Assessing the Economy When the Government is Out of Office

Jeffrey Buchbinder (00:00):

<Silence> Hello everyone, and welcome to LPL Market Signals. Jeff Buchbinder here with my friend and colleague, Jeffrey Roach. Jeff, it was a good weekend because the Amazon website didn't go down until today. My daughter turned 14 over the weekend, so happy birthday Emily. And we certainly did a little bit more shopping before Sunday, her birthday than we did during. But I am very grateful to Amazon for having a functional website before Sunday. How are you?

Jeffrey Roach (00:38):

Doing great. I also have a 14-year-old in the house, so I, I know what that's like.

Jeffrey Buchbinder (00:45):

It's good.

Jeffrey Roach (00:46):

A 14-year-old daughter, no less. So we're, we're right in sync. The two Jeffs.

Jeffrey Buchbinder (00:51):

Not quite old enough to, to hate dad every day. I think that's a nice, that's a nice age. You get a little older than that. It's, it's hit And miss <laugh>. We'll just, we'll leave it at that. So we got a good show for you today. We're going to talk about this credit scare, and actually, we've got a quite a rainstorm here in Boston today. I would argue that the storm from the credit scare has already passed, unlike the weather here today. It is Monday, October 20th, 2025. As we're recording this that credit scare, if you want to call it that from last week, that caused volatility in the regional banks. That is the topic of the Weekly Market Commentary this week. And then we're also going to hear from Dr. Roach on the economy and how to assess the economic outlook when you've got no government data or very delayed government data. So that's on our agenda as well. And then we'll close with a week preview. It's earning season this week. It kicks into high gear, but I would argue that the CPI is probably the more important or might get more attention maybe than the earning season, just because we've been lacking the economic data. And that report was delayed.

Jeffrey Buchbinder (02:21):

All right, so let's get into it. We'll start with just a quick recap of last week's market resilient amid credit concerns. I mean, if you look at this, Jeff, you'd think we didn't even have a little bit of a credit scare, because you have the S&P 500 up almost 2% last week. And of course, the center of the scare, if you will, is the financial sector. And even the financial sector was flat. Not too bad. All 11 sectors flatter up last week. Risk on Nasdaq outperformed risk on Russell 2000 small cap Index outperformed this market. Market just cannot seem to give us a good buying opportunity. We are not getting a dip. We've been waiting for it for a while. You can't even call what, we just had a pullback. Does this resilience surprise you?

Jeffrey Roach (03:15):

Well, I think we, we called it in a blog several weeks ago, Jeff, thinking about, hey, when the economy is not heading in recession or currently in one, and the Fed is easing up on rates, that's typically good news for markets. I think that's the narrative.

Jeffrey Buchbinder (03:35):

And don't overcomplicate it.

Jeffrey Roach (03:37):

That's right.

Jeffrey Buchbinder (03:37):

Economy, growing market doesn't see recession profit's growing, fed cutting. That those are the ingredients for mm-hmm <affirmative>. A continued bull market just celebrated its third birthday. We're going to move on to year four. So solid week certainly for stocks. I think the market is coming around to the view, and we'll talk more about this in a bit, that, that that the bad loans, essentially these write downs that some of the regional banks and other lenders have taken are one-off and not systemic. So certainly that realization helped the market last week, and we continue to get support from AI. Seemingly there's an AI press release every other day. And then the trade tariff situation market got a little bit more comfortable with the China situation because President Trump came out and said that a hundred percent incremental tariff on China is not sustainable.

Jeffrey Buchbinder (04:41):

I don't think too many people thought that would ever actually happen anyway. But in this era of machine trading, the bots just jumped onto that. And you know, the fast money loved it and drove us higher. So we had a strong start to the week on a good start to earning season and a strong finish to the week as some of those concerns that drove this little bit of a dip were put to bed. So continued hire and we continue to believe you should remain pretty much fully invested to your target in equities.

Jeffrey Roach (05:14):

Yeah. Yeah. And a just a good reminder too. I mean, we haven't even talked about government shutdowns per se. We'll talk about it later in the podcast, but just a good reminder too. We had 160 million plus or minus workers, the non-essential government workers affected by the shutdown, about 2 million. That's just a bit over 1% of the workforce, not a major impact. And clearly markets have certainly looked past the potential downside from a shut shutdown.

