Good afternoon, everyone, and welcome to our market update and third quarter outlook webinar. My name is Jake Symoniak, and I'm a Senior Global Equities Strategist here at Manning & Napier. We have two guests with us today to walk through what we've seen to start the year and get into where we think we may be going from here. I'll be joined by Jay Welles, Managing Director of Core Equities and a member of the firm's Investment Policy Group, and Brad Cronister, s enior a nalyst in the firm's Fixed Income Group. Gentlemen, welcome, and I was hoping that both of you could briefly talk about your time here at the firm and maybe walk through your various roles before we get started with this. Sure. So glad to be here. I can start off first. So I've been here 24 years. I'm the Head of Core Equities, which in plain speak means I manage the department that picks the stocks that go into the portfolios. I'm also a member of the Investment Policy Group or the IPG, which is our asset allocation body, and I'm a member of the Core Team, which is our portfolio management team. I'm a senior analyst within the Fixed Income Group. I've been with Manning & Napier since I actually started as an intern in 2009. I'm a portfolio manager for the core bond fund, as well as the unconstrained bond fund. Great. Thanks. I appreciate it, guys. So, as always, before we get into this, I kinda wanna take a step back and set the stage for the conversation that we're gonna have today. The first thing we're gonna do is kinda take stock of where we are in terms of the economy, the inflation, and the broader market. And then from there, I wanna revisit some of the bigger picture topics that we introduced kinda earlier in the year when we talked about some of the big picture topics, the questions that we were asking, kind of moving into and through 2024. After that, we'll get into a couple other things as time allows and hopefully get to Q&A. Before we do that, I think there's two topics that are gonna come up a decent bit in some capacity throughout the course of the conversation today, and I wanna introduce those really explicitly and kinda get them front and center for people thinking about the conversation as we go. The first is the idea of, and kind of the difference between softness and outright weakening, and I think that this is gonna be t his topic is gonna be particularly important, especially at the beginning of the conversation today, when we're talking about the economy and the labor market. Then the second thing that I think is important to keep in mind is really the importance of balancing risk and reward in the market today. You know, I think there's a fair bit of uncertainty in the market. We see risks to both the upside and the downside. Valuations aren't terribly compelling in a lot of different markets, and it sets up an environment where we're finding opportunities, but again, we're constantly thinking about the balance between risk and reward. So having laid that out there, you know, we'll get right into it, and I wanna start with the economy. So we're coming off a period where we saw resilient economic growth, elevated inflation, and the Fed act incredibly aggressively to combat those inflationary pressures. And really, the narrative that we've seen backstopping markets, really the narrative against which we functioned in financial markets for a long time, has started to change. I think growth is clearly slowing, inflation is coming back towards target, and that's just a different environment than we've been in. So Brad, maybe we'll start with you. If you can, can you talk to us a little bit about how growth has evolved kinda over the past couple of years, and really, at a high level, talk about where we've seen resilience and where we're starting to see some weakness on the margin now? Yeah, I think the main theme has been the consumer has been extremely resilient. Spending, specifically within the services sectors like travel, leisure, hospitality, healthcare, have really been underpinning growth and keeping us from seeing a contraction in economic activity. We're seeing a bit of a slowdown on consumer durable spending. Some of that is probably the consumer dealing with higher interest rates as well as a rundown in excess savings post the COVID fiscal stimulus. We're also seeing investment, you know, marginally weaker. A lot of that is coming from the residential investment side. Again, higher mortgage rates are impacting new home investment, so, you know, it's a bit mixed, but the consumer remains resilient. I think it's important to note, though, that the government deficit is doing a lot of the heavy lifting. We've been running government deficits of 5%, 6%, 7% at a time when unemployment was below 4%. Not very traditional at this point in the cycle. So, while the consumer is resilient, a lot of that resiliency is due to high fiscal deficits that seem unlikely to stay with us for a while. Great. I appreciate that. And I think maybe the point that I would highlight, too, is looking at this chart, looking at the last couple of quarters, the point you made is exactly right. It's a domestic economy that's been resilient, largely because of the consumer, and the last couple of quarters, also because of investment. So, Jay, maybe we'll go to you, and I'll pose a similar question just at a much more granular level kinda given your exposure at the equity level, at the more micro level. Are there industries we've chosen to have exposure to or maybe chosen to avoid because of some of the resilience or the weakness that we've seen in the economy? Sure. So it's, yeah, it's a seemingly simple question at face value, but of course, you know, you need to take into account the future outlook and what's priced into equities at the current moment. So I'd say there's a few different buckets you could break it down into. A reas that we're underweight currently because they've been strong but where we expect fundamentals to deteriorate or the equities are overvalued would be tech and energy. To start off, with tech, you know, it's been an area where earnings growth has been well above the market, but it's simply been difficult for our analysts to find equities that are attractively valued currently. And so we've been underweight tech. Energy, that's another area that's been resilient, but I think it's always key to keep in mind that energy is, at the end, cyclical, and the high oil prices that we're seeing right now sow their own seeds of destruction eventually. And where you see that is with where the price of a barrel of oil is today, we're seeing record U.S. production. And really, the energy market is only being buoyed