle back to you and something you talked about with respect to earnings and maybe this calendar quarter of earnings might be a little bit softer than expect, or maybe not as great as people expected, but I gotta believe that some of the earnings pressures we're seeing, because of Omicron and things like that, might be temporary. We've got a few things we've gotta get through in terms of cost pressures, and wages, and so forth that are certainly, they have some impact. And of course there are some individual companies that might be more out-sized and more exposed to this than other, but it seems like the overall backdrop, if we maybe think about the earnings recovery is maintaining itself through the entire year, right. We have kind of a soft patch now, but earnings could recover in the second half of this year. Doesn't that provide some support if you look at the full year earnings of this year, and maybe even next year too.

Yeah, theoretically it sure does George. I noticed how you're trying not to use the word transitory when you said that, but like when you take a look at the earnings, I mean, we're right at 224 for the S&P 500, for the forward 12 month earnings right now. We very easily could exit the year at 240. It's the trajectory that is lower this year than what we've seen over the last year and a half, which is to be expected. I mean, we had huge earnings numbers year over year, growth numbers coming off of the post pandemic close. I mean, where we sit today, we expect as the cycle matures to see lower earnings growth. The thing that does give me some concern is we've seen the multiple break lower now, so we're trading at 19.8 times forward numbers. This is the first time since middle of the fall last year that we've been below 20 times. And really we've been trading between 20 and 22 times forward numbers for the last 18 months. So clearly the multiple that people are willing to put on those earnings is lower because of the higher rate environment. And multiples, this is really gonna be, and I've said it before and I'll say it again, this is really gonna be a year where the multiple that you're putting on the earnings is gonna be the thing that drives the market, as opposed to the underlying earnings numbers themselves, because the earnings numbers themselves are likely only gonna grow in the high single digits.

Yeah, I don't disagree with that, I just think we'll have to see how the full year plays out, maybe people shift their numbers from one quarter to another, but overall it seems to me the economic backdrop is still pretty solid overall. And again, inflation is the biggest risk that we've talked about. So you've got this environment of hot inflation. Again, markets are kinda crowded and we're kinda seeing the results of that now. So I still think our overall outlook for the year of kind of flattish returns still holds.

I'd agree with that. You can have the market have a drawdown of 15 to 20% and still end the year positive, right?

That's very typical. Yeah, that's very common.

Yeah.

Indeed. In fact, I think, you're right, the average return, I'm sorry, the average entry year decline rather is about that number. It's about 14% if you go back to the early eighties. And at the same time on any given counter year, the market's been positive 75% of those times as well.

Yeah, years like last year where the market goes up on a rail, up and to the right, those are not usual.

Well, have to stay tuned to see what happens next. And again, as Rajeev and others have talked about, next week I think it'd be a really pivotal week with respect to what happens with the Fed, and also what happens with earnings.

So thanks for joining us today. Be sure to subscribe to the "Key Wealth Matters" podcast through your favorite podcast app. As always, past performance is no guarantee of future results, and we know your financial situation is personal to you. So reach out to your relationship manager, portfolio strategist, or advisor for more information, and we'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you achieve your financial success.

The "Key Wealth Matters" podcast is produced by the Key Wealth Institute. The Key Wealth Institute is comprised of a collection of financial professionals representing Key entities, including Key Private Bank, KeyBank Institutional Advisors, and Key Investment Services. Any opinions, projections, or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. This material is presented for informational purposes only, and should not be construed as individual tax or financial advice. Bank and trust products are offered by KeyBank National Association, Member FDIC, and Equal Housing Lender. KeyBank Private Bank and KeyBank Institutional Advisors are part of KeyBank. Investment products, brokerage, and investment advisory services are offered through key investment services LLC, or KIS, Member FINRA SIPC, and SEC registered investment advisor. Insurance products are offered through KeyCorp Insurance Agency USA, or KIA. KIS and KIA are affiliated with KeyBank. Investment and insurance products are not FDIC insured, not bank guaranteed, may lose value, not a deposit, not insured by any federal or state government agency. KeyBank and its affiliates do not provide tax or legal advice. Individuals should consult their personal tax advisor before making any tax-related investment decisions. This content is copyrighted by KeyCorp 2021.

January 14th, 2022

Welcome to the Key Wealth Matters podcast, a series of candid conversations with leading experts about how individuals and organizations can grow and protect their finances tailored around current events and trends. Here's your host for today's podcast, Brian Peter Angelo.

Welcome to the Key Wealth Matters weekly podcast, where we casually ramble on about important topics, including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to unlock the mysteries of the markets and investing. It's Friday, January 14th, 2022. I'm Brian Peter Angelo. With me today, we have two of my esteemed colleagues in the world of investments, George Mateo, our Chief Investment Officer, and Rajeev Sharma, our Head of Fixed Income. As a reminder, a lot of great content is available on key.com, including updates from our Wealth Institute on many different subjects and especially our key questions articles series addressing a relevant topic for investors each Wednesday. So it's been an interesting week. Let's start with a couple of economic news items, including inflation, retail sales and unemployment. George, what do you think the economic data's telling.

Well good morning, Brian, and a happy Friday too, buddy. And, it was kind of an interesting week to say the least. And I think the headline said that inflation rose 7% or so year over year, the fastest since 1982, I think that was the year a flock of seagulls and some other bands that we'll probably just leave off the conversation for now, but we definitely have seen this inflation narrative really kind of take hold here in the past couple of days. It's really been kind of validated by things we've been talking about now for several months or so, but inflation is quite hot. Again, if we go back and use that reference that this is the hottest it's been since 1982, I think you'll have to ask yourselves kind of what's the right narrative? I mean, I think if you look back further in time, instead of 1982, there were some interesting parallels. If I look back for example, in 1946, when we had a similar spike of inflation following World War II and at that period of time, a lot of price controls were put in place in light of the war. When those controls were taking off, we had this pop in inflation in a very similar level and it came back down a year or so later and that was maybe one analogy that people are looking at this time around. Conversely, another story that people might wanna think about, or maybe a narrative they might wanna think about is what happened in 1966. And at that point in time, inflation also moved higher to seven or so percent, and I think it got close to that level we're at today, and it was actually starting to follow base similar to what we've seen in the past decades where unemployment was low inflation was kind of anchored around that 2% range in the mid 1960s, and then moved higher when we went through this campaign of guns and butter to try and provide some service to the economy, at the same time fight the Vietnam war. Of course, we know that inflation from that point on moderate a little bit in the early part of the '70s, but then really spiked higher as many other people have talked about. So I think we're gonna have to kinda think about what kind of narrative the inflation outlook is going forward. I think there's probably a bit of both there in the sense that we're probably seeing some excessive level of inflation because of things like lock down, because of the restrictions that were put in place because of COVID-19 and now we're essentially kind of living our life again and people are really spending quite aggressively, but at the same time, we have to be careful that we don't over legislate policy I think to make inflation perhaps more problematic in the out years than it should be. That's my take on it. Rajeev, what do you think?

Yeah, I think you're absolutely right, George. Good morning to you and good morning to you, Brian. And I really do feel that the inflation narrative is continuing. Feds got their ideas on it. They're focused on inflation right now. The print that came out this week was a very high print, highest in what, four decades or so? It was almost in line with consensus. So I think that the market didn't move as much this week as maybe we would have thought about a while ago. And I think that's gonna continue. I think we're gonna see these high prints, market's anticipating high prints, the Feds anticipating higher inflation. I think that continues and I think that that's really gonna be the focus right now in the market on inflation and really just looking at the data. But here we are and inflation is real. It's not transitory. Persistent and it's gonna be pretty big clips over here om inflation. We're gonna see these prints come out. We're gonna see the Fed react to that. Interesting to see the market being a little more numb this week to the print than anticipated and I think it's only because it's in line with consensus.

Yeah, it's curious. Over the same time we saw this high inflation print, as you talked about, Rajeev. This morning we got some fresh information on retail sales and they were actually a lot weaker than expected. I'm not too surprised by this. I think it's kind of curious to see how the market reacts to this later today, but we've probably had a big pull forward of demand in October, November. I think there was a lot of concern around people getting gifts under the tree for the holidays and they might've pre-ordered some things, and I can't remember the exact number, but I have to go back and look, I think at that time, retail sales were up some double digits, maybe kind of mid teens or so year over year. So we've probably moderated quite a bit since then. But nonetheless, I do think that the inflation backdrop is still pretty strong as we thinking about what happens the rest of this year. We've got wages that are still front and center. There's a lot of talk about energy prices and I think they've stayed pretty elevated, and housing meanwhile, I think is also a third leg of that stool that to me suggests inflation might be a bit stronger. But how did you take this morning's retail sales number, Rajeev?

Again, I agree with you. I think it was expected. I think that I was not as surprised. I will see how the day plays out, but I don't think the market's as surprised by these numbers either. I think what the market really is focused on is again, focused on inflation. Every other data point is kind of secondary to it. Even if inflation does go down as expected, we're not gonna have these huge prints every single time. If that does happen, it's still gonna be elevated, anticipate to be elevated over the Fed's 2% target. So I think that these other data points are obviously very important, but the market is completely fixated on inflation readings.

At the same time unemployment ticked up a little bit on initial claims on Thursday. And I think it's probably a similar response, George and Rajeev, in that it wasn't much of a surprise given that number is a little bit volatile and it's still under the pre-pandemic level of 256,000. So at the end of the day, again, with the Fed's dual mandate on employment and price stability, we probably think that the number on the unemployment at 3.9% overall is probably a bigger factor. George, your thoughts?