Jeffrey Buchbinder (05:48):

Yeah. The shutdowns not getting a whole lot of attention from investors here. Just, I mean, almost like the China tariffs, right? The market just knows it's going to be resolved at some point before long. The pressure will build. So why worry about it? It's temporary. The bond market's certainly not worried about anything, Jeff because We got a half a percent gain in the ag last week, that broad bond market benchmark. We've got a 10-year yield below four barely, but below four even today in intraday trading. That is a very comfortable level of the bond market for this market. And you're getting some support from low gas or low oil prices too, because prices crude is below 57, certainly helps the inflation outlook and the bond market outlook.

Jeffrey Roach (06:41):

Yeah. And the key is, you know, markets are probably right. I think that's, this is our view that inflation is going to improve by the time you hit December. We're going to have some, some upside surprises like we did last month but it's not going to last long. So that's really what I think a lot of investors are hanging their hat on. Of course, if we're wrong on that, that certainly could incite a little bit more volatility.

Jeffrey Buchbinder (07:09):

Yeah, absolutely. And keep in mind that, you know, the winter heating season is coming soon, unfortunately, for those of us in cold weather areas of the country. And if you have low oil and gas prices coming into that that is certainly an excellent sign for the inflation outlook. So, pretty good picture. Oh, by the way, another record for gold, precious metals keep working. Almost a 4% gain last week. Continuing to rally here. At the start of the new week, we continue to hear reports of central bank buying and certainly the momentum there is so strong and enough people are looking for hedges alternatives to the equity market, given how far we've come, that gold is just getting a it's more than its fair share flows. So we continue to like the precious metal space, although certainly it gets a little uncomfortable as the metal gets more and more overbought.

Jeffrey Buchbinder (08:08):

In fact, we'll maybe we'll dig into the gold chart when we get Adam Turnquist on the podcast here. I think maybe next week. Not sure. So let's turn to the economic update, Jeff, and this you, this section you titled "Deciphering Economic Signals, While the Government is Out of Office," which I think is a great, a great title. The lack of data makes it challenging for folks to figure out where the economy is going. But you've got a couple of charts here to help paint the picture.

Jeffrey Roach (08:42):

Yeah, it's just important, I think a little bit overdone in terms of the folks talking about how much we're flying blind and in a fog. Now, granted, I don't want to minimize the fact that we, we aren't getting the official data, but we do have a host of other data. I'm showing you a chart here on data from the ISM report. So that's outside the government, it's private sector, excellent report, lot of history. I'm showing you going back to the late nineties on here. And it really does track general momentum. It's business activity. So it's a good leading indicator. It's suggesting that while we're waiting for the official data after politicians figure out what they need to do and get the appropriations and, and things funded again, the, the point is the economy's slowing, but it's not slowing more than would make us nervous, right?

Jeffrey Roach (09:37):

It's, it's just slowing. We're late cycle. It's something to be expected. We're coming out of a lot of excess money in the markets from fiscal stimulus, post COVID kind of activity, and we're, and we're slowing down. And, and I think that's what we're seeing from some of the private sector data. And that's encouraging. It's basically suggesting, hey, look, recession risks not zero, but certainly not as high as what was talked about. Say, you know, right after liberation day. We don't think recession is in the near term but the private sector data is suggesting that we're seeing a slowdown. Probably actually not going to see that slowdown until Q4 data shows up. Just to set the stage here, Q3 growth, still looking pretty good. We're talking about a Q4 and a Q1 2026 when we start seeing a little more of that slowdown, which a good segue for the next chart is basically saying, hey, this gives the fed a lot of opportunity to say, even though inflation is elevated and a little bit of surprise to the upside because of services, we do think that an easing and improving in the trajectory and later this year, early next year, as well as slowing business activity is, is the perfect scenario to, for the fed to say, okay, we can keep on easing up a little bit on our rates.

Jeffrey Roach (11:06):

That's the orange line, the copper colored line there on our expectations throughout this year. By the way, the Fed does meet next week, and so we'll have some, some quick takes on that right after the announcement next Wednesday. We do think the Fed does ease, again, 25 basis points, a quarter of 1%, and then of course, December, probably pause January 2026, but then again, commence on easing up in March 2026. So let me just kind of, yeah, put a bow on this one. At the last chart was economic growth, GDP, the official government metric, which we are not getting currently matched up with the ISM number, which is the private sector. This chart is that corresponding data point that's important for really not just fixed income markets, but also equity markets and business activity and lending and credit, et cetera, is fed policy as it relates to inflation.