by voluntary OPEC production cuts. And we think it's a really risky setup to be counting on OPEC maintaining the discipline when there's so much latent capacity sitting on the sidelines that could flood in. You know, the other bucket is we wanna be overweight areas that we expect will remain resilient and which have attractive valuations. A couple examples of that would be consumer staples and healthcare. So if you think of why the valuations are attractive there right now, staples are an area that are very rate-sensitive. So with the backup in interest rates, we're seeing staple valuations, you know, quite attractive right now, quite low. Healthcare is usually an area that struggles in election years because it tends to be a political lightning rod. So similarly, we see healthcare valuations, you know, being near historic lows. And then finally, in terms of the resiliency, you know, healthcare and staples, those are areas in a slowing economy as we're seeing now that are less discretionary purchases. You're still gonna buy your, you know, your bottles of Coca-Cola or your Nestlé candy bars. You're still gonna buy your healthcare drugs or, you know, need surgeries, et cetera. So those should hold up better. You know, the other areas that we're going to and that we see opportunity is areas where that haven't been resilient where there's pain, but where we think we're a good deal into that fundamental pain, and those areas are gonna resume growth and valuations look beat up. And if you look over the past year or so, areas where we've bought into, that sort of weakness have been industries like the rails, chemical distributors, IT services, several housing-related industries like lumber, power tools, plumbing, paint, and the credit bureaus. Those have been areas where there's been sort of industrial-level recessions, if you will, and we're certainly willing to, you know, be opportunistic into that weakness. And then finally, I would just end on consumer discretionary. That's an area where we're seeing consumer pressures build, and we expect further weakening. It's fairly constrained to the low-income consumer now, but we expect that to spread. But that's an area where we're starting to dig for opportunities. You know, and as we see further weakness and valuations come in, you know, we're underweight now, but that's an area where we may be, you know, shifting some chips going forward. Yeah, so I think that point you made about a weakening consumer is incredibly important, kind of taking a step back or kind of removing ourselves and going back to the top-down view. Because if the consumer is slowing, that's very much gonna have an impact on the broader economy. So Brad, maybe if we can go back to you. You talked to us a little bit about kind of where the economy's been, where we are now, but how do you see things playing out from here? Yeah, I think for our base case is a continued slowdown. It's really difficult for us to make a case that you see an inflection higher with the consumer, just given where consumer debt loads are, a bit of softness in labor markets. So we don't see the consumer ratcheting up spending any time in the near future. To make the case for the upside, you really have to see business confidence come back, and again, business confidence, when you look at the small business indicators that we look at, they remain fairly weak. But on the flip side of that, seeing a sudden drop in economic activity when financial conditions are so easy, you typically don't see that. So again, for us, continued softness but not outright weakness in the near term, b ut we do think the way that growth is going to look over the next few quarters and into next year will look different than we have, you know, been accustomed to over the last 20 years. We think, with slow growth, you're still gonna see relatively high prices, and so while real growth might be 0.5%, 1%, we still think price pressures will have inflation in the 2.5%, 3% range, which gets you to nominal growth in around 3.5%, 4%. So that's kind of how we see things playing out in the next 12-18 months. Great. And I think, you know, it's important again to call out that point that we talked about kind of at the beginning of the conversation, that difference between softness and outright weakness. And I think one of the things we would have to see to get significantly more concerned about softness turning into weakness in the U.S. economy is a much weaker labor market than we've seen to date. Now, there's no question the labor market has held up well. I think, for the first time in a little bit, though, we're also starting to see some cracks in the labor market. And again, we come back to this idea of softness versus weakness, s o Brad, if you can, can you talk to us a little bit about some of the softness that we've seen in the labor market and how you see things evolving from here? Yeah, I think it's important to put it in the proper context, though. 12 months ago, we were at historically tight labor markets, close to 3.5% unemployment rate, really high wage growth. The softness we've seen so far has only got us to modestly tight. So from a level perspective, employment isn't too concerning here, and to be quite honest, that's the economy needed some softness within labor markets. It kind of alleviate that both price pressure from wages f or businesses. And the, you know, modest uptick we've seen in unemployment has been healthy. It's higher participation rates, reentrance into the workforce, as opposed to kind of the outright layoffs that you would typically see as you head into a recession. Now, that being said, there's, you know, three main indicators that we're looking at to see whether employment moves from a softening into weakness. I think one is clearly jobless claims. It's the best real-time indicator that we have to look at weekly. On top of that, we're also looking at the breadth of hiring. The last few jobs reports, we've seen concentration in hiring towards both the government and healthcare side, as opposed to a broad, you know, increase in employment across the entire economy in all sectors. So that concentration's a bit worrying. It probably raises a yellow flag as opposed to a red flag here, but it's something that we continue to monitor. And then I think the one thing that really is a red flag for employment moving forward is temporary hiring. That has been negative for, I think, six-nine months now, and something that is historically a pretty good leading indicator for employment moving forward. Great, I appreciate that. Jay, I'm gonna kinda pose a similar question that I did on the last slide. We're gonna take it