Yeah, I think the employment situation is still pretty solid. As you rightly pointed out Brian, there's a lot of moving parts and a lot of fluctuations even with the fact that they smooth the data series out over a period of weeks, it can still be somewhat volatile, particularly as you restart a year, I think. So I'd have to go back and look at that over many years to really draw that conclusion. But I would think that the bigger picture is that unemployment, as we talked about, I think at the last call had fallen below the Fed's target. So the Fed kind of came into this year, thinking that the year would end around 4% or so inflation and now we're clearly below that, which I think is one of the reasons that market has really picked up and really kind of stop at the Fed I assume might be more aggressive this year than I initially thought. We talked a bit about that last week and we talked about the fact that the Fed now is likely to raise rates four times, I think is the consensus now. I went back and looked just three or four weeks ago, I think it would have been something half that. So we've seen a really significant shift in overall heading towards what the Fed might do. Rates moved up a lot last week as Rajeev pointed out. But again, I don't think the unemployment claims number are that big of a driver. Rather the employment rate itself is really something that people focus more on, particularly in inside the Federal Reserve. And at the same time, I've also thought that other variables might be more important to watch in terms of what happens with respect to the employment situation. We've talked about, for example, participation rates being somewhat stuck. Many people are retiring. Many people are unfortunately not able to reenter the workforce because of healthcare concerns or childcare concerns. And until we see some of those participation rates tick up, we probably have this labor supply issue, this constraint, if you will, that might be a bit more persistent, which again, feeds into that inflation narrative. Rajeev, maybe shifting gears a little bit in terms of what the Fed is thinking these days, we had a couple of nominees, new nominees put forth by the Biden administration just the other day. What's your take on how the composition of that might change as some of these people are successfully appointed to the Federal Reserve?

It's a great point, George. I think that the Fed and the nominees that Biden put forth allows the Fed to be a little more diverse, and if these go through, these will be the most diverse nominees or members in the institution's history. So I think that you have Lisa Cook, who's an economics person from Michigan State University. You've got Sarah Bloom Raskin, she'd be over at supervision looking at the Fed supervision. So I think these are some really interesting nominees. I do think it changes the makeup of the Fed. I think that it's gonna be a welcome change I think for the Fed. I think that's something that needed to happen and I do think that it's gonna be very important, however, to make sure that the Fed remains independent. There's a lot of things going on in the news right now and you've seen that too. The White House is intervening with Fed policy as well, which is something that we haven't seen ever. The White House is pretty much telling the Fed to be more hawkish, telling the Fed to raise rates. We have not ever seen that in history and it's amazing to see the White House intervening there. So it's gonna be very important even with these nominees to maintain some... Diversity's important, it's also important to make sure that the independence of the Fed remains intact.

Yeah, on that note, Rajeev, in addition, there were some comments made at the Senate confirmation hearings for both Powell and Brainard this week with respect to accelerating and being responsive to inflation and using the tools that were there and being able to respond quickly if necessary. What are your thoughts on George's comment about a potential for three rate hikes? And do we think March is the bogey now, as well as what we might think from the perspective of the balance sheet going forward.

Great question, Brian. And I really do think that the focus on inflation by the Fed right now leads me to believe that we will have at least three rate hikes this year. Fed's calling for three, the market's calling for four. I've heard actually a few a sell-side analysts talking about six, which is really out there. But I do think that at least three this year. I do think we have a lift off in March. I think the Fed is gonna try to be as aggressive as possible to contain inflation. If you look at Brainard's comments this week on her confirmation, she pretty much stick with the party line that inflation is the key right here is what we need to focus on. She did talk about the rebound in growth, the decline in unemployment. It's the best in the last five decades, the economy is really working very hard to continue to grow, but she really wants to be tasked to bring inflation back to 2% and keeping the recovery in mind. So I think the party line is the same. I think most of the members that we've heard from this week, we heard from Barkin, Evans, they also spoke this week. Evans is very dovish, but even Evans said that it might be time to raise rates, and Barkin said that he underestimated inflation last year. He thinks the Fed should be free to normalize rates in March if needed. I think we do have the lift off in March. I think that the taper is gonna go as accelerated as possible to get us there and I think they're gonna really try to contain inflation. The problem to me is that, and to the market was, okay, we're fine with the accelerated pace of the taper, we're fine with the March lift off. But in the last Fed minutes when they talked about the balance sheet runoff, then that's essentially quantitative tightening. So once that came out, that's really what moved the market last week. And the real big question is when would this quantitative tightening happen? When would the balance sheet runoff actually occur? We don't really know what the timing is, but the anticipation is it would be in the second half of the year. So if that changed, if say we start raising rates in March and we start doing this balance sheet runoff, this Fed balance sheet runoff that could really move the market very quickly to see rates move very aggressively at that point. The anticipation is for more of a July start for something like that. We saw a balance sheet runoff back in 2017. They capped that runoff at 90 billion per month. If we try to think of that type of scenario again, we've seen it before. It's very interesting though, because no one thought that QT was gonna be this year as well. So I think that really moved the rates a lot. What do you think, George?

Yeah, I think that there's not gonna be too much change in policy with some of the new members coming on board. You talked a little bit about that, Rajeev. I don't think it's gonna be a big shift one way or the other. I mean, I think the Fed might lean a bit more dovish going forward but I think you're right to point out some of the big implications around the overall diversification of the Fed, which I think would be a welcome change from many people's perspective. So I think in actual terms of policy, I don't think it changes too much. And again, I think the bigger thing that people are concerned with is, and we haven't talked about Omicron. We've been on the phone now for the last 10 minutes or so. We haven't really even spent much time talking about that. So I think that's kind of moving a bit to the rear view mirror a little bit, hopefully fingers crossed on that. But I think we still have this backdrop of somewhat hot inflation. And again, we talked about the three reasons why that might stay a bit elevated. Again, housing, labor, and energy are the three reasons we point to. Corporate profits are booming at the same time. So I know that the Fed is being kind of forced to really try and take some of the Punchbowl away now, but it's really kind of hard. I think it'd be interesting, maybe I shouldn't say it's hard, but I think it might be interesting to see how they can actually effectuate that easily. It might be a little bit bumpy. And for that reason, I think our outlook for the year continues to hold, which is gonna be somewhat of a flattish kind of market overall. And many asset classes are gonna struggle, but we're not calling for a recession. So we're not really calling for a really big bear market either. So volatility will likely persist and we'll just have to strap on our seatbelts extra tight this year and prepare for that volatility when it comes.

That's great. And last comment, Rajeev, you alluded to it, the 10-year touched 1.779% as an indication to some of the movement that we've seen with regard to the Fed and what's going on in the overall market. What do you think that means for bond investors going forward? And then George, what do you think that means for the potential to invest in areas in addition to bonds?

What's interesting here, Brian is that we ended last year where many thought that rates were lower than they should be based on a Fed that's in this mode of a hawkish stance and they're talking about raising rates and how could the 10-year be so low. I would just always point out that the two-year is really what is impacted the most by Fed policy. So if you look at the two-year, that's risen to almost 90 basis points. So we saw a huge rise. The two-year had been anchored at 14 basis points for most of 2020, and last year we saw maybe at 21 basis points for most of the year. It moved very swiftly in the fourth quarter based on the Fed's idea of, we're gonna go out there, we're gonna accelerate the taper program, we are going to increase rates. The 10-year pretty much stayed range-bound. And it's interesting because most people would think that why is a 10-year not moving higher? So this year we start off and we see the 10-year almost touch 180 and this week we found some support at that 180 level. We saw buyers step in. We saw successful auctions this week, treasury auctions this week, we saw the 10-year was supported. What the 10-year's really telling us is there's doubts in the market. And the 10-year really points to those doubts. Is there gonna be a Fed policy mistake? Is the Fed gonna go too far? That's why that 10-year, we're not seeing that rise beyond 180. The next resistance point is about 1.9. We do anticipate rates in the 10-year. We do anticipate the 10-year to go higher this year. We are calling for over 2 1/2% maybe for this year or by the end of the year, but it's not going to be as swift as we're seeing in the front end. The problem with the Fed here is that they noticed that. They noticed the front end is moving higher. The 10-year is kind of staying sideways. If that continues to flatten, there could be this fear of an inversion of the curve. And that's where this quantitative tightening comes in. That's why the Fed is very keen on reducing their balance sheet. That's going to try to lift the 10 year so that we don't have that inversion. So that pressure on the 10-year is gonna be consistent. The market's looking at the 10-year and thinking that there's gonna be a Fed policy mistake. The Fed is known to go on too aggressive, too fast and kind of play catch up and then go too far. When something breaks, that's where the 10-year reacts. So I think the 10-year stays in this range bound area right now until the Fed breaks up.

Rajeev, I think you're right on as usual. And I think that's gonna be the key signal to watch in terms of that your curve going forward, and also at the difference between the two-year the 10-year and probably other years could be queued off as well from that. To your question, Brian, in terms of other things we might think about, I think it's gonna be a really interesting year that you wanna be somewhat nimble, perhaps more nimble than in the past. It's not kind of a year that you can set it, forget it as we like to say. Active management hopefully can do well in this environment. But again, that requires active management being nimble. So you really wanna focus on, in the near term, probably some of these high quality cyclicals we talked about, maybe the portfolio leans a little bit towards a value orientation in the near term, but as Rajeev pointed out, if things start to slow down and we start to see the Fed maybe go too far, too quickly, you wanna rotate probably back into more defensive positions with inside your equity portfolio, for example. And I think our view on really maintaining a quality bias throughout this choppy time, I think is gonna be well rewarded, remains to be seen if that's the case, but I think quality won't be one thing that endures for much of the cycle as we go forward to 2022.