Jeffrey Roach (12:06):

By the way, just for our listeners, so you see that blue line, the legend, PCE year-over-year percent change. Well, normally the average Joe on the street, Main Street thinks of and, and remembers, you know, the, the news cycle, talking about CPI consumer price index, the fed's preferred inflation metric saying very similar to the CPI, but it's from this personal consumption expenditure report. Hence the PCE since we don't want to put that mouthful all on the chart. The PCE is the fed's preferred metric of measuring inflation. So to make sure we're all on the same page here.

Jeffrey Buchbinder (12:48):

So Jeff, I want to dig into your comment about late cycle real quick. So we're going to have the stimulus come in in 2026, and, and as, as you know, you're not calling for an immediate recession. Does that mean that we have to really be on recession alert, potentially 2027, 2028, you know, how would you think about late cycle in terms of when we might get the next recession? And I know it's hard to predict, so you got to have the right probabilities.

Jeffrey Roach (13:13):

Well, recessions happen, right? They're, they're normal. You think about you know, every 6 or 7 years or so, right? We get a recession. Now, granted, most of the time, this is really important for our listeners, you get a recession when there's some exogenous shock, meaning there's some shock that's outside of the pure economic signal. So global pandemic <laugh> banking crash, great financial crisis. Going back before 2008 recession, the 2001 recession, we had a terrorist attack on our soil. Again, all these are outside of kind of the, the typical world of economics going back even farther. You think about the crude oil crises, you know, the seventies that kind of shock the economy into recession. So you think, okay, what's the next potential of a shock? You think about, well, what are the risks? Now, clearly there are, there are headwinds, particularly when you think about how the dollar is trading and how trade policy is being restructured really on purpose, right?

Jeffrey Roach (14:21):

That's one of the words that policy makers have said, particularly in the Trump administration, the restructuring of trade that certainly can create a little bit of a headwind. Late cycle just means, Hey, we've grown really hard. The economy has added a lot of jobs back post government shutdowns of the COVID pandemic. Now we're kind of working through the you know, the slack and maybe the tightness depending on what areas of the economy you're looking at. And so when you think about late cycle, you think the economy's slowing. Your follow up question is, when should we think of a recession? Well, I think you got to thread, see how well the policy makers thread the needle in early 2026, mid 2026. It's probably worth a short answer to your question would be, it's worth having your recession spider antennae up, say mid to late 2026. Just being mindful of, okay, where, where are the fragilities? And being mindful of where those are.

Jeffrey Buchbinder (15:27):

Yeah. And that's why I think we're more comfortable waiting for a stock market dip to buy than adding risk here, despite the strong momentum in the equity markets, because an economic slowdown is coming. It might be, you know, sort of temporarily staved off by stimulus in 2026, but the stimulus waterfall, if you will, it starts to kind of stair step down after next year. And you know, like you said, Jeff, who knows what exogenous factors will come into play. So,

Jeffrey Roach (16:02):

Yeah, yeah. But there's, there certainly are. I mentioned, I mentioned the word headwinds, but I do want to be really clear, there are a lot of tailwinds. One is in addition to the Fed easing in recessionary environments. The other is the, the OBB where, you know, potential tax rebates. The, the, the business friendly components within that bill certainly going to help businesses throughout the, at least the, the early part of 2026, as they plan capital expenditures and plan those, you know, the spending for the big ticket items

Jeffrey Buchbinder (16:37):

And potentially half a trillion in AI CapEx <laugh>, that that's going to matter too. If it comes through, like companies are telling us that it will, and, you know, our view is that it's much more likely to come through than not. So still a pretty good economic outlook, even amid a potential near term slowdown. So let, let's switch gears to the Weekly Market Commentary this week. Call this section Cockroaches and Canaries, which is you know, reference to the Jamie Diamond comments about these, you know, auto lenders that went bankrupt. And when you have a couple of these, you tend to have more, thus, the cockroach reference. And then you have canaries in the coal mine. We all know that phrase, similar concept here that maybe, even though we haven't had much happen yet, it's, there you go. Spidey sense again, Jeff, maybe we put up our antenna on the credit markets and potentially see a little bit more evidence of deterioration.

Jeffrey Roach (17:42):

And just to, just to add too, I mean, yeah, go ahead. Maybe you want to, but just put, be careful with, you know, the leader of JP Morgan, obviously an incredibly smart guy who's been managing you know, exposures to markets for a very long time. But it, it's helpful for our listeners to remember, well, this, the head of JP Morgan, Jamie Diamond also talked about impending headwinds, I think, was that 2022 or maybe even early 2023?