from the top down, kind of down to the micro. Is there anything you're seeing at the company level that would be suggestive of kind of broader layoffs in this environment? So what we're seeing, I think, meshes pretty well with what Brad's seeing it top-down. So I'd describe it as pockets of weakness. I, you know, would not say that we're seeing anything suggestive of broad-based layoffs. You know, if you were to go back, coming out of COVID, you know, a lot of the tech companies had over-extrapolated the demand that was present. Given the, you know, the rapid shift of things online, they'd hired kind of, you know, well ahead of demand, and probably 18 months or so back, there was a wave of tech layoffs, but we've since worked through that. The area that does still seem relatively weak is small, medium-sized businesses, and that's probably, you know, be one of the recurring themes today, the kind of bifurcated nature of the economy. Certainly smaller businesses are being impacted by higher rates, and that's where we've seen employment being more challenged. Brad mentioned temporary employment. So bottom up, there are temporary employment agencies that we follow, and I think something interesting there is our analyst that covers those companies has started to note that while temp employment is declining, you know, the declines are no longer accelerating. So it's not positive news yet, but at least things are ceasing to get worse at this point. And then finally, I'd note employment's a lagging indicator. You know, really, you know, something we would look at kind of bottom up to get ahead of that and be a bit more forward-looking are our profits. Corporate profitability, earnings growth still look really good at this point, and, you know, it does not appear that there's the need or the precursor for companies to make layoffs to boost profitability. So we did get a question that I think is worth answering here. As we've seen bankruptcy filings kind of tick up, do we think that we're on the cusp of more layoffs, or are those bankruptcy filings kind of limited in where we're seeing them and maybe not as big a concern, Brad? I think it's important to note that, bankruptcy filings, the level is still actually at, you know, prior troughs. So we've come off of, I think, the lowest corporate default rate, at least the last 20, 25 years, and now we're up, you know, marginally higher. So we've seen a slight uptick in corporate defaults, but it's certainly not widespread. I do think that's something we're gonna get to in a little bit, so we might kinda holster that for now. But, you know, we've talked about growth, we've talked about the labor market. I wanna move on to inflation at this point. You know, we saw inflation reach levels that we hadn't seen in several decades. We saw an aggressive Fed hiking cycle to combat those inflationary pressures, and we've seen inflation come down, but the pace at which it's decelerating has certainly stalled, kind of in the mid-3s, where we are today. So Brad, if you could, maybe quickly, you could talk us through, I guess, the various scenarios for inflation from here. You know, are we quickly heading back down to target? Are we likely to bounce around from here, or is it possible that inflation starts to move higher than the market might think? Yeah, I think, you know, the case for lower inflation would just strictly be that you have increased risk of recession. Your traditional slack comes back into the economy. D emand for goods, you know, retrenches lower. Even in that environment, I don't know that we see inflation go, you know, near zero like we saw, you know, during previous recessions after the global financial crisis, even for, you know, a few months, during 2020, where we had deflation. You know, to us, inflation in a recession is probably in the 1.5%-2% range, bu t it's a recession that would lead to inflation coming back to and slightly below target. In terms of higher inflation, I think you would have to be making the case that the softness we've seen in labor markets is over, and maybe that's just because business confidence improves or, you know, financial conditions are still extremely easy, and so that the slack that's needed to come into the economy just doesn't. You always have the risk that higher commodity prices could lead to higher energy prices. You have downstream input costs that can go into businesses from there. And then, you know, the election in November, if either party were to sweep Congress and win the White House, I think you would have to pencil in some type of fiscal stimulus, which again could push prices higher. But I think in general, that prolonged period of inflation in the, you know, where we're at now in the 3% range makes a lot of sense, and I think mainly that's a function of the Fed not being as tight as they think. Again, financial conditions are extremely easy. Services prices have remained, you know, relatively sticky to the high side, and a lot of that is shelter and housing haven't fallen as you would expect. Yeah. So, Jay, again, we're gonna pivot back to you and talk about the corporate level. How have you seen pricing power evolve? Y ou know, I know it's gonna vary by industry, but as growth has slowed, as inflation has come down, kind of what have we seen happen to pricing power? Yeah. So it's I think the charts that we have right here are, you know, the headline inflation numbers are a pretty good encapsulation of what we're seeing, you know, sort of company by company. And, you know, maybe it's certainly the case that, you know, prices being pushed through have moderated over the past year or so. And, you know, maybe a great microcosm is to talk about these consumer staples companies, where, you know, if you went back kind of the 2022 timeframe, we were seeing packaged goods price hikes of 10%+. And for a few of those companies, those were the largest price increases they had put through in their recorded histories. That ultimately hit volume growth as, you know, consumers retrenched, you know, and then maybe ran into some affordability issues with how sharp those price hikes were. We've now seen that moderate, packaged goods, you know, maybe running closer to, you know, no growth in pricing year-over-year, flat to low single- digit declines in some cases. Right. So, you know, we've painted a picture of the U.S. economy that's slowing, and we've talked about some of the risks, I think, both to the upside and the downside. I think, in our view, we see the risks as fairly balanced and, if anything, maybe biased to the downside from here, but against that backdrop, we're looking at an equity market trading at