What Is Happening & Where Do We Go From Here?

Sammy Azzouz: On this episode of the Podcast I’m rejoined by Heritage Financial’s Chief investment officer, Bob Weiss, who usually talks to me at the beginning of the month, and we go over what you think, what we think you need to know about the market and investment universe right now.

00:00:16.770

Sammy Azzouz: But through a quirk of scheduling. Last time, Bob, we ended up recording on April first, which was the day before Liberation Day or the tariff announcements, and we published on April 3rd the day after. And, you know, talked a lot about things that were relevant at the time and are still relevant, but ended with the thought that basically look just ignore politics. It doesn’t matter to your portfolio. And obviously through the quirk of timing that probably doesn’t stand the test of time. So we wanted to jump back together today a couple weeks later and share some thoughts as to what’s going on, or as much as we can understand about what’s going on, and answer some frequently asked questions and concerns that we’re getting about the state of the investment universe since that April second afternoon announcement.

00:01:12.380

Bob Weisse: Yeah, I think I ended the podcast with, and don’t worry about politics, and I will stand by that advice as being good advice more often than not, but over the last 20 days or so politics have definitely driven markets, so I think, dissecting it is a worthwhile endeavor.

Sammy Azzouz: So why don’t we start there? How have asset classes performed since April second? And and maybe for a little bit more context, year to date.

Bob Weisse: Yes. So since April second, let’s look at the Us. Stock market. Msci, U.S.A, it’s down 9%. And this is through the close. On 4, 21. Today’s 422, and the market’s up. But through 421, Us. Market down 9 since April second, and for the year Msci, U.S.A. down about 12%. And then looking overseas world Xusa. So this is developed international markets since April second, it’s about flat, specifically negative 0 point 3 4%, but pretty close to and year to date. That same index, Msci Worldx, Us. Is up about 7%. So healthy return for foreign developed stocks and then emerging markets since April second through yesterday, down 3.4%. And here, to date, it’s flat up 36 basis points and then looking at bonds, the Bloomberg aggregate. This is interesting. We can get into this a little later as we go but that index is down one and a half percent since April second, while it’s up about 1.4% here to date.

00:03:00.260

Sammy Azzouz: So it’s interesting in just that. Recap us. Stocks were down year to date before April second, and have continued obviously and not just continued, have, you know, faced a more aggressive decline although, as you point out, today, is a big update. So there’s a lot of volatility. But directionally, you know down quite a bit more since April second, whereas the international markets are basically flat, and the fixed income markets have reversed course. So kind of 3 different scenarios. So I’ll ask you, you know, since that time we’ve all been trying to play, catch up and understand what’s going on. And you know, reading, talking to people trying to follow what that announcement could lead to economically and from an investment standpoint. And you know, in times like this, you really need to focus, I think, on people you’ve always relied on to learn from not the overnight tariff or global trade experts that you didn’t know anything about. Prior to this coming out, and from what I’ve seen, there isn’t a lot of people saying that this won’t be anything but potentially inflationary. And you know, leading to an increased likelihood of a recession in the Us.

00:04:24.970

Bob Weisse: Yeah, I’ve heard that that does seem to be consensus as like expert recession odds have definitely ticked up quite a bit. Maybe you know, from low single, from low, low numbers, entering the year to now here 50 60% numbers like that, as far as recession probability. But you know I was talking to someone yesterday, and they said, but this is a hand on the stove situation where you know. President put his hand on the stove, and it’s hot. You might be able to fix it as easily as taking your hand off the stove. It’s self-inflicted, so I’d say the range of outcomes is wide and a scenario with the recession, or even what you could call worse than a recession stagflationary environment. That is one path where this could head, and a more favorable one is, the administration gets their act together, and knows that midterms are coming up in about 18 months, and, you know kind of gives into political pressure, and and does what they can to save face from all this and make it go away, and markets would rally on that. So I don’t think it’s a foregone conclusion that we’re in for a world of hurt for the next couple of years. I think this definitely could go in either direction.

00:05:46.420

Sammy Azzouz: So can you explain the issue, then, a little bit, to the extent that anybody can, because there do seem to be changing narratives and priorities depending on who is representing the Administration’s viewpoint.