Jeffrey Buchbinder (18:13):

Think it was 2023? Yeah, yeah.

Jeffrey Buchbinder (18:16):

Storm is coming and it created a little bit of a of a media frenzy. Clearly, he has a more conservative bent, and he is paid more to manage risk than to try to, you know, take advantage of big market opportunities and swing for the fences. So you have to know, know your audience. Now that doesn't mean that nothing is happening here, right? The, in fact, this chart makes it that very point. These are some bankruptcies. Some of these names you will know, maybe not know, Fortress Energy, but Sacks filed for bankruptcy. First brands in Tricolor, these are high profile auto lending bankruptcies that some of these regional banks and other lenders have exposure to. Now, reportedly there's a fraud involved. So that means these can be idiosyncratic. These bond market prices, these are bond prices. They have absolutely collapsed.

Jeffrey Buchbinder (19:21):

I mean, suggesting, you know, not only a bankruptcy, but very little in asset recovery. So we have had some defaults. We are going to get more defaults. In fact, I'll add to that case here when I get to the next slide. But this is still a fairly small and fairly contained picture put. I'll put this into context here. These are also, by the way, lower quality lend borrowers <laugh>. So obviously a fraud is going to be a lower quality mm-hmm <affirmative>. borrower. But even that aside, generally speaking, these were lower quality borrowers even before the bankruptcies. So I want to be careful not to, I mean, you can read the piece, it's on LPL.com on the research section, but not trying to be alarmist here at all. This is a piece written by Lawrence Gillum and Mike McClain. Lawrence, our chief fixed income strategist, Mike McClain, our, one of our alts strategists.

Jeffrey Buchbinder (20:22):

We have had more bank loan downgrades than upgrades year to date. So the yellow bars here are the downgrades, the blue bars are the upgrades. That's not that uncommon. I mean, this doesn't look too different than what we've seen over the last couple of years. But the point is that we are getting a little later in the credit cycle and with rates up over the last several years, and you're kind of beyond that COVID, you know, extend and pretend period where frankly, loans weren't, or borrowers weren't defaulting, right? They didn't have to pay back their loans in many cases. So we're past that. So it makes sense that you have a little bit more pressure. But again, not this, and you'll see this when I show you spreads in the high yield market on the next chart, this is not a dramatic deterioration.

Jeffrey Buchbinder (21:19):

The first half of 25 though, did see an increase in bankruptcies. There were 17, what I guess the junk bond folks call mega filings, 117 total filings by companies with over a hundred million in assets. There's a lot of companies out there with over a hundred million in assets, but that is an increase over the long-term average. So this is a little bit of a negative credit cycle, I would say but it's still contained. This is kind of middle market lower quality borrowers. The it's also important to make the distinction between the speculative high, you know, high yield market and the higher quality borrowers. So if we just look at the high yield spreads this is actually surprising to me. So Jeff, I would've expected these spreads to be wider based on what's been happening. This was priced on the 17th, so this is just Friday. It's very current. And spreads are still under 300 basis points on high yield index compared to history. That's, that's pretty moderate. I mean, look at, I mean, you could kind of take out the pandemic but, you know, we were coming into Silicon Valley Bank, we peaked at like five 5 to 600. So 290 is quite tame.

Jeffrey Roach (22:46):

It's a good reminder too, that when we think about potential risks and, and recession and slow downs, et cetera, this is, this environment's very different than say, the period near the great financial crisis. You know, this is not a credit crisis. It's still a pretty good realistic pricing. In some ways. You could almost argue that the low spreads, you know, a month ago were too artificially low <laugh>. This is a little more realistic, right? So I was, I was thinking about this as you were talking about Jamie Diamond, just to go back to him just for a second. Yeah, it's funny when you think about it, you could say, well, okay, is the glass half full or is the glass half empty? Of course the answer is yes, <laugh>. So it's both true. So when you think about some of the, you know, the credit components within the markets, maybe this a slight repricing is, is still within a very, very good range

Jeffrey Buchbinder (23:44):

Overall, historically, yeah. The dollar amounts so far are not that big relative to the broad market. And it's not like Silicon Valley Bank where interest rates spiked, affecting virtually everyone. This is a, for now, and we think it will continue to be contained and in idiosyncratic, certainly this is what the banks have been telling us, and this is our view. So we're not going to see, we don't think high yield spreads blow out to five, 600 like they did a few years ago mm-hmm <affirmative>. In fact, they blew out over 800 in 2015 when we had kind a combination of China currency crisis and an oil crisis. So, you know, 300 is a pretty calm, normal environment now, because that's kind of normal. That means we don't think that the risk reward on high yield bonds is all that great. So we're not recommending high yield bonds right now.