Fantastic. George, Rajeev, thanks so much for sharing your insights today with us and thanks for everybody for joining the call. As always past performance is no guarantee of future results and we know your financial situation is personal to you. So reach out to your relationship manager, your portfolio strategist, or your advisor for more information. We'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you achieve your financial success.

The Key Wealth Matters podcast is produced by the Key Wealth Institute. The Key Wealth Institute is comprised of a collection of financial professionals representing key entities including Key Private Bank, KeyBank Institutional Advisors, and Key Investment Services. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. This material is presented for informational purposes only and should not be construed as individual tax or financial advice. Bank and trust products are offered by KeyBank National Association, member FDIC and equal housing lender. Key Private Bank and KeyBank Institutional Advisors are part of KeyBank. Investment products, brokerage and investment advisory services are offered through Key Investment Services, LLC or KIS. Member FINRA, SIPC and SEC registered investment advisor. Insurance products are offered through KeyCorp Insurance Agency, USA, or KIA. KIS and KIA are affiliated with KeyBank. Investment and insurance products are not FBIC insured, not bank guaranteed, may lose value, not a deposit, not insured by any federal or state government agency. KeyBank and its affiliates do not provide tax or legal advice. Individuals should consult their personal tax advisor before making any tax related investment decisions. This content is copyrighted by KeyCorp 2021.

January 7th, 2022

 

Welcome to the Key Wealth Matters Podcast, a series of candid conversations with leading experts about how individuals and organizations can grow and protect their finances, tailored around current events and trends. Here's your host for today's podcast, Brian Pietrangelo.

[Brian] Welcome to the Key Wealth Matters weekly podcast, where we casually ramble out about important topics, including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to unlock the mysteries of the markets and investing. It's Friday, January 7th, 2022. I'm Brian Pietrangelo. Happy new year to everybody. With me today, we have two of our investment experts, George Mateyo, our Chief Investment Officer, and Steve Hoedt, Head of Equities. As a reminder, a lot of great content available on key.com, including articles from our Wealth Institute on many different topics, and especially our Key Questions articles series, addressing a critical topic of the week. It's been an interesting week, so let's jump right in, talking about the jobs report that came out just about an hour ago. 199,000, a little bit less than expectations, but also some upward revisions from October and November. Also the out of employment rate went down overall from 4.2% in November to 3.9% in December. George and Steve, what are your thoughts?

[George] Yeah, Brian. Good morning. Thanks for the intro. I think you're right in characterizing it as kind of a mixed report overall, but still pretty solid. You know, I still think we're kind of clawing our way back and despite maybe the fact that the headline number wasn't quite as robust as expected, you still saw some good things underneath the surface a little bit that suggest, you know, the recovery's still on track and we're kind of digging our way out of it. We're still, you know, a couple million short of where we were pre-pandemic, in terms of the number of jobs. I think that's pretty noteworthy, in the sense of demand is still pretty robust. And frankly, there just isn't the labor supply to meet that demand, you know, point to point. So I think, result of that, you're going to see wages continue to stay somewhat elevated. I think in the report that came out this morning, wages were up some 4.7, 4.5% or so. Some of that has to do with some mixed shift issues. Some other things kind of, that kind of caused those numbers to be a little bit fluky. But I think the general trend is still intact, where the recovery is ongoing and wages are still somewhat elevated. Unemployment dropped quite a bit. So the actual unemployment rate, I think fell below 4% and I think it seemed like it's headed down to the low threes, if not even lower. And that again, could kind of continue to put pressure on wages and inflation for the rest of the, at least for the quarter, maybe the first half of this year, I think. Steve, what do you take of the report?

[Steve] You know to me, George, the most important number in this report was the 3.9% unemployment rate out of the household survey because it really opens the door for the Fed to go in March, as opposed to waiting to later in the spring or June. You've got a complete change in the liftoff scenario now. The Fed had targeted 4% as this, you know, line in the sand in terms of what it considered full employment and we're there, we're there. So, I mean, I think that we are going to see the market start to rapidly price in the idea that the tightening cycle's going to come quicker than we had expected.

[George] Yeah, indeed. We got...It seems like we get kind of validation of that this week when the Fed didn't really do anything and they didn't really say anything, but they just, they released their minutes from their last meeting officially, but it suggested that they're getting more active. They're almost kind of taking the Omicron situation and putting that off the, off the table, basically. Removing it off the table, I should say. And it seems like, you know, they're ready, as you pointed out, Steve, to start hiking rates, potentially, maybe a couple of times more than people expected. At the same time, they're starting to signal that they're going to slow their bond buying, purchasing program, known as tapering. So, you know, I think the Fed is certainly, they've more than just pivoted. I mean, they're there, right?

[Steve] I certainly think that they are the story of the year. You know, what, what we're going to see is something that anybody who's a professional investor that is under the age of 40 or anybody really, who's under the age of 40, hasn't seen a Fed that has been hawkish, right? So I think how markets react to this, is really an open question. Oldsters, like us George, we've been around and seen this before, but so many market participants haven't, it's going to be really interesting to watch unfold.

[Steve] Yeah, you're right to note that. I think there's a kind of a newbieness, if you will, or a novice kind of investor base that probably has to navigate their way through this. Although we did see the Fed raise rates in 2017 and 18, they got pretty aggressive then, but then had to pivot, and now they're pivoting again. So what I haven't seen is this kind of on again, off again, cycle. I mean, certainly the coronavirus has kind of maybe exacerbated that, but I'm just kind of, I guess I feel wit's end myself, thinking that if I look over the course of, jeez, just four or five years, you know, the Fed's changed their mind and their policy pretty aggressively in that short, relatively short, period of time time.

[Steve] The biggest fear that I have, George, that the Fed has this tendency to wait until, to wait until the data has gotten so bad that they have to become very aggressive. And then when they become aggressive, they have a tendency to break things. And whether it's the repo market in 2018, or whether it's the dotcom bubble in 2000, or the housing bubble, I mean, when they go, they tend to go too far and something in the market snaps. And I don't have any idea what it's going to be this time, but I know that market participants are really focused on trying to figure out, hey, is the Fed going to be able to remove accommodation and do it in such a way as to not cause a dislocation? Because the historical track record on them being able to remove accommodation without causing a problem is not good.

[Brian] Yeah, that's a good observation. And one of the other things, that some believe the Fed's been consistent over the last few months, and some believe that they've been inconsistent. One of the things that showed up recently in the Fed minutes was the potential for quantitative tightening. That's a little bit new relative to the script. What are your thoughts?

[George] Well, just to kind of lay out some terms, I mean, the thing that when Steve talks about, you know, accommodation, that again, is the, I guess the exact inverse of tightening or quantitative tightening. So accommodation is just this massive amount of stimulus that the Fed and other central banks around the world have put forth to try and save the economy from COVID. And certainly now that they're kind of reversing that, now we're going to this tightening phase, and yeah, we've been talking about the pivot for quite some time. I guess the overall tenor is it's probably a bit more aggressive, in terms of what people thought would be the case just a few days ago, literally. But, you know, I think, you know, we have to keep one thing in mind. It's that, you know, it's really not the Fed. The first Fed hike rate that causes the market to really sell off, if you will. It's a subsequent series of rate hikes. You know, I think we, if we look back over time, it's not the first shot that kind of gets everybody nervous. It's, you know, as Steve pointed out, it's multiple hikes, or maybe the Fed moving too quickly, too aggressively. And yeah, he's right to think about the fact that there there's history there that suggests that that could happen, but I don't think it's time to be uber bearish right now either and get super defensive. I mean, I think we're still kind of enjoying a pretty good recovery from where we were year ago. Profits are still really robust. We'll get, of course, a fresh set of profit numbers in the next few weeks or so, as we close out the, the year from 2021 and, you know, the overlap economic backdrop, as we started pointing out earlier, is still pretty, pretty favorable. So I think we can kind of grow our way through this. It just depends on, again, maybe the second half of this year as to how quickly the Fed moves, but maybe I'm reading that differently. Steve, what do you think?

[Steve] No, I think when you're right to point the earnings, George, because at the end of the day, the direction of the S&P 500 tends to be governed by the direction of the forward 12 month estimated earnings line. And we will look at the same chart, seems like almost every week, but the 12 month forward estimated earnings line is still trending up and to the right for the 500. It's at 222, as this week closes. We think that that number is likely to gravitate up toward 240 as we get to the end of the year. And if you're going to have earnings go from 222 to 240, it's hard to see the market having a really bad time. Now that doesn't mean that we can't have, you know, dislocations or corrections as the market digests the removal policy accommodation, or, you know, geopolitical issues or what have you. But at the end of the day, we still think that with an increased market volatility regime for 2022, the bias for the market is to the upside.

[Brian] Oh, speaking of volatility, Steve, we saw December unfold with pretty wide swings, almost on a daily basis, going up and down anywhere from 1% to 2%. And in some cases above 2% or below 2% on the downside. And we've seen some of that come into 2022. What are your thoughts with regard to volatility and managing the volatility from your perspective?