all-time highs, you know, valuations that aren't terribly compelling. So, Jay, if you could, maybe you could walk us through kind of what we've seen in terms of performance just to start the year. So I think 2024 has largely been a continuation of where last year left off. So the, you know, market indices are sharply higher year-to-date, and it remains a market that's quite bifurcated with, you know, narrow breadth. I think, a couple of good examples of that, NVIDIA has been about 1/3 of the S&P 500's, you know, almost 15% rise in the first half, and the 10 largest stocks in the S&P 500 have accounted for 3/4 of the gains year-to-date. When you peel back the onion, look beneath the surface, you know, the market strength has been much less impressive. Small-cap stocks have really been struggling. Or if you look at the average stock is, you know, barely up on the year, s o it's a very mixed environment. It's not healthy for the market to be driven by so few stocks, but that certainly mirrors what we're seeing in the economy and with the earnings. I'd note there's a quite sharp divergence between, you know, low-income consumers and small businesses are struggling with higher rates, while we're seeing high-income consumers and larger enterprises continuing to power through. So it's very much a kind of a two-speed economy, two-speed market that we're in right now. I think one thing I do wanna touch on specifically, too, before we move on to fixed income markets is valuation. So, you know, valuation is a notoriously poor short-term indicator in terms of, you know, forward returns and performance in the equity market. The flip side of that is that it is, you know, you could argue it is the single most important indicator for long-term returns. So how are you thinking about valuations in the equity market today? The market looks, you know, as you can see in this chart here, relatively expensive, you know, at a price-to-earnings ratio that's in the low 20s. It's, you know, about a deviation above the long-term averages, and so that would, you know, actually one would think, you know, that would be foreshadowing returns, you know, that would, you know, relatively muted going forward. But, you know, I think the caveat there, the nuance, is again it's being distorted by the very largest stocks. When you look at the market on an equal-weighted basis rather than sorted by market cap, the market looks a lot more reasonable, more in line with the historic averages. And that matches up what we're, you know, the signals we're getting from our bottom-up analysts. With the market and the performance being so bifurcated this year, they're finding a lot of stocks that are slipping through the cracks or being left behind. So the idea generation this year is actually, you know, despite the market being up, actually is better than what we saw last year. There, you know, again, seems to be more stocks that are kind of slipping through and more kind of opportunities underneath the surface out there. Finally, I'd just note, you know, if one's investing in a market cap weighted index like the S&P 500, or if you own a mutual fund that has, you know, high weightings in the Magnificent Seven, you're probably putting too many expensive eggs in the same basket and missing out on a lot of really good opportunities below the surface in, you know, the other 493 stocks that are in the S&P 500 beyond the Magnificent Seven. Right. So Brad, I don't wanna forget about you and kind of leave you out here. I know we don't have a chart up, but if you could, could you also talk to us a little bit about kind of what we've seen in the treasury and corporate markets here in the U.S. kind of to start the year as well? Yeah, yields are marginally higher than where they started the year. W e were in a pretty tight range for quite a while on that 4.25%-4.75% on the 10-year. Today, after the CPI report, we kind of went through that lower end of the range, but I think in general, we don't mind taking on interest rate here, interest rate risk here. I think the one thing that's been really interesting this cycle has been how long the yield curve has been inverted. So historically, you think about, an upward normal slope curve. You have short-term securities yielding less than long-term treasuries, and the upward slope, you know, remains there for quite a while. You know, over two years is the long. Over two years of the yield curve being inverted is the longest we've seen in recent history. I think we ultimately think it will steepen back to a more upward sloping curve, but it's been pretty stubborn in terms of staying inverted, which is, you know, notoriously a good recession indicator once it starts to re-steepen at the end of a cycle. I think, within credit markets, you know, Jay touched on the bifurcation in equities, but it's there in credit as well. Broad credit market spreads are near all-time tights, but kind of when you dig into lower quality, specifically when you look at CC C high- yield bonds, kind of the lowest- quality bonds you can, corporate bonds you can find out there, they're closer to their median or slightly cheap levels despite an overall credit market that is expensive. It's almost like the market is daring you to go down in quality to reach for yield, and, you know, we're not quite willing to play that game here, but, yeah, bifurcation within credit markets is certainly the name of the, you know, name of the game so far this year. Great, guys. Well, you know, I appreciate the conversation, and I think some of the things we talked about, some of the themes in terms of the two we introduced at the beginning, kind of the bifurcation that we're seeing in the equity market, the fixed income market, that really sets the stage for what I think is maybe the more interesting part of this conversation here, where we get into some of the questions and, you know, maybe give a more forward-looking approach in terms of kind of what we're heading into. So, you know, there's no question that inflation has been one of the most important topics, really, over the course of the last couple of years in the market, s o I wanna start with that. You know, Brad, you talked about kind of the different scenarios for inflation moving forward, and I guess I just wanna get your view. You know, if I held your feet to the fire, where do you think inflation goes over the next quarter or two? Yeah, we think ultimately inflation settles in the 2.5%-3% range, so marginally lower than what today's CPI report showed. I think in terms of what will cause inflation to continue to decelerate from here is core goods has actually been in deflation over the past six-nine