Bob Weisse: Yeah, I think it’s worth just taking a step back, because, you know, one of the things that I see is people are very polarized on politics. It just seems like everyone’s either far left or far, right. And then there’s really little in America these days, and just looking at the topic. So if you just bear with me stepping back, what are we talking about? The trade deficit? Just start with Gdp, what is Gdp formula for? Gdp is C plus i plus g plus net export. C is consumption. I is investment. G is government spending plus the trade deficit or surplus net exports in the Us. We have strong consumption. Our consumers spend a lot of money. So we’re good with the C investment. It’s not stock market investment. It’s a capital investment, like businesses, building warehouses or real estate construction. We have strong economy, strong investment government spending. So going on to the G. We’re strong on that front. The Government spends a lot of money. But if you think of the budget deficit relative to tax receipts, the Us. Spends too much money, and I don’t think that’s debatable, even like Jerome Powell says it’s unsustainable, the current budget deficit. So while the government spends a lot of money and more than tax receipts getting a budget deficit. It’s good in the short term. It’s good for the economy, because when they spend money, say, you know whether building bridges or hiring Federal employees. That goes into the Us. Economy. But it comes with debt. and then the net export in 2024 the trade deficit was about 900 billion. So the Us imported roughly, 4.1 trillion exported 3.2 trillion. That’s how you get to the negative 900 billion that comes off Gdp. So it’s a headwind. And if you think about so with that framework with the department of Government efficiency, Doge and Elon Musk trying to cut government spending. That’s putting a negative restrictive pressure on the G component of Gdp.

But then we have the big trade deficit. That’s what I call them the twin deficits because they hit Gdp that way, and I do think it’s worth acknowledging that there is. I’d call it a bipartisan interest in balancing the trade deficit. This is what trump is the one who’s talked about a lot and acted on it most. If you look back to Biden’s administration, 2 of the more major pieces of legislation that that he passed and signed off on one was the Chips Act. And if you think about that, what was that that’s bringing the production of semiconductors onshore in the Us. Rather than importing semiconductors, and the second was the inflation reduction act Ira, and a big part of that was ev tax credits, and we already had ev tax credits. But they were changed in a way, so that you received more a larger tax credit, or to get the tax credit they needed to be American made vehicles. And if you just pause and think about those 2 things, it has it kind of rhymes with what trump’s trying to accomplish as far as fixing the trade deficit. So just point that out. And then, when you look at the I hear people say, like, we’re not going to be making sneakers in America. No one wants those jobs. So we’re not going to make T-shirts here. No one wants those jobs to balance the trade deficit. When you have 4.1 trillion of imports and 3.2 trillion of exports, you need to move each about 10 to 15% and call it meet in the middle that you get both to about 3.5 3.6 trillion. And then you balanced. So I think people use kind of the most extreme examples of of imports that are not realistically ever coming back here for production, and they don’t need to be to balance it. What you need to do is look at that 4.1 trillion and say, what’s at the top. The kind of the lowest hanging fruit that we could move on shore. And then, if you look at the exports, what do we do? Really? Well, that we could just sell a little more to the rest of the world, maybe remove some frictions and balance trade. And with imports. I’ve read that semiconductors are about 200 billion. So we could reduce imports by close to 200 billion if we produced our own semiconductors like Nvidia Chips, can cost tens of thousands of dollars per chip these days, and they make them overseas. So I’m just kind of setting the stage for April second with this that I do think going into it. It is a real problem to address balancing trade, and it was sensible. And it was bipartisan. There’s also a video of Nancy Pelosi talking about this in the nineties. So it’s not unique to trump and it is sensible to balance the trade deficit, because what’s happening is with this big trade deficit. Foreigners are then turning around with that money and buying treasuries, and the Us. Is just getting more and more in debt relative to Gdp. So.

00:11:01.780

Sammy Azzouz: So when you do that setup of, and that’s a great explanation. And you had the twin deficits fixing the government spending deficit that’s actually  hurtful to the economy in the short term, because you’re pulling, spending out.

Bob Weisse: It is.

Sammy Azzouz: It is okay, and then the other one is hurtful. Maybe in the short term, as you reorient things to get to a better trade deficit.