[Steve] Yeah, I think that when you look at the paper from 2013, 14, it gives us a really good roadmap as to what to expect. And if you overlay that tightening cycle with the current cycle, what you see is a increase in volatility starting right about now and blasting through the next six, say six to nine months. In 2014, 13-14, we saw the market have a bias to the upside with increased volatility. And it seems to us that that roadmap is pretty applicable right now. You know, we've definitely seen some pretty pronounced rotation away from a lot of the growth high-flying names, toward some of the value and cyclicality names. In fact, the best performing group here to start 2022, is the banks, which makes perfect sense, given that they have leveraged to higher rates. Rates move up, banks move up because net interest margins improve. They earn more money plain and simple. So I think that we see pockets of opportunity where the increase in volatility is driving a rotation that investors can take advantage of. But we definitely think the regime for volatility is much higher this year than we've seen over the last couple.

[George] Yeah. Then I haven't known, I guess that, you know, Steve is right to draw these parallels from 2013. And if anything, it's probably more of an accelerated taper. It means that the fed is actually moving more aggressively, more rapidly than they were back then, because I think we were still kind of coming out of the great financial crisis of 2008 and 2009, and the economy was still fragile. Today the economy's in really great shape. I mean, consumer's balance sheets are at record levels and that's really a function of the rising stock market and home prices. Corporate balance sheets are also really robust. And even the financial sector, as Steve pointed out, in addition to actually benefiting from higher rates, you know, their balance sheets are in really good shape as well. So we've got kind of a three legged stool, if you will, that's actually kind of providing a lot of support to the economy. And then I'd also note that, you know, these things that kind of, we kind of refer to as growth scares are really real events. And we're probably, you know, we might see one of those, to Steve's point earlier, where if the Fed is kind of overdoing it, and maybe at the same time that they start raising rates, we might start to see a bit of a momentum shift downward in the economy, not a recession, but just a deceleration of growth, if you will. And when you get these growth scare every once in a while, they're scary, but, you know, they usually are short-lived. I mean, they could last, you know, a couple of weeks or maybe even a few months. And again, markets don't really kinda respond favorably to that, but they, they really don't. We don't have a big bear market, if you will. So we have some volatility Steve pointed out. It's not surprising that in any one given year, you could see declines of 10 or 15% in the major averages, but, you know, for the time being, I think you want to kind of be focused on maintaining your discipline, looking for opportunities, as Steve pointed out, and, you know, trusting active management to try and help you navigate these choppy times.

[Brian] Fantastic, George. Thanks for that color. And it wouldn't be a podcast at Key Wealth Matters if we didn't at least touch on the main topics of inflation and Omicron from the perspective of what might be going through your mind and what you think we're looking at for the next month or so.

[George] Well, look. I think, you know, we're going to probably see a lot more elevated inflation ratings in the next few months, as you said. I think there's probably a bigger debate as to how quickly inflation does get back to its quote unquote long-term trend and long-term average. And even I think the definition of the long-term average is probably a little bit suspect. I mean, over a long period of time, we went back and looked at data going back almost seven years, and I think the historical average is somewhere close to 3.5%. And that probably is, you know, a reasonable way to think about where we would kind of drift down towards. I mean, again, inflation, as we've talked about on these calls, is currently ended up the high fours, low fives. And for it to kind of meander down to something with a three handle makes a lot of sense to me. Where I think some of the forecast might be a bit optimistic is that people are calling for inflation to fall to the low twos and even fall below two. And I think, you know, that might be possible in the out years, but certainly not this year. So I don't think we're going to see inflation kind of drift down to, you know 1.8, I think is the low end of the street right now in terms of overall forecast for inflation, because I feel the same, wages are pretty elevated, housing is pretty robust, and energy is kind of a wild card, but I think you've got a few factors and a few forces in play. And then with respect to Omicron, just the way that we kind of debate, you know, how you define a long-term average for inflation. I think people are starting to debate really what it means to be vaccinated. Right? So how do you actually... when you were fully vaccinated, do you have the booster too or not? What I'm kind of really sensing is that the administration and other policy makers are now kind of shifting their thinking to say that we're never going to get over this. Unfortunately, this is going to be something that's going to be with us, but it's kind of gonna be like the flu. Like we just have to kind of get our annual shot, hopefully, and then go about our lives. And so that this is a bit more scary perhaps, but certainly every year, unfortunately, many people die from the flu. And if we can kind of maybe change our mindset around Omicron and COVID-19, you know, maybe we'll be in a different place in a couple of months from now. Who knows? But that's one thing I'm thinking about. How 'bout you, Steve?

[Steve] I'll echo your comments there, George, on Omicron. At the end of the day, this is going to be endemic. And we just are going to have to learn how to live with it as a society. And, you know, it's... I think the part of the thing that people are just going to have to get over is the fear. And whether it's the media that has stoked it or, you know, politicians using it for various reasons, you know, I think as a society, we just need to figure out how to move forward and get back to living, you know?

[Brian] When you think about inflation,

[Steve] Inflation is going to be persistent, and you know, we're going to be dealing with it. I think that that 2% handle that you mentioned, it's not, we're not likely to see that for quite a while.

[Brian] Well, George, Steve, thanks so much for your insights as always. We appreciate your joining us today. Past performance is no guarantee of future results, and we know, your financial situation is personal to you. So reach out to your relationship manager, your portfolio strategist, or your advisor for more information. We'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you achieve your financial success. Thanks everybody.

[Narrator] The Key Wealth Matters Podcast is produced by the Key Wealth Institute. The Key Wealth Institute is comprised of a collection of financial professionals, representing Key entities, including Key Private Bank, KeyBank Institutional Advisors, and Key Investment Services. And the opinions, projections, or recommendations contained here in are subject to change without notice and are not intended as individual investment advice. This material is presented for informational purposes only and should not be construed as individual tax or financial advice. Bank and trust products are offered by KeyBank National Association, a member of FDIC, and Equal Housing Lender. Key Private Bank and KeyBank Institutional Advisors are part of KeyBank Investment products, brokerage, and investment advisory services are offered through Key Investment Services LLC, or KIS. Remember, a FINRA, SIPC, and SEC registered investment advisor. Insurance products are offered through KeyCorp Insurance Agency USA, or KIA. KIS and KiA are affiliated with KeyBank. Investment and insurance products are not FDIC insured, not bank guaranteed, may lose value, not a deposit, not insured by any federal or state government agency. KeyBank and its affiliates do not provide tax or legal advice. Individuals should consult their personal tax advisor before making any tax-related investment decisions. This content is copyrighted by KeyCorp, 2021.

December 10th, 2021

 

Welcome to the Key Wealth Matters podcast, a series of candid conversations with leading experts about how individuals and organizations can grow and protect their finances, tailored around current events and trends. Here's your host for today's podcast, Brian Pietrangelo.

Welcome to the Key Wealth Matters weekly podcast where we casually ramble on about important topics including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to unlock the mysteries of the markets and investing. It's Friday, December 10th, I'm Brian Pietrangelo, and with me today as always, we have a trio of our investing experts, George Mateyo, our chief investment officer, Stephen Hoedt, our head of equities, and Rajeev Sharma, head of fixed income. As a reminder, a lot of great content is available on Key.com, including articles from our Wealth Institute on many different topics, and especially our Key Questions article series addressing a critical topic of the week. So really busy, let's get into it right away with inflation. The print came out this morning, .8%, month over month, down 1/10 of a percent from the prior month, but the headline number for 12 months year over year is 6.8%, almost the highest it has been on record since 1982. Some big numbers there George, what do you think?

Yeah Brian, indeed it was. The headline, as you'd mentioned, kinda rising almost a full percent in the month alone which, again, is noted, translates to a pretty strong year over year gain of close to 7%, those are really pretty heavy numbers, and I would guess that those folks that were in the transitory camp really are gonna have to throw that label out the window. So I guess it seems to us, or at least seems to me that we're kinda going through this moment where inflation is begetting more inflation, and I think there are some temporary factors here that will probably kinda normalize themselves out, but at the same time, demand is heating up, people are getting ready for the holidays and probably wanna spend a lot of their money that they've been accumulating and saving for quite some time, so it does seem like it's gonna persist a bit longer anyway, to me. Steve, what're you thinking about inflation these days?

I mean I'm looking at the market reaction to the numbers this morning, George, and it seems like everything was in line with expectations, so even though inflation is ripping, I think the market has gotten its arms around the idea that inflation is going to be persistent and somewhat higher than what we've been used to for a while. I mean, the bond market really is not having a bad reaction to the number this morning with both the 10-year and the two-year only down a couple, actually down a couple basis points. You would think if inflation was gonna be a problem, you'd see the long end of the yield curve responding by having rates move much higher and they're not, and equities are up a half percent this morning, so I think that the market is taking this in stride, and the goal that the Fed had which was to have inflation run hot for a while seems to have been achieved.

Yeah, I would agree, I think the Fed gets the go-ahead on this one. I think Fed has been behind the curve and I think this print certainly gives them the, I mean it's the highest print in four decades, so they have the go-ahead to do the acceleration of the taper, so I do think that next week's FOMC meeting, this gives them all the catalyst they need to increase the pace of taper.

I thought it was kind of interesting that airfares, airline fares actually were down quite a bit in the report, which, it's a pretty small number in the overall scheme of things, but that kinda seemed to be somewhat counterintuitive to me. I'm not sure you guys have looked at travel any time lately, but airfare is down. That was kind of a surprise to me.