months. This was really the main reason why inflation spiked so much in at the end of 2021, into 2022 and into 2023, honestly, but you're seeing deflating goods prices mainly from the higher interest rates the consumer is feeling. You know, commodity prices are at higher levels, but they've been relatively tame over the last year or so. Then, you know, I think an important element that isn't talked about enough is China has been exporting deflation given where they are in the economic cycle. So those three variables are likely to keep goods in, goods prices in, you know, close to zero, if not outright, you know, deflation, b ut we still think that we're in an environment of higher highs and higher lows for inflation throughout the rest of the cycle. So that means that even though inflation might be moderating here, we're still gonna be much higher than where the lows were in the previous cycle and the cycle before that even. So 2.5%-3% gets us kind of into that ballpark. Yeah, and I think that's an important point that you made at the end there. And you know, I'd address one of the questions we just got kind of while you were talking about that. I do think we're probably in an environment where fiscal policy is gonna be more of a driver than it has over the last, call it, decade or two. And I do think that we should probably expect higher fiscal deficits when we have one party in power, b ut I think it's important to understand, you know, even if we settle in at a higher rate, inflation is still gonna be volatile. So we can think inflation might be elevated kind of over the course of this next cycle, but it doesn't mean that it's not gonna ebb and flow. Jay, if I could, I'd pivot to you quickly. And so, you know, how do you think companies are poised to respond to the inflationary environment that we see coming? So with our strategic profile, bottom-up strategy, we're trying to find companies like a Visa or Amazon or Coke that have pricing power. So they have, you know, a strong brand or competitive advantage that allows them to raise prices in excess of their input cost inflation, but that's, you know, that's a small minority of the companies that are out there. And so to answer your question in a broader sense. M oderating inflation, I think, should be positive for companies in general because, you know, the vast majority of companies don't have that pricing power. They really struggle during a period like 2022, when there is strong inflation, to maintain margins, to pass through those costs via pricing. And so, you know, what Brad's talking about, kind of 2.5%, 3% inflation, you know, that's a much more favorable environment for your average enterprise. Yeah. I think that any conversation about inflation naturally leads into the Fed. So, you know, the Fed, again, has been front and center of conversations really over the course of the last three or four years now, and I don't think that's set to change anytime soon. So given kind of the slowing growth environment we see and the risks to both the upside and the downside to inflation that we've talked about, Brad, how do you think about kind of the dilemma facing the Fed right now in terms of waiting versus going now? And maybe what do you see in terms of cuts for the rest of the year? Yeah, I think two cuts makes a lot of sense right here. And if we take a step back, a year ago is when they got to about the 5.25%, 5.5% rate that we're at now. At that time, unemployment was below 4%, inflation was above 5%. Right now, unemployment just went above 4%, and inflation is right around 3%. So to me, there's no reason for them to continue to have the same policy as they had a year ago. So I do think they have cover to cut two or three times, and even if they cut two or three times and you have a policy rate around 4.5% or 4.75%, that's still relatively tight. That should continue to, you know, put a lid on demand, allow slack to continue to come back into the economy and get inflation back into that a level that they're more comfortable with, at 2.5%. So yeah, I think two, maybe three, cuts by the end of the year is definitely a possibility. Jay, one of the things that we've been doing, I guess, I've been doing throughout the course of this conversation is I've kind of been taking Brad's views and flipping them back to you at the micro level, and I think I want to do the opposite here. So one of the things that you're responsible for at the firm is helping us set the asset allocation decisions. And there's no question that the Fed and, I guess, its actions have a strong impact on financial markets broadly and the, you know, the asset allocation decisions you guys have to make. So when you're thinking about investing in a company, you're thinking about kind of asset allocation more broadly within the context of our portfolios. H ow is it you're thinking about the Fed? Are you guys trying to, I guess, predict what the Fed is going to do and position the portfolios accordingly? Or is it more about managing around the risks and the potential different scenarios that play out? Yeah, it's definitely the latter, trying to, you know, manage around the different outcomes. So it's important to keep in mind we're primarily constructing the portfolios through bottom-up stock selection, but as asset allocators and portfolio managers, we do need to be aware of what the top-down scenarios are, the relative odds of those scenarios taking place, and then what the aggregate exposures of the portfolio are and whether those make sense. So to give a tangible example. R ecently, we've been discussing the possibility that interest rates could remain higher than expected. That's one scenario. And within the context of that scenario, just whether the aggregate interest rate sensitivities of the portfolios is, you know, logical. You know, a couple of things we want to avoid. One, we want to make sure that the bottom-up stock picking isn't inadvertently resulting in a portfolio that's wildly out of step with the scenarios the top-down teams view as being likely. Second, we also want to avoid, you know, aggressively positioning for a single macro scenario and only having one way to win when we know that multiple scenarios are possible. Yeah, and I think one of the advantages that we have here at the firm, having fixed income, having equities, is the ability to kind of work across various teams. And I think that this has been one really good example and kind of the process you've just talked about of those multiple teams coming together, you know, and talking about those portfolios, making sure that we don't have those unintended risks, and just really understanding the