Bob Weisse: As you. It depends on. If you could just flip a switch and it’s balanced, that would be a good thing there could be. There’s pain, if it’s disruptive and difficult to get there, which that’s what we’re in now, and I don’t know that the path that we’ve taken. So I kind of set the table with that introduction.

Sammy Azzouz: At the table with a very good overview that I think if it wasn’t you know, connected to President Trump, who does seem to be approaching things in a chaotic fashion. People could wrap their heads around and understand. Yeah. And now and now you want to get to that second point right.

Bob Weisse: Yeah. So the second point is, it has been chaotic word you use, and I wouldn’t disagree with it. My word would be more antagonistic Us. Versus them, and really unwinding global trade and making enemies with our trading partners, whether Canada and Mexico to the North and South or Europe, Asia. The U.S. Does not seem to be making friends through this process. It’s quite the opposite, and that, I think, has been a misstep, the way that everything has been so public, like a public address from the lawn in the White House, with those big poster boards of reciprocal tariffs and some of the terminology he’s used. It has not been friendly for our trading partners, and when you go back to where I was a few minutes ago trying to balance the trade deficit. You really have 2 levers to pull, you can import less or export more. Or I guess, do. A little of each is probably the best way to do it, and if you want to sell more to rest of the world, export more being confrontational and antagonistic with rest of the world, and is not exactly going to get you there and you can measure it if you look at an example of like Tesla. Are Tesla sales going up or down overseas. I don’t think they’re going up right now. That might be an extreme example, but I think one of the issues with the way it was addressed is that consumers have a lot of choices, and if we want to balance trade, we need foreign consumers to choose us goods and services more than they have been in the past and I don’t think the way the Us. Has behaved recently is encouraging them to do that. And I think we actually might see the opposite, which is counterproductive. So that’s 1 point or issue with what’s happened recently.

And then the second is President trump has used a lot of poker analogies like who has the cards in a negotiation. And if this was isolated, to say the Us. In one country and a smaller country say it’s just a negotiation between the Us. And Vietnam. Then we could bully them around, probably, and strike the better deal and air quote win the negotiation. But can the U.S. negotiate against rest of the world at the same time, and expect to kind of be in the driver’s seat and call it win that negotiation, and I think that might also be the second misstep where the U.S. Other countries may need the US. Individually more than the Us. Needs them, but collectively does the U.S. need rest of the world more than rest of the world needs the Us. That’s a a much harder negotiation and a harder statement to make and believe in that, that we can really play hardball with the entire world and and call it a win. So where does this lead us? It leads us actually back to where we started talking about stagflation word I used. And I’ll just explain that a little bit. So typically the Federal Reserve looks at really 2 things, employment and inflation. And they want full employment. So if you want a job, you can get a job and inflation to be around 2% not too high, not too low. And typically what you see is the economy that gets too hot or too cold. So when it’s too hot. You’re in an economic boom. So growth is great. Employment is great, but inflation’s high. So they throw some cold water on it, hit the brakes slow things down. Restrictive policy or the economy gets too cold. You’re in a recession, and the labor market’s hurting. So it’s hard to get a job. But there’s no inflation, and you stimulate so that there’s not to call it easy. But there’s a playbook for both too hot and too cold. You just kind of hit the break or hit the gas stimulate. There’s a few ways to do it, and then you fix it. Stagflation is tricky because it’s where you don’t have growth. You’re not growing, maybe even the economy shrinking, but there’s inflation. And if you stimulate at that time you’ll fix the growth. But you’re throwing gas onto the inflation fire, and you could end up with something closer to hyperinflation which would be really bad.

And then on the flip side, the other tool, if you try and break inflations back because it’s too high, you’re already not growing so through restrictive policy, you’re only going to make it worse. So stagflation is a really tricky place to be from a policy standpoint, as far as how do you fix it? And that is a concern of where we go from here because these tariffs could very well be inflationary, whether it’s just simply the math of you put a 10% tariff on an input cost, and it gets passed through the consumer. There’s inflation, or more severely, if people think back to Covid, and the price of lumber went through the roof because the sawmills shut down, and how that just trickles through. And then anything tied to lumber, just as one little example, you know, is up 100% or more for a short period of time. The supply chain effect. If you remember that if we’re in a trade war with China and China makes key inputs analogous to lumber. You could see that getting backed up and flowing through the supply chain and seeing inflation from a supply shortage. So whether it’s the tariffs or supply shortages due to a trade war it could lead to inflation. And then, meanwhile, the covid inflation came with a lot of government stimulus. So we had growth to offset it. But if there’s lower, consumer confidence which we’re seeing in surveys, if there’s just overall less economic activity as people are more uncertain about the future. You could get hit on the growth front, and that’s how you end up in stagflation. So that’s a lot. But.