Yeah, it's true. And the other thing that I've also noticed is everybody's talking about tech with that kind of CPI print. What do you think, Steve, about tech, the sector itself with that kinda print?

So technology tends to have a deflationary impact on things. They're a productivity enhancer, and I think that what we are looking for there is that this trend will continue, that they'll continue to provide a deflationary impulse that helps to offset some of this inflationary pressure, but when you look right now, what you see is these supply chain problems in the chips, semiconductor chips in particular, continue to put upside pressure on price, and it's causing delays all throughout the supply chain, so for example, we've talked recently about automobiles, right? So there are literally auto, lots of automobiles that are just waiting for chips and different types of boards to be put it in in order to get to the finish line, to be considered manufactured that they can actually be sold, and they're still waiting, so it's a good point. I think you've got puts and takes with it though, puts and takes with it though, Rajeev.

On that point though, I mean, couldn't you see this kinda scenario play out, Steve or Rajeev, that, this year I read something that suggests that auto sales really have dropped quite a lot this year, I think they're down to like, something like 13 million cars or something like that are gonna be bought this year, and that's down from like 18 the prior year. I would think though that given some of those issues you talked about, Steve, like supply chain issues and chip shortage and whatnot, could actually kinda create this, another little boomlet with respect to demand coming back next year, so maybe we jump back 18 million autos next year. I mean, doesn't this suggest that this is gonna keep going for a while?

It's entirely possible that it could, George. I mean, your point is very well taken that we've seen a dip in unit volume there. I think in general, when we think about it, the sectors, industrials, consumer discretionary, it's been very clear that these are the two areas that while they benefit from this cyclical impulse that we've seen from economic strength, they've been underperforming on a relative basis to other sectors of the market because they are directly impacted by these supply chain problems, so for our, as far as our thinking goes, we still see these problems as being something that we're gonna be dealing with well into 2022, and frankly, if not into 2023 for some of the supply chain problem.

So Rajeev, what does this mean for the Fed? I mean the Fed, as you mention, is kinda throwing the towel in now, they're likely to start tapering and we can talk about what that means, but they're also thinking about maybe raising interest rates, I mean when does the Fed have to get involved here?

Well the Fed has definitely made that pivot that they're focused on inflation. The employment picture, which they were focused on for a very long time, they really are not focused on that right now. I think it's all about inflation. I think the Fed accelerates their taper program, and what they do is, by doing that, they give them the optionality to do something with rates next year earlier than expected, and I think we're gonna hear a lot next week on the FOMC meeting, I think that's gonna be very telling for all of us and it's one of those things where the Fed has been on the sidelines for a very long time and now they're trying to catch up. They've been behind the curve.

Yeah, it's probably true, and at the same time, you have got these, job numbers keep getting better and better and better. Although they kinda tell some mixed signals, right, because I think the number of job openings now is, what, it's at 11 million jobs are unfilled right now? And yet there's still some four million people who are unemployed relative to where we were pre-pandemic, so how does the Fed square that circle?

It's the highest ratio we've ever seen for that figure, George, in terms of the openings versus unemployed.

What do we think of that?

So that's a good segue into wage-price inflation, so if we think about the Employment Cost Index was north of 4%, there was a recent survey that came out that said that year-end increases for 2021 across major corporations in the US would be about 3.9%, and you talked about the numbers for the employment figure, George, so collectively, gentlemen, what do you think about the overall stimulus into that from a wage-price spiral effect, and what would we do about it from a Fed policy perspective?

I'd have to ask Rajeev, I mean I think that would suggest the Fed's gonna have to get more aggressive sooner, right? I mean if they really, if we do really see a wage-price spiral that you talked about, Brian, where wage increases are starting to really escalate, I think the Fed would have to probably get more aggressive. I mean right now, we're thinking of, what Rajeev, two rate hikes next year? I mean, that would probably be the under if wages really got out of hand, right?

Yeah, we're thinking two rate hikes next year, and where rates are right now, it's not really out of the realm of something that would be too aggressive. I think the Fed can actually become more aggressive, maybe do three rate hikes, but we're not calling for that, but at the same time I think that there's a lot of room for the Fed to move and that's why I think they wanna end the tapering program as fast as they can so they have that time gap and they can handle all these issues, whether it be employment or whether it be inflation. They'll have a lot of optionality if they end this thing in March.

What about Steve, what do you see on, for the companies' perspective, are you seeing any kinda profit revisions or companies trying to pull in guidance because of profit margins under some kind of pressure? I mean just this week,

Not yet.

just this week, we got some interesting news from one group of people up in Upstate New York that they've now actually been able to unionize Starbucks, right? So people are starting to kinda come back and ask for more wage concessions and other things to try and advocate for fair labor, but at the same time, that probably would put some pressure on companies at the end of the day, right?

Yeah, typically though, we haven't seen profit margins come under pressure unless the economy starts to roll over, so I think that when you look at consensus numbers for 2022 and 2023, the margin compression that I've seen is only about 30 basis points, so that's clearly not a major, a headwind. Maybe a little bit because of this higher wage pressure for them and has salary bills and what have you, but we're not seeing any major impact on corporate profit margin projections from the sell side or the buy side yet, so we'll see how it goes. I mean my thing with inflation and this wage-price situation is that if human behavior changes, then we have a serious problem on our hands, because that's what you saw in the 1970s. People started to pull their buying behavior because they knew that if they waited, they would have to pay more to get the car or to get the couch or what have you, because price was gonna be higher six months from now so they'd accelerate their purchasing behavior. And we've had distortions in the economy due to COVID, so I think it's hard to discern so much, some of these things right now, but I would tell you that if human behavior changes because of what we're seeing going on and people demand more wages and it causes an acceleration in terms of purchasing behavior, the Fed's got a real problem on its hands, because it's not so easy that just two or three 25 basis point rate increases are gonna fix it. I mean, think about what Volcker had to do in 1980, in 1981 in order to break the back in inflation the last time. So I don't think that's our base case George, but it's something really that I think ourselves and the rest of the investment community really have to pay close attention to.

I think you see that in the longer end of the curve where there is this thought in the longer end of the curve that there could be a policy mistake, and that's why we're seeing rates in the longer end kind of anticipating a slow down and, or anticipating a policy mistake by the Fed.

Yeah, and you know, that's the big risk as we head into 2022 is that the Fed could make a policy mistake, and although I would argue that there's people out there who think that the Fed has already made a policy mistake by not being more aggressive right now.

That's true, behind the curve.

Well meanwhile, those are good comparisons, but I went back and looked at some data from 1974, and interest rates were a lot, lot higher. I mean today, the Fed fund rate we talked about is at zero, effectively, back then it was I think 10% or so. Long-term rates, as you mention Rajeev, are still kind of around the 150 range or so. Long-term rates back then were 8%, so a significantly different environment, and perhaps even more notably is that, to Steve's point, corporate profitability was really kind of in the tank back then. Corporate profits fell that year nearly 20%. This year they're gonna be up around 30%, so a completely different set of cards for sure, but as you pointed out Steve, a lot to think about as we head into next year.

So we'd be remiss if we didn't talk about the fact that we're in the third week of the discovery of the Omicron variant, and at the end of the day, it seems to have stabilized with the market relative to the news of it being a little bit less severe than originally anticipated, and the market's reaction this week thus far, three positive days on Monday, Tuesday, and Wednesday, yesterday was down a bit, but if today holds true, after the CPI print, we'll have another positive day, so what are your thoughts on where we are on Omicron?

Y'know, it seems like we're kind of processing it. I think there's still a lot of different things, I'm sorry, a lot of information we just don't know, a lot of things with just don't know for sure around whether or not the vaccines are effective. We've had a little bit of news on that this week, but I'm not sure if there's anything definitive, so I think it's a bit too early to say for sure, but it does seem like what we've kinda suggested might happen is that people are kind of taking this in stride a little bit more, they kinda recognize it perhaps, this is the new normal and are kinda getting about their lives to some extent. You know, you've seen some countries become more aggressive and more restrictive, so again, I would suggest it probably still involves a bit of a, kind of a stagflationary effect too in the sense that maybe a bit of a slowdown kinda suppresses demand but then maybe once we get behind this, you might start to see, again, another wave of acceleration in terms of economic activity, so I think people have, I think you're right, I think people have kind of calmed down, but I think at the same time, there's still a lot of things we just don't know.

Great, well at some point in time, the volatility to Omicron may dissipate and the volatility relative to the Fed's policy decision next week may take the spotlight, so we'll have to see where that ends up. Last question for Steve, on the volatility side, we saw volatility spike in terms of VIX from under 20 for most of the second half of the year to up to about 28 and now it's back down. Any thoughts on the volatility from your perspective in the market?

Yeah, I'll tell ya, you know, one of the things that interested me in the last week is that we saw spot VIX, spot volatility trade to a premium over futures, three-month futures volatility, and if you go back and take a look at the market since the bottom of the great financial crisis in 2009, every single time that happened except for the COVID response in 2020, it turned out to be a buying period for equities. Basically it marks a period of short-term panic, and absent a really nefarious situation, it's shortly resolved itself with a recovery back to the upside. And sure enough, that's exactly what we saw play out last, in the last week, so whether it was the Fed or whether it was Omicron or whether it was both, it seemed to give us a buying opportunity, and right in front of the traditional, most seasonally bullish period of the year, Santa Claus rally, so for us, it was a, really marked a buying opportunity here as we head into year-end, Brian.