way the portfolio is positioned and why. So I think, from here, I want to start to narrow down to some more specific asset classes, and we're gonna start on the equity side of things. You know, we were just talking about the Fed, and one narrative we've heard for a long time is that the market would do better as the Fed started to cut. I think it's been interesting that, as cuts have been priced out of the market, it's continued to move higher, s o looking at U.S. equities today, Jay, what do you see as being priced into the market? A nd kind of what are some of the potential paths forward from here? So to answer the part of the question directly. I t would appear the market's somewhat priced for perfection at these valuation levels, as we discussed earlier, in that, you know, one would expect relatively low returns going forward. You know, there's multiple potential paths, but I think there are three that are maybe most probable and worthwhile discussing. You know, one is there's an economic slowdown, which we think is absolutely happening, and that transitions into, you know, a soft landing, the Fed sticks the landing. There's reasonable odds of that happening. That's, you know, perhaps arguably what's kind of the path we're going down now. I think there's a couple issues there, though. First, it's very consensus. Everybody's on the same side of the boat in that expectation, and it's priced in. So there's, I think, a logical question of, well, one would think a soft landing would be good for the markets at these valuations, and with it being widely expected, what are you really playing for? And then second, to paraphrase something that Brad, you know, rightly likes to point out, a soft landing looks like a soft landing until it doesn't, w hich brings up, you know, another scenario, which is, you know, perhaps equally plausible, which is that, you know, we haven't totally skirted a recession in a bear market. We're not out of the woods yet. You know, as they say, they don't ring a bell at the top of the market, and the market takes the elevator down. So it could be that this soft landing ultimately slips into a recession. And I think something that's worth keeping in mind there is it's quite normal for monetary policy to have a long lag before it filters through to the economy, you know, upwards of a couple years perhaps. And so those rate hikes, you know, that we've experienced, they may just still be filtering through at this point. So certainly, the odds of a recession are dramatically elevated versus normal, and that is a scenario that, unlike a soft landing, is not priced into the market here. We just don't see that concern. And then finally, you know, I'd say there's the possibility of a market bubble. There are some early precursors there. We're starting to see signs of speculative behavior, whether it's, y ou know, I just kind of have to laugh, but the, you know, the return of Roaring Kitty and the meme stocks and the behavior of bitcoin and crypto this year. The very narrow market leadership we talked about before, that's, you know, something that's kind of indicative of more bullish behavior. And then, you know, if you think back and study market bubbles. Historically, there's usually some sort of new era, you know, this time's different narrative, you know, whether it was going way, way back to railroads or more recently the Internet. Certainly, AI could serve as that narrative, that launching pad this time around. So it's a possibility that we have a bubble here. I think there's certainly higher odds of either a soft landing or a recession as opposed to a bubble. I’d note lastly that, you know, a bubble is, you know, just kind of inherently speculative and irrational, so that’s, you know, not gonna be something we ever position for as a base case. Yeah, I like the term "priced to perfection," and I think it's something we've kind of alluded to already throughout the course of this conversation. And equities are not the only market we see that are priced to perfection. So Brad, I think we're gonna go to you, and if you could, you know, we had defaults come up earlier in this conversation. We've talked about slowing growth. You know, we've heard about the potential risks to things like the commercial real estate market, but when you look at where high yield spreads are and kind of corporate spreads in general, they're still sitting on their lows. So, I guess, are things as calm as they appear on the surface, and should we, you know, should we expect a default cycle to play out? O r kind of what are we seeing there? Yeah, I mean, I think I mentioned earlier credit markets are pretty bifurcated. So again, broad credit is, as you can see from the chart, near all-time tights, but we're starting to see some increase in corporate defaults, again where the level isn't overly concerning but the direction is starting to be. You have a lot of companies that are still adjusting to significantly higher financing costs. A lot of these companies took on debt in 2019, 2020, 2021, when it was extremely cheap, trying to refinance now. Well, it's not overly difficult to refinance the debt. It's much more expensive than they're used to, s o even in a soft landing scenario, we would expect corporate defaults to continue to march higher. Now, in a soft landing, that increase in default is likely to be more linear, as opposed to your traditional recession, seeing that exponential shift higher into corporate defaults. So we continue to think that corporate defaults march higher in the soft landing, and we don't think you're getting paid, you know, very well, honestly, to take on a ton of credit risk. It's more you've gotta be selective within your credit you're taking on. I guess, Jay, one for you on this. You know, how are you guys thinking about credit risk in the equity portfolios or even in the multi-asset- class portfolios? It dovetails with Brad's comments there at the end. So, you know, you can take some balance sheet risk, some credit risk exiting a recession and early in an economic cycle when, you know, spreads are wide and you're, you know, in equities, you're being compensated with, you know, low valuations that where you're being paid to do that. What you don't wanna do is take credit risk late cycle when the risks are elevated and you're not being compensated for it. It's, you know, a real double whammy there. A nd we think that's the sort of environment that we're in, you know, right now, elevated risks and not getting paid to take those risks, so you're seeing us, you know, manage the balance sheet risk on the equity side, you know, very tightly. Okay. So, you know, so far throughout