00:18:24.250

Sammy Azzouz: Lot. But it’s great. I mean, it’s why we are recording for the second time this month, because I think there was a lot to touch on that we didn’t get to at the beginning of the month because it hadn’t happened yet. Do you worry that we will see a foreign purchasing of us assets, including, you know, in particular treasuries. Slow down.

Bob Weisse: I think we already have. If you go back to the early part of April the stock market. After April second the stock market was going down day after day, 2% or so a day, and while the stock market was going down in price, Treasury yields were also declining, and yields were declining, treasury prices were increasing. So it’s the classic flight to quality. People were sell stock, and buy treasuries. That’s what you typically see. And then I think it was April 7th and April 8, th right around the time when they were going tit for tat with China and escalating tariffs. It was like 100%. No. 100, 1,120, and just the stakes were getting out of control. The Treasury yields did A. V. They went from dropping every day to then increasing pretty significantly while the stock market continued to go down and that definitely caught my attention. Stock market’s going down. So this looks and feels like a panic sell-off flight to quality. But quality treasuries are also selling off what is going on here. You normally don’t see this. And there’s really 3 categories of what could be going on, because we don’t know, but it could be foreign selling. It could be the market pricing in higher inflationary risks. But I don’t think it was that one, because there wasn’t any specific news hitting like that specific, those specific days that changed the direction of anything.

And the 3rd issue could be basis trade or hedge funds unwinding. So think of it as levered investors, hedge funds with big bets on stocks and big bets on bonds like a risk parity strategy, for example. And then you start losing your stocks and you get margin calls and need to cover, and you cover by selling your treasuries. So hedge fund unwind you could call it. That’s the 3.ANd It could be a combination, but I do think the most likely of those 3 is foreigners, whether it’s China or retail investors in France coming in to meet their advisor and saying, Hey, I don’t want any Us. Positions in my portfolio. I think we started seeing foreign selling, and it was after that we saw 2 days in a row of rising Treasury yields with falling stock prices, and that’s when trump linked. That’s when he came out and said, All right, it’s off. It’s off for 90 days, and the stock market rallied so yes, we I think we’ve we’ve seen a little bit of it, and it could be here for a while.

00:21:43.300

Sammy Azzouz: So I want to pivot now to some questions that we’re getting a lot, and the 1st one is going to be, I think, connected to what you just laid out, which is, you know, very good, I think, and level headed overview about what’s going on. And the the question we get then is so where do we go from? Here?

Yeah. So where do we go from? Here? I’ve said earlier wide range of outcomes to maybe I don’t think I quite laid out the good case to take the hand off the stove. But a benefit of our political system is, we have midterm elections coming up in about 18 months, and right now Republicans in Congress are getting in line and standing behind trump because you don’t want to be an enemy of his. But for those that are up for reelection in November 2026, as it gets to campaign season. Call it next spring. If things aren’t looking better they’re going to have to put pressure on him to turn things around, and it’s in his own interest as well to turn things around, because he’s not going to want to deal with a blue Congress for his last 2 years, so I think the clock is ticking as far as how long we can be in this your word at the beginning, Sammy chaos, as long as we can be in this world of chaos. I think we have 12 months, Max, before the political pressure won’t tolerate it, and the Republicans will get their butts kicked at the next election, so that I do view, as I think you can count on them all to look out for their own self-interest. So that’s 1 glimmer of hope that hopefully they can turn this around and make it go away. But we do step back and look at valuations and valuations entering the year were really high in the Us. And they were more favorable overseas, more like long-term averages overseas and the Us. It’s gotten better, but it’s still on the more expensive end of history. And then, meanwhile Bond yields. Bonds are pretty attractive on the higher end of what we’ve seen over the last 15 years. So our positioning is globally diversify. We are still a little underweight stocks, a little overweight bonds, and if we see a bigger sell off, let it be a friend, and then get more neutral weight into stocks.