Great, well thanks everyone for joining us today. As always, past performance is no guarantee of future results and we know your financial situation is personal to you, so reach out to your relationship manager, your portfolio strategist, or your advisor for more information. We'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you achieve your financial success. The Key Wealth Matters podcast is produced by the Key Wealth Institute. The Key Wealth Institute is comprised of a collection of financial professionals representing Key entities including Key Private Bank, Key Bank Institutional Advisors, and Key Investment Services. Any opinions, projections, or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. This material is presented for informational purposes only, and should not be construed as individual tax or financial advice. Bank and trust products are offered by Key Bank National Association, member FDIC, and equal housing lender. Key Private Bank and Key Bank Institutional Advisors are part of Key Bank. Investment products, brokerage, and investment advisory services are offered through Key Investment Services LLC or KIS, member in FINRA, SIPC, and SEC-registered investment advisor. Insurance products are offered through KeyCorp Insurance Agency USA, or KIA. KIS and KIA are affiliated with Key Bank. Investment and insurance products are not FDIC-insured, not bank guaranteed, may lose value, not a deposit, not insured by any federal or state government agency. Key Bank and its affiliates do not provide tax or legal advice. Individuals should consult their personal tax advisor before making any tax-related investment decisions. This content is copyrighted by KeyCorp, 2021.

December 9th, 2021

 

Welcome to the Key Wealth Matters podcast, a series of candid conversations with leading experts about how individuals and organizations can grow and protect their finances, tailored around current events and trends. Here's your host, Tracy Collins.

Welcome to the key wealth matters podcast, entitled Real Estate Gifts: What Every Nonprofit Should Know. addressing today's topic are two individuals from Key Bank. Emily Mogan, national trust real estate manager, and Cindy McDonald, national director of philanthropic advice. Emily has been helping individuals and organizations navigate the complexities of trust real estate for over 20 years and has been in the role of national trust real estate manager for the last 10. And Cindy has been providing thought leadership around planned giving for almost 30 years. And for almost half of that time, she was a voting member of keys national trust real estate committee, providing oversight and governance around various types of real estate held in trust. Welcome Emily and Cindy.

Thank you, Tracy.

Well, this is really an interesting topic to me and I have to admit, I don't know how often clients think of gifting real estate to charitable organizations. You know, I know when working with my clients, when the subject of gifting comes up, we typically talk about gifting cash or stock.

So is this a newer trend.

I think it is. I, we are getting a lot of inquiries with regard to real estate donations for many of our clients. I think that many organizations are now open to the idea of accepting real estate as a gift. So what type of real estate are we talking about? I mean, is there a difference from an organization's viewpoint, whether the gift is, say a home versus a commercial building or maybe even a farm?

Yeah, so I think any type of real estate could be donated and each property type comes with different risks associated to them. So for an example, in a residential home, you know, you want to take into consideration the age of the home, the condition, whether or not it's part of an HOA, what those additional costs may be and what those additional restrictions may be. Whereas maybe on a commercial or an investment property, you know, you want to know who your tenants are and you want to ensure that you're not going to have a reputational risk of any kind based on that tenant base. And you're going to want to examine the cashflow and perform some environmental due diligence, and then the same sort of on a farm. You need to perform some environmental due diligence review the cashflow, understand, you know, who's farming It. Are, are there any additional liabilities, if that farm ceases to operate as a farm, there could be some tax recoupment charges. So the organization just really needs to know that there's different risks associated with each property type. And once the organization determines that the property itself is one they would like to consider, are there other concerns or questions they should ask before moving forward,

Yeah, they should ask, you know, does this gift advance their mission? And do they really have the staff or the experts in place within the organization to support the gift, manage it and, or liquidate the gift to cash. So is this something they're really willing to take on? And what does their gift acceptance policy say?

Yeah, Tracy, the gift acceptance policy. That's, that's a key element right there for any nonprofit organization. They, if they don't have the real estate written into the actual policy itself, they may not be even be able to accept it. Like not even have the conversation with the donor and not only that is that the gift acceptance policy, their CFOs should really understand that policy as well. Cause the assets that are coming in, maybe sitting on the books and the balance sheet somewhere for could be a month, could be a year, could be two or 10, who knows, but they need to be involved as well. So that understanding of the gift acceptance policy statement, having it in place, having it updated annually is a critical part of what the not-for-profit should be doing.

Well, Cindy, you bring up a good point. Do they do the questions or even the vetting process change If the organization is thinking about holding the gift of real estate versus perhaps just selling it?

So I don't think the questions change as much as if you think about a donor, their two largest assets are what their IRAs and their homes. So they're thinking more outside the box on how they can gift. So a lot of folks are now approaching Emily and, and other organizations saying, you know, instead of cash, stocks and bonds, I'd like to gift my primary residence, my vacation home, whatever the real estate may be. So when the donor is approaching the not-for-profit with that type of gift complex gifting, the not-for-profits should understand all the different steps within their gift acceptance policy and what they can do in order to have that conversation. So can they take the real estate in, can they hold the real estate or do they have to liquidate it right away? What type of planned gift will this real estate be funding or is it an immediate gift where they're just handing over the house or the, or the type of real estate to the not-for-profit as more of a transactional instead of a planned gift type item.

So the property passes, the vetting process and the organization is interested in taking the gifts. So let's talk about potential structures for completing that gift. I mean, is it just as simple as someone signing over a deed or are there specific estate planning structures that better accomplish this type of transfer?

Yeah So there is a transfer on death deed that could be prepared and recorded, which would transfer the real estate upon the donor's death. And then Cindy, I believe there are several trust vehicles that you could also use to donate.

There are, there are definitely charitable remainder trust, charitable lead trust. These are just a few that pop to the top of my mind that I see specifically trending over the past couple of years, specifically more like the past 12 to 18 months. funding these charitable type trusts with real estate. Because again, thinking outside the box, they don't want to let loose with cash, stocks or bonds, but real estate is valuable and it will fund. So when it funds the charitable remainder trust, then it can be liquidated and then invested, and then continue on with the terms of the agreement, the proposed tax plans that the Biden administration is doing is also having donors sit back and really look at their estate plans overall, because currently right now is state tax exemptions are very high, it's 11.5 million, and they're supposed to sunset, December 31st, 2025. So bringing that down to 5 million, well, the Biden administration is even looking at bringing that exemption down even more so to three and a half million, which was proposed. It's not law yet. It's just proposed. So it's making donors sit back and really look at their real estate and saying, okay, you know what? This may fit differently in my state plan now. So having those conversations with your donors and seeing what their actual financial plan is looking like, it may be altering and it may be changing. In addition to that capital gains tax rates are going to increase as well as individual rates. So now's a great time to keep having those conversations with your donors.

So Cindy, are you saying that the proposed changes and the Biden tax plan are going to help with the potential, for more realistic gifting in the future? I see a trend upwards of, yes, a lot of, a lot of donors and a lot of not-for-profits are approaching us to have the conversations and saying we've we keep having people knock on our door saying, you know, I am looking to gift this piece of real estate. And I'm looking to do that with you as an organization and support you, can you help us make that happen, more conversations than ever before? So it's really an important, that a not-for-profit understand how they can have those conversations.

So based on the vetting process that you both talked about and the estate planning structures that you mentioned, Cindy, I'm guessing that conversations around real estate gifting need to take place well before the actual gift. So let's talk about pre planning and the process behind that. What does it look like? And when should it really start?

So it should not start December 15th, if you want to complete the gift of that year. That is for certain. So these conversations should have been flowing already. And a lot of the times it's typically in the beginning of the year, and then usually it's wrapped up within, by the end of the year. And the gift is made. It depends on the actual donor itself. So is the donor looking at just starting the conversation and maybe looking to gift it out in two or three years, and they really don't care about what Biden is proposing, but you know, this is their process and their flow. It's, it's really important that you focus on the donor and what they want to do and what they want to accomplish. It may not be so much as let's just hurry up and make this gift so that we have the tax write off at the end of the year. It's probably a lot more important to the donor that it's made properly and right

Writing gifts should always be reviewed prior to any transfer or transfer on death Deed is prepared or recorded. And if a property is determined to be unsuitable for a particular charity, they, they really need to be able to decline that gift because the donors wish is not going to be honored.

Well, I have to say, ladies, this has been very interesting for me. And, and you know, this is definitely information I'm going to take back to my clients, but for our listeners who want to maybe build out this area more within their organization, or maybe fine tune it a bit, what are some key takeaways that can help them in their organization better understand and prepare for real estate gifts?

I always say first and foremost is that gift acceptance policy, really understand it and look at it, you know, as a 10 years old and you haven't lifted it up and really read it through it in the past decade, make sure it's current and review it each and every year. And I'm sure Emily has a few more to add to this.

Yes, absolutely. And, and vetting the gift of real estate is also critically important. You want to make sure that you understand the gift of that's being given and all the risks and liabilities that are associated with that piece of real estate. So you need to spend some quality time vetting that real estate. You also need to involve your CFO in your decision-making process, and you need to engage your internal or external counsel and or real estate professional to assist you and really know your donor, know your donor and know the gift that they're giving you.

Well, thank you, Emily and Cindy for joining us today and to you, our listeners for taking time out of your day to listen in, for those listening. If you'd like more information about real estate gifts, we've included several attachments in the show notes for this podcast. And if you do have a specific question, there is also a URL you can use to submit your question directly to our Key Bank team. And as always, if you've enjoyed today's discussion, then please be sure to check out the other podcasts in the key wealth matters series. Again, thank you for listening.