the course of this conversation, we've been almost exclusively focused on the U.S. I do wanna take a step back, or I guess maybe a step out is a better way to say it, and look at the global cycle, global economy, global markets as well. One of the things that I've been talking about and I've been pointing out for a couple of years now is that really, since COVID, and in a lot of ways because of COVID and because of the way the governments responded in terms of support or lack of support with a country like China to COVID, the global economic cycle has really decoupled in a way that we haven't seen in several decades. So I guess, Brad, I would put it to you. Do you think that view holds water right now? How do you see things playing out over the next couple of quarters? Yeah, no, I completely agree with that. When you look at Europe, they've been softening for six-nine months now. They're much further along in inflation coming down, unemployment going higher. You even had the ECB begin to cut rates last month. So to me, Europe is further along in their slowing, which means that they're probably closer to being early cycle. PMIs are starting to look a little better as well. So, you know, I think Europe looks more early cycle and has gotten through more of the soft patch that we're likely to see in the U.S. I'm not quite sure what to make out of what's coming out of China. You have deflation, they're struggling with huge debt loads on the private sector. So, you know, that looks to me like your traditional recession despite what the economic data that they publish says. And then maybe in Japan, it looks more mid-cycle. You're just beginning to start to see tightening of monetary policy. Inflation is starting to accelerate a bit. So I think, across the world, it really is, you know, very different cycle for a number of different countries. So, Jay, I guess, given where we are in the economic cycle, and we've had somebody kinda in the chat rightly point out that valuations seem to be much more compelling, and certainly, valuation spreads relative to the U.S. are at extreme levels that we haven't seen somewhere between, you know, in several decades to ever, y ou know, how are you guys thinking about kind of ex U.S. allocation in the portfolios? So the, y ou know, our sector analyst teams are, you know, they're global, and, you know, the allocations are largely being determined by where they're finding bottom-up ideas, you know, whether it's in the U.S. or foreign countries. And I think the comment is right on, that international equities do look historically cheap against the U.S. right now, s o we've certainly been prodding the analysts to, you know, be spending more of their idea generation time, you know, looking for opportunities ex U.S. That said, we're still finding a lot of good opportunities in the U.S. So it's a real fight for capital right now, and we'll see how that shakes out. But if you ask me to place a bet, I would expect that, 12 months out, 18 months out, that our international exposure creeps higher, because I would agree with the statement that, you know, in an aggregate sense, it appears that, you know, valuations internationally are more attractive than they've been in quite some time. Great. So we've kinda, you know, we've gone through the U.S., we've kinda done a quick tour of the world. A nd from here, again I wanna take a step back and maybe talk broadly about asset classes in general. So one thing we've talked about is, you know, really, the backdrop for financial markets is much different today, with rates where they are, with valuations where they are, than it's been in quite some time. So, you know, I'll put it to both of you, and maybe, Jay, I can start with you. Do you guys think the financial markets have kind of fully digested the idea that equity space is real competition for capital in a way that they haven't in quite some time? The short answer would be no, i f I look at just simplistically the earnings yield of the stock market, so the, you know, the inverse of the price-to-earnings ratio. The yield that you can earn on equities as compared to the yield on bonds, stocks are the most expensive, relative to bonds, that they have been since the, you know, the global financial crisis, so circa, you know, 2008. You know, possibly, you know, on some measures, you have to go back to the early 2000s, you know, since fixed income has been this relatively attractive versus equities. And I think that's hard to square when one considers, you know, that, you know, we've moved from a regime of, you know, kind of zero interest rate policy to, you know, yields having normalized with historical averages, and you have economic risks that are elevated, you know, that present, you know, more downside to equities. So given those reasons, we've been in the multi-asset- class accounts, kind of neutral to slightly underweight equities. Yeah, no, I think broadly it's tough to make a case that equities are facing competition for capital. I do think, though, under the surface, it might be playing out a bit more. You talk about small cap performance against large cap. You mentioned CCC high yield spreads above their median levels. So I think, from a broad level, it's totally fair, but it might be playing out under the surface a little more than, you know, headlines would suggest. Okay. You know, from there, I guess I want to open it up to you guys, and I think this is such an interesting question to me because you do have varied backgrounds, different roles at the firm, and significant experience here. So you know, you know what you're talking about. When we think about things broadly, I guess, where are you guys seeing opportunities today that interest you? And Jay, you got first crack at the last one, so we'll start with you, Brad. I've mentioned a few times our view of inflation and interest rates following a path of higher highs and higher lows as compared to the last 20 or 25 years. And to us, you know, we really like high-quality, short-duration securities. That to me is pretty attractive and kind of the sweet spot. So again, high quality, shorter duration as kind of a fundamental part of a portfolio. I also don't want to shy away from interest rate risk here. That being said, I really like duration risk when 10-year was above 4.5%, as opposed to now, but I think there's probably a place for duration, longer treasuries, as a hedge to riskier parts of client portfolios. Jay mentioned a number of times the market is not really pricing the left tail recession risk, and you see that in treasury valuations, options pricing within treasuries, and attractive valuation with real yields