Sammy Azzouz: Yeah, which is where I’m gonna go next. So well, in in a couple of questions, the next one is. Is it time to sell? And when people say that I think they’re talking specifically about us stocks, and I think there’s a reasonableness to the question. If you say we could be facing a slowdown in the economy which would lead to a slowdown in corporate earnings with maybe people with sentiment indicators. You know, when you talked about foreign lack of desire to purchase our assets. Maybe multiples will be lower. Why, as a chief investment officer, wouldn’t you trim your Us. Stock market exposure right now?

00:24:50.040

Bob Weisse: I think, as far as like, how should my portfolio be positioned? Now? My answer is always, you should get to Home base, get where you should be. I think I’ve used this analogy on the podcast before. If you go to the doctor and you’re overweight. And the doctor says, hey, Bob, you should get on a diet, and I say, hey! When should I start that diet? I was thinking of a bacon cheeseburger for dinner. The doctor is going to say today, you should get to the right allocation for you today. And if you’re drastically overweight us equities, you should get out of those Us. Equities and get to a well-rounded, diversified portfolio today. Don’t wait for them to come back, because it could take a decade for a strong recovery where the Us gets back in the lead compared to foreign stocks. So I would get to a reasonable, balanced allocation, like, we talk about on this podcast today. Beyond that I would not make big decisions like, Get me out, go to cash, and I don’t think I have to look back too far to give a good example. I think it was 3, 4 months ago that clients were calling, knocking on my door and saying, Why do I own any international stocks. Look at us versus international, and the Us. Has just been the market. To be in. AI is great. AI is going to lead the Us. Market. There is no catalyst anywhere in sight for foreign stocks. We have Mr. Make America great again in the White House, like international stocks, are a dog. Just get them out. I don’t want them and look where we are, and no one saw this coming. So one of the difficulties of investing is, we don’t know the future and the unexpected does happen. So happen so just say, expect the unexpected and be diversified. Don’t try and sniff out what catalyst is around the corner, or what’s around the corner, and then put all your eggs in counting on that happening, because it just seems like more often than not the consensus is wrong. So, taking something as simple as what you hear the consensus on Cnbc saying, and then position your portfolio for that. Please don’t do that. That’s not what we do. Markets are very smart, and they do. It gets to next level thinking, what’s on the TV is priced into the market. And inevitably the market’s always one step out of the pundits so I would diversify and not make any extreme bets in your portfolio.

00:27:12.360

Sammy Azzouz: I’ll ask you the flip side of that question then, Bob, because we also have been hearing from people who want to use the sell off. And you think I think you said it was 12% year to date for Us. Equities. It had gotten worse. I think it had gotten to 1819, very close to 20. Would you view this as a buying opportunity? And I know you wouldn’t, because I work very closely with you. But what would have to happen for you to start thinking that a shift in allocation towards us stocks in particular, would be warranted and not specifics. I know we don’t know how it’ll play out, but what either magnitude of decline, or, you know, adjustments to valuations would make you want to kind of rebound which you had started talking about make you want to rebalance a little bit towards us. Equities.

Bob Weisse: Yeah, there’s a lot to that question. So just 1st kind of looking back, we have not had a real healthy bear market since 2008 17 years. A lot of investors haven’t really had significant wealth in the last 17 years, and you know, the 2,008 market we started going down. I think it was October 7, and ended March 0 9. So it was about an 18 month bear market, but since then we had the Covid crash, and that was just I think it was like March 2020. And then we were. So it’s like one started decline, maybe in February. But it was like 2 months, and then government stimulus kicked in so as far as a real clean out of the economy bankruptcies real recession, you know. 18 months in 2,008, and then you had the tech bubble 2,002. That was 3 years, 2,000 2,001 2,002, 3 years of economic pain, and investors have a short memory. They tend to forget that when things do go bad they can be bad for 18 months to 3 years just in in this century. So I would keep that in mind. That’s 1 that you know. Markets don’t always just like Covid don’t just rebound in 2 months you do have recessions that can last, and then the second is less on time and more in price and valuations. Valuations are still high, they’re still in the Us. Above historical averages. And then, meanwhile, if you look where bond yields, are the equity, yield, if you flip a PE ratio and do E. Over P. The E. Over P. Yield on stocks. It’s about the same as yield on bonds. There’s very little equity risk premium priced into the market, so to call the overall Us. Stock market cheap, we would need to see a bigger decline. Sure, our listeners want me to put a number on it. So I’d say roughly, 10% from here is when we’d look to increase our equity allocation. And that’s when you start to see 20% plus declines. That’s when forward returns are more attractive. So that’s what we would look for to to dial up risk.