The key wealth matters podcast is produced by the key wealth Institute. The key wealth Institute is comprised of a collection of financial professionals representing key entities, including key private bank, key bank, institutional advisors, and key investment services, and the opinions, projections or recommendations contained here in are subject to change without notice and are not intended as individual investment advice. This material is presented for informational purposes only, and should not be construed as individual tax or financial advice. Bank and trust products are offered by key bank, national association, member FDIC and equal housing lender. Keep it private bank and Key Bank institutional advisors are part of key bank. Investment products, brokerage and investment advisory services are offered through key investment services, LLC, or KIS member of FINRA SIPC and sec registered investment advisor, insurance products are offered through key Corp insurance agency, USA or KIA. KIS and KIA are affiliated with key bank. Investment and insurance products are not FDIC insured, not bank guaranteed, may lose value, not a deposit, not insured by any federal or state government agency. Key Bank and its affiliates do not provide tax or legal advice. Individuals should consult their personal tax advisor before making any tax-related investment decisions. This content is copyrighted by KeyCorp 2021.

November 5th, 2021

 

Welcome to the "Key Wealth Matters" podcast, a series of candid conversations with leading experts about how individuals and organizations can grow and protect their finances tailored around current events and trends. Here's your host, Tracey Collins.

Welcome to the "Key Wealth Matters podcast entitled "The Latest Tax Proposals and Their Potential Impact on Non-Profits." With me today are two individuals from KeyBank who will help us sort through some of the key facts within the proposed plan. Tina Myers, Director of Financial Planning and Cindy McDonald National Director of Philanthropic Advice. Tina has been providing planning and tax guidance to individuals for almost 25 years. And Cindy has been advising nonprofits for almost 30 years, so we have a lot of experience with us today. Welcome, Tina and Cindy.

Thank you, Tracey.

Thank you. Good to be here.

Good to have you both. And this is certainly a timely topic and one that I think has everyone, individuals, corporations, and not-for-profits, not just concerned, but I think somewhat confused. There's been so much information, misinformation and predictions around Biden's plan that I'm not sure anyone really understands what these changes could mean to them. And while we can't address everything in the plan during today's discussion, let's hone in on the key points in the plan that could affect nonprofits and their donors. And let's start on the donor side. So Tina, at a very high level, can you share with us some of the key points in the Biden tax proposal that would affect charitable planning for individuals?

I sure can. Thanks, Tracey. And I'm happy to be sharing some of these thoughts today. So top of mind, I think is the potential increase in the preferential capital gains rate. So if you remember our long-term capital gains and our qualified dividends are taxed at a lower rate. And it's usually right now, it's like 0%, 15 or 20% at the highest, but Biden wanted to increase that rate to be the top ordinary income tax rate for those that had over a million dollars, so it could have been as high as 39.6%. The negotiations going on in Congress right now, I guess, as we speak, we're not really sure where that's gonna land, but I don't think it's gonna be as high as 39.6. I think it's gonna end up somewhere, I think, maybe 25%. So the impact of that though, would be that donors would probably make more gifts of appreciated capital assets to charities, instead of recognizing those gains themselves. So that's one big change. Another big change that Biden was proposing. He originally wanted to cap itemized deductions and limit them until like, I don't know, if it was like 28% of itemized deductions. I know that one did not make it through in the latest House Ways and Means Committee proposal that was out on September 13th. That one in particular would have further limited your charitable donations. And if you can remember a couple of years ago, they increased the standard deduction. And when they did that, that meant there were a lot less people that were actually itemizing their deductions, that would get a benefit from their charitable gifts. That would have placed more limitations on those charitable gifts there. So again, good thing it's gone. It's not even being talked about anymore. Another big one too, was this thing that Biden called deemed realization event. And this one would actually trigger recognizing a capital gains tax, if someone gifted an appreciated asset upon death or just in transfer. There was an exception though, for gifts that were made to charity, which is great for charity side of things, because that would have been horrible. The one part I think that people were afraid of regarding charities was that it could affect split interest trust. So a split interest trust is one where you have a non-charitable beneficiary and a charitable organization benefiting for a period of time. And that's the one that, I guess, they were thinking that the deemed realization could impact that not particularly the portion that went to charity, but the portion of the gift that was for the non-charitable beneficiary could have been subject to realization at that time. And so it's a good thing that I don't think that one has fit into the September 13th House Ways and Means proposal, so I don't think that one is gonna show up anymore. Hopefully, that one is gone for right now. I don't think it'll show up again, hopefully. And then something that actually wasn't in the Biden proposal, but I think it's very important to charitable organizations is something called the Accelerating Charitable Efforts Act, or they call it ACE, A-C-E. It was proposed in June of 2021 and it impacts donor-advised funds. And I know I've seen a lot of clients using donor-advised funds in the last couple of years because of the change and the standard deduction and things like that. So the impact of this one would be that the big appeal of the donor-advised fund is that clients can make a gift in a current year, but they may not know exactly what organization they want to benefit yet, but they get their tax deduction in that year that they make the gift. And then maybe like over the next couple of years, they dole out the money in grants to different charitable organizations. So it's like a mismatch of the time of like when you get your deduction and when the organization actually pays out the money to charities. Well, apparently, they don't like that mismatch there and they actually want to kind of say that the donor can't get a deduction until the donor advised-fund actually doles out the money to the charitable organization. And then there's also something that they said for like really large donor-advised accounts that are over like a million dollars. They wanna do kind of like how private foundations have a minimum distribution requirement. They wanna impose a 5% distribution requirement there. And then they wanna limit donor-advised funds, if they're in place for a really long time, like 15 or 50 years or something like that. They wanna be able to put an excise tax on those undistributed funds there 'cause I guess, I don't know, they haven't been around that long, so I don't know why they're thinking 15 or 50 years. But anyway, I think that's pretty much it. That's the high level overview of the possible changes, I think.

Well, Tina, if that's a high level, I'd hate to see the low level. That's a lot to digest. So Cindy, should these potential changes affect how nonprofits interact with their donor base? I mean, are the conversations now with donors different? And is there a priority as to which donor to reach out to first to have these conversations?

Right, that's a great question, and I'm happy to talk to you about it today. So it's really not so much as a different conversation, but more enhanced and knowledgeable conversation. So non-profits, they know their donors. And for those donors that tend to make more complex gifts, I think they are sharing with you or sharing with the not-for-profits. Their overall strategy and intent on their philanthropic planning, so that you know the not-for-profit, the types of programs that resonate with them as donors, what they wish to see that they use their funds for. So sometimes it's not always about the tax deduction, which is scary, because of all that's coming down to play, but sometimes the most important thing to the donor and their family is what impact they're making for the not-for-profits. So I think one of the biggest things, conversations that not-for-profits can have literally is to make sure that their donors, if they're looking and thinking about complex gifting before the end of the year or into next year, that they really need to start having these conversations with their advisors. However, on the flip side of that, in speaking with not-for-profits, not only across the country, but different sectors. So your healthcare, your arts and culture, or community-driven organizations, the conversations are very much the same of late, and that's they're sitting back and they're saying, oh my gosh, how are these tax proposals that this new administration is creating, going to affect charitable planning and giving? We're doing budgets right now. Is that going to affect an income stream for us? So I know it depends is such not a solid answer, but it truly depends on the donors' financial situation and the types of assets that they're looking to gift, such as immediate gifts of highly appreciated stocks. Or are they going to plan out a gift so it's planned gifts such as a charitable lead trust or a type of remainder trust. So as major gift officers, having an understanding of what is actually being proposed by the administration will do nothing but help further your conversation and possibly solidify that gift. So your donor will feel more confident in making that gift, knowing that you understand the impact that this administration is possibly proposing, not only on the donor side, but the not-for-profit side too.

Well, I can say that in my conversations with my clients who have been charitably inclined in the past, they're just trying to figure out, much like you said, Cindy, what is the best gifting strategy if the tax plan passes. They still wanna give, but now more than ever, they really wanna understand the tax implications of these gifts. And we've talked about different strategies, but let's go back to simplistic. So is cash still the best strategy? Is highly appreciated stock still the best strategy? And is it maybe a disconnect between what donors want to give and what non-profits wanna receive? I mean, and Tina, why don't you start from the donor side? What now under the proposed plan, might be the best type of gift to give? Is it the cash or the highly appreciated stock from a donor perspective?

That's a loaded question. You're right, it depends, because a donor could have cash appreciated assets or some other like weird type of non-cash asset that they wanna give. I actually just listened to a webinar a couple of weeks ago about charitable gifting of non-cash assets, and there are some really strange things that clients say they wanna give to charity as long as the charity will accept that. But especially in today's environment and over the past year, I've run a number of different projections for this. The big question is do I give cash in 2021? If I give cash to a public charity, I get a 100% adjusted gross income limitation. Before, years prior, well, actually prior to 2020, it was a 60% of adjusted gross income limitation. And then other than that, you got to carry over any unused charitable deduction for the next five years. But you get 100% deduction in 2021, if it's cash. I mean, sometimes that's way better than giving an appreciated asset that you can only take up to 30% of your adjusted gross income and then carry it forward for five years and risk not being able to use all of that charitable carryover in that five-year time period. So I've seen a couple of scenarios where we ran a couple numbers and we did some things where do you sell the capital asset, the stock or something like that first, give cash, or do you give cash? And each situation is different. You just have to run a couple of different scenarios and see what works out best for them. Depending on, like I said, it depends on their adjusted gross income. Maybe they have one huge, one big year that they're trying to offset the charitable deduction and then other future years will be lower. And then, like I said, they may end up wasting some of that future deduction. So that's what I'm seeing for right now. I don't know, Cindy, if you're seeing anything different on the non-profit perspective.