above 2%. Don't mind taking interest rate here. Again, it'd be nicer if yields were closer to 4.5%, but those are the two main things that we're finding some value in. For my part, I think there are two generalized themes I would point out. The first is I'd say we're being able to pick up some strong strategic profile companies that are sort of the proverbial baby thrown out with the bathwater in this, you know, narrow market that we're seeing. So, you know, if you went back several months ago, you know, a stock like Apple, that's obviously a great franchise. You know, with all the AI hype, you know, that was one that had been discarded as, you know, they had missed the boat in artificial intelligence. You know, there wasn't gonna be another, you know, powerful iPhone upgrade cycle. And, you know, that story has really changed in the last three months. So we've been able to make some opportunistic investments of that sort, companies like MSCI or Sherwin-Williams that we think are really great franchises that were, you know, too expensive for a protracted period of time. W e've been able to pick some of those off on weakness here, as again, there's been a lot of stocks that have been really, you know, flagged or been left behind or hit particularly hard during earnings season. The other thematic area, you know, where I'd say we're seeing generalized opportunities are some cyclical areas where we've seen, you know, recessions within those industries, if you will. So, you know, I mentioned several before, in housing, I would zoom in on lumber as one of the areas recently that we've been accumulating. And we believe there's a hurdle rate strategy there, which is, you know, the various lumber mills are loss-making at this point because the housing market has been so weak as far as like new builds and renovations because of how high mortgage rates are at this point. So with mills losing money, we're seeing capacity being pulled out. We ultimately believe that will tighten the market back up, and returns will improve, and those stocks will do well. You know, chemical distributors is another area that's very weak right now, but there are some good businesses there that are going through a patch of weakness. So it's really been picking off some, you know, one-off strong, strategic profiles or going to some areas of temporary cyclical pain. Great. So I do think we have time to answer a couple of questions. I think one thing we glaringly didn't touch on that we did get asked about is the election that's coming up shortly, so maybe we could talk a little bit about not necessarily what we think is going to happen but kind of the, I guess, the potential various scenarios that could shock the market and kind of change the backdrop that we're looking at. Brad, maybe we'll start with you. Yeah, I think we got a decent preview of how the market would react should you get a Republican sweep after the debate a few weeks ago. We, at least within rates markets, you saw a bear steepener, meaning that interest rates went higher across the curve, but they went higher on the long end relative to the front end. To me, that says that the market may be a bit worried about increased deficit should either party, honestly, control both Congress and the White House. So if either of those scenarios play out, doesn't matter if it's Republican or Democrat, I would, you know, be worried about a spike in, even more spike in deficit spending and potentially higher interest rates. I think Brad pretty well covered it. I think kind of regardless of which party wins, I think the one thing that seems like a given is we're not going to see fiscal discipline anytime soon, and there are obviously repercussions of that. I do think it's notable. Y ou know, you mentioned, Jake, market surprises. You know, I get so many political notes, you know, research notes every day. There's so much ink and brainpower spent on trying to make political calls, and I don't know. I just feel like, the elections, it's you know, always a hot topic, but it feels like the amount of attention focused on it is outsized relative to the actual investment impacts. A lot of times, you know, I think we've seen, the last three or four years, some sectors have done. You know, the performance has been quite divergent versus what you would expect, like energy doing well with a Democratic president, for example. And I do think, unlike 2016, it won't be a surprise this time around if Donald Trump is elected, and we know what the policies will be. So, you know, a lot of attention, just not clear there's much in the way of investment implications, as I think it's all been pretty well sussed out. Yeah, and I think the only thing I would add to that is I agree that there's not a ton of value in trying to figure out exactly what's gonna happen. It's probably more an understanding kind of where the tail risks are. I think you guys rightly pointed out the potential for yields to move higher in a Republican sweep scenario. I think maybe the only thing I would add is, in a scenario where Republicans, you know, control Congress to some extent and we end up with a Democrat in the White House, regardless of who it is, you know, you probably don't end up with the same executive action on tariffs, you don't end up with the same executive action on immigration, but you also don't end up with any real fiscal support because, you know, the Republicans and Democrats aren't gonna work together. I think that's the type of scenario where you could see kind of the opposite shock of a Republican sweep and potentially see yields surprise to the downside in a way that did move markets. You would have to at least that you would want to think about happening before it did so you weren't scrambling to adjust the portfolio after. So, you know, we're right up on 5:00 P.M. here. We've gone an hour. I don't want to take too much of anybody's time. So with that, you know, I wanna thank everybody for taking the time to be here with us today. If we didn't get to your question, we'll be sure to follow up with you after the presentation, and please continue to reach out to anybody here with any questions or follow-up you might have. You know, as a reminder, for your convenience, a recording of this webinar will be emailed to you shortly. We'd also really appreciate it if you guys could take a few seconds to fill out the survey that's linked in the chat. So with that, Jay and Brad, you know, I appreciate you guys taking the time out of your day to be here. And to our listeners, you know, thanks for coming, and thanks for listening to what we have to say. Take care, everyone. Yeah. Thanks, Jake. Thanks, everyone.