00:30:13.210

Sammy Azzouz: Great, no great overview, Bob. I really appreciate that. It’s always something in in the markets, right? And these declines that we’ve had. I’m a little bit older than you. So I was working during the tech wreck. And then we had 2,008. We had Covid. We had other things. This one is unique, but it seems to me somewhat similar to 2,008 in that at 1 point we were watching to see what the Government was going to do were they going to pass tarp after it failed? What was you know the Fed going to do was the Treasury, so we got to the places differently. But I feel like a lot of eyes are focused on the government similar to how they were in 0 8 and 0 9.

Bob Weisse: I agree with that focused on the Government. The good news with this one is like, I was saying, it’s self-induced. In 0 8. We had a housing crisis, and I don’t know how they could have managed that any better. You had a big Wall Street investment banks that were way over, levered with all the loans out there. That was a problem. This we don’t have that underlying fundamental issue. It’s it’s more just the damage of the tariff rhetoric, and hopefully the administration can save face. Get some small wins, have some press conferences with handshakes and smiles, and make peace with our trading partners and get us out of this.

00:31:37.400

Sammy Azzouz: Bob, I want to close with one listener question as a reminder. We do love to answer listener questions. You can email us at wealthybehavior at heritagefinancial.net. And while I’m saying that if you could take an opportunity and rate and review our podcast wherever you listen, we would really appreciate it. The reader sorry the listener question is, would it be a bad idea to have a second rainy day fund that I would only invest in the market when there’s a severe market downturn.

That’s an interesting question. It it depends. Probably not, is the short answer.

Sammy Azzouz: Not because I think your returns over the long run would be better off if you were fully invested.

Bob Weisse: Exactly because what most likely will happen is markets will go up, as you know, over time. They do go up and you’ll get left behind, and you’ll be sitting on the rainy day fund, and that rainy day may never come. You could get lucky and markets tank a second underlying question would be, you need to have very good discipline, because when markets do go down it’s scary, and I’ve seen people try and do that strategy. And oh, but not now. It’s only going to get worse, and it just gets to market timing, and it’s very difficult. So I would not recommend that.

Sammy Azzouz: It’s very difficult. I’ve looked at it from time to time, and it’s similar to a question that I think you and me and your team kicked around once is, would you be better off in a hundred percent stock portfolio over the long run, or owning other asset classes so that you had an opportunity to rebalance when stocks declined, and I think the answer, if you were looking purely at return, is, you would be better off being fully invested in equities over the long run, and foregoing the rebalancing opportunity. And then, 2, as you said, it’s just very hard to implement right. What would your threshold be, and would you actually be willing to do it?

Bob Weisse: Yeah, I’ve tried to. I’ve taken historical stock market data, and I’ve tried to make market timing models get in and out of stocks. Wouldn’t that be nice? And the problem is that stocks have just done so well for 100 years that anytime you’re out of stocks. The average return that you’re giving up is pretty meaningful. And meanwhile you’re exchanging the average return of stocks for the average return of cash.

Bob Weisse: and it’s just very difficult to bet against the stock market in favor of cash and win. That’s why, in our new client process, one of the slides we always go over is the Us. Stock market return, and it’s averaged about 8 and a half percent above cash since 1928. So it’s you’re on the other side of that 8 and a half percent return over cash. And that’s a tough headwind.

Sammy Azzouz: Thank you, Bob. Thank you for doing double duty with me this month. I have a feeling. In the next couple of weeks we’ll talk again, and we’ll be talking about a lot of the same things. But I appreciate your time and insights today.

Bob Weisse: Sounds good. Thanks. Sammy.