No, I think you nailed it exactly right, Tina. That's pretty much exactly what I'm hearing from clients and our planned giving officers.

Oh, great. So Tina, I wanna go back to something that you had talked about earlier, and that was the donor-advised funds and the split interests gifting strategies. And I wanna really hone in on the impact of the Biden tax plan on these types of strategies. So if I understood you correctly, you had said these will not only still be viable for future donations, but there's not going to be any impact on structures that are currently in place as well. Is that correct?

Yes, that is correct. And I guess, I'll tackle each one of them separately. So let's talk about the deemed realization one first. Deemed realization would have impacted split interest gifts, so gifts to charitable remainder trust, lead trust, and things like that. Again, not make it through that current House proposal. But again, it would have caused an income tax realization event at the time that the gift was made on the non-charitable portion of the gift. Maybe that's not what the original intent was when the original writers of this came up with the so-called deemed realization. They just kind of said, oh, well just, when somebody transfers something, we wanna make it a realization event, not knowing that there's this thing out here called split interest trust, that all these charitable organizations came to the forefront and said, no, this would not be good for us. So anyway, so that's off the table now. And I don't even know if that would have had that much of an impact because there was also like a $1 million per person exclusion on this like unrealized capital gains. It could have been portable to another spouse that you had to have somebody who had a significant gift that they wanted to make using a charitable remainder trust. So it won't affect any existing clients that have a charitable remainder trust or something like that already in place. It would have just affected future gifts to a split interest vehicle. So for right now, like I said, off the table. It's pretty good for our donor organizations there. So let's talk about the donor-advised funds. So that was the other proposed change. Again, it's not part of the Biden proposal, but it was in some other proposal earlier this year. And that's all about matching the deduction with when that charitable organization distributes the money to those charities. It will not affect if somebody has a donor-advised fund in place with an organization right now. It would probably grandfather those. It would affect future gifts that are made to a donor-advised fund, where you wouldn't be able to get your deduction maybe immediately until the organization actually paid it out. So like the thing is none of us, I've never seen anything that actually impacts existing, whatever, split interest trust or donor-advised funds. It's always gonna be prospective gifts that they're going to affect.

Well, I think, a lot of donors are confused about what to do right now. So many are almost frozen to the point of not doing anything. Do I wait until I know what the tax plan is? Do I make a gift under the current tax plan and hope that the tax implications aren't changed by the new tax plan? Because there has been talk about it being retroactive. So Tina, what are your thoughts? I mean, should donors really wait until the Biden tax plan is finalized or should they still try to do some of their gift giving prior to year end?

Well, I don't think they should wait until the very last minute. Definitely have an initial initial plan in place, but allow for some flexibility to change quickly, if you need to. I know Cindy mentioned this when you're, make sure that they're talking to those planned giving departments and your advisors, you're running the numbers already. If you plan on doing something like a split interest gift or anything where you're gonna have to transfer, do stuff with custodians and transfer assets and things like that, go ahead and get all that paperwork done now and have all your ducks in a row now, so that come the end of the year, if we have clarity and we know that nothing's gonna impact the structure of that gift you already have mostly in place, then you can pull the trigger and you're done with it. But if you wait until the very last minute, you're going to risk not being able to complete your transaction before the clock strikes midnight on December 31st. So I definitely would not wait.

And Cindy, I'm sure quite a few development committees and finance committees are struggling with what to do and how to keep funding coming in as people are struggling with even to make their gifts and the timing of these gifts. So what can nonprofits do right now to encourage both immediate gifting, as well as planned giving over time?

And you know what? I'm having a lot of these conversations, Tracey. So you're right. Encouraging the conversation is always there, but what I'm hearing more is like truly backing it up and saying, and this is all like post-COVID. So this has come more into play ever since COVID has hit the world, quite honestly. It's understanding what's most important to the donor. Is it the tax deduction before year end? Or is it taking time to plan out the gift and see the impact that they'll be able to make for the programs and the missions of the organizations? So these major gift officers are out there talking to their donors and having these wonderful conversations, and to Tina's point, not doing it last minute. Because if they do wanna say they wanna fund a charitable remainder trust, you can't do that December 20th. So having those conversations right now with their advisors and having these major gift officers encourage those conversations, because if they do wanna create that plan gift, to Tina's point, it can't happen December 31st. There's a lot of steps that have to take place administratively. So if they know what that is and what the time is, the timing to actually fund a trust, say, or make a gift of stock, it will be much easier and much smoother. In addition, though, I would have to say, naturally, there are advantages to gifting before year end. Everybody knows it. Tina actually just, she just laid out a whole bunch of rules that's proposed, but right now, so far the gifts made are right now under current tax law. So whatever it is in play right now, so any gift made before 12/31 is under current law. But again, have it be flexible. That's the conversations with their advisors, so that if they do need to pivot before year end, they can. And at the end of the day, the most important steps organizations are taking right now is stewarding of their donors. So sharing with them what your organization is doing to move forward and to grow and share the impact that the gifts will make is incredibly important. You don't want that transactional gift as much as you want the transitional gift, the bigger gift that lasts much longer.

Well, Cindy and Tina, there is definitely a lot in the proposed plan, and I feel in many ways, we've only barely scratched the surface. We could probably fill up several podcasts with information and a direction for our listeners. But I know the listeners that have tuned in for us today, specifically on nonprofits, wanna know what they can do right now. So Cindy, can you share with them some key takeaways, things that they can start doing with their donors now to address the current tax environment, as well as donor uncertainty?

Absolutely. So right now, go back to your donor base and start internally, understand your donor base, review your database, start with your bigger donors and working down to your transactional donors, and then really concentrate on those that you know and you feel are going to make a large gift that have a tendency to do so before year end. Review the pending plans and gifts, revisit those conversations. You talked to Mr. Smith back in January, and he was thinking of funding a trust. When's the last time you spoke to him? Why don't you go back and revisit that conversation and see is he intending to do that before year end? Or is he looking to just say, you know what? I'm just gonna push it out to 2022. It's really important that they manage the donors.

And Tina, any closing thoughts from you?

Yeah, I would say also in working with the planned giving departments and things like that, like Cindy said, it's the impactful gift, it's not the one-time gift. If they wanted to make a gift, no matter what the law says, they're going to make that gift, whether or not they get a tax benefit for it. The point of it would be that we just want to be able to advise clients and make sure that they are maximizing their giving ability. They're choosing the right asset, the right vehicle, the best timing for making it. So just despite the proposed changes and things like that, just make sure we're maximizing everything.

Well, this has been a very enlightening and helpful discussion. I know that the information that you both shared will help our listeners navigate these uncertain times a little easier. And I'm also sure that when the plan is finalized, we'll invite you both back again to get your perspective. Thank you, Tina and Cindy, for joining us today, and to you, our listeners, for taking time out of your day to listen in. For those listening, if you'd like more information about the proposed Biden tax plan and its potential effect on charitable giving, we've included several attachments in the show notes for this podcast. And if you do have a specific question, there is also a URL that you can use to submit your question back to the KeyBank team. And as always, if you've enjoyed today's discussion, then please be sure to check out the other podcasts in the "Key Wealth Matters" series. Again, thank you for listening.

The "Key Wealth Matters" podcast is produced by the Key Wealth Institute. The Key Wealth Institute is comprised of a collection of financial professionals representing Key entities, including Key Private Bank, Key Bank Institutional Advisors, and Key Investment Services. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. This material is presented for informational purposes only and should not be construed as individual tax or financial advice. Bank and trust products are offered by KeyBank National Association, Member FDIC and Equal Housing Lender. Key Private Bank and KeyBank Institutional Advisors are part of KeyBank. Investment products, brokerage and investment advisory services are offered through Key Investment Services LLC or KIS. Member of FINRA, SIPC and SEC Registered Investment Advisor. Insurance products are offered through KeyCorp Insurance Agency USA or KIA. KIS and KIA are affiliated with KeyBank. Investment and insurance products are not FDIC insured, not bank-guaranteed, may lose value, not a deposit, not insured by any federal or state government agency. KeyBank and its affiliates do not provide tax or legal advice. Individuals should consult their personal tax advisor before making any tax-related investment decisions. This content is copyrighted by KeyCorp 2021.

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The Key Wealth Institute is comprised of a collection of financial professionals representing Key entities including Key Private Bank, KeyBank Institutional Advisors, and Key Investment Services.

Any opinions, projections, or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.

This material is presented for informational purposes only and should not be construed as individual tax or financial advice.

Bank and trust products are provided by KeyBank National Association (KeyBank), Member FDIC and Equal Housing Lender. Key Private Bank and KeyBank Institutional Advisors are part of KeyBank. Investment products, brokerage and investment advisory services are offered through Key Investment Services LLC (KIS), member FINRA/SIPC and SEC-registered investment advisor. Insurance products are offered through KeyCorp Insurance Agency USA, Inc. (KIA). KIS and KIA are affiliated with KeyBank.

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