Jeffrey Buchbinder (24:41):

We just don't think you're being compensated for the amount of risk that's there, despite the widening in spreads. That gives you a little bit more compensation for the risk, but just not quite enough. So, so Lawrence and the team still think you should be high quality bonds focused. That's treasuries, that's investment grade corporates, although we don't love investment corporates either. And mortgage backed securities, high quality government backed bonds to act as a cushion in case we get equity market volatility and give you decent yields anyway because you're not getting that much better yields if you go out on the credit curve. So that's kind of a high level view of our take on fixed income. Really good weekly commentary from Lawrence and Mike to help you understand kind of what's been going on with the credit jitters over the last week or so.

Jeffrey Buchbinder (25:36):

So let's wrap up, Jeff, with a look at the week ahead. And it's earnings week 90 S&P 500 companies report this week, including some pretty big names. We get Tesla, Ford, and GM in the auto space. We get IBM and Intel in in techland, Netflix too. Procter and Gamble and Koch and consumer products. So the market's going to get a nice you know, let's call it batch of, of reports to dissect the economy from the perspective of corporate America. But as we know, we're not getting all the economic data that we need to dissect the economy, as you pointed out before, we've got private data we can rely on. I guess this week we're finally going to get the CPI and then we're going to get some housing data. What else should we be watching or any more comments on, on inflation in particular?

Jeffrey Roach (26:38):

Yeah, I think this, this week we are going to get some data, some important data. So the BLS despite the shutdowns will publish. That's the latest that we have as of today on the 20th, publish CPI late this week. And one of the things that's important to remember, even though it's going to come in a little bit hotter than say just four months ago, we don't think that that necessarily going to change the calculus for the Fed in the meeting next week. They're still going to ease. Part of the reason of course, that is we think the September numbers have popped up above 3% temporarily. It's not going to stay there at least by the time we hit December. So it's important to remember, you know, might be shocked in the near term. That's not going to change decision making next week.

Jeffrey Roach (27:31):

In addition to that, we still are getting some Federal Reserve data that's very, very important. For example, like the previous weeks, we got the Beige Book. Very, very important insights across the country, across all industries, very detailed. Beige Book, by the way, is the Federal Reserve Board's publications on a lot of verbatim conversations that they have with business owners, CEOs, CFOs purchasing managers, and we'll continue to see some of those. Some data, by the way, it's the University or the Federal Reserve of Chicago and the Cleveland Chicago branch both publish their own inflation data. That's very helpful to understand, despite the fact that we're not getting a full slate of government data. So we're not flying blind, but we have to be a little bit more creative using the private sector and other agencies to help us offset what we're not getting right now.

Jeffrey Buchbinder (28:30):

Yeah. So the CPI will finally get a sense of whether the PCE is going to be delayed, Jeff? Probably right?

Jeffrey Roach (28:40):

It could be. And of course, it's not going to be as important since, you know, they're already be making decisions and announcing that decision in the middle of next week. So it's a little bit of a moving target because the president can determine what's considered essential or non-essential. So during these shutdowns, the essential businesses, I shouldn't say businesses essential bureaus will continue to operate. But that's really up to the executive branch determining what is essential versus non-essential.

Jeffrey Buchbinder (29:17):

Very interesting. So yeah, I'm not going to say that the PCE is essential <laugh>, we'll, let, let President Trump hear that out. But if people came back to work for the CPI, maybe they'll do the same for the PCE and then, and, and then go back to the shutdown because It doesn't look like there's going to be a breakthrough this week. I hope I'm wrong. Right? And we certainly want federal employees and the military to continue to get paid, you know, the Trump administration jiggered around some things to pay military last week, but I don't think they can continue to do that much longer. So we'll watch maybe that next pay period, which I think would be November 1st, maybe that can be sort of a pressure point for some talks and, and an eventual deal. I have no idea <laugh>, but, but we'll be watching that getting all the data that we can to assess the outlook for the economy, but also hoping that the government reopens and, and we can fully put that behind us, even though the market has already seemingly put it behind them. <Laugh>.

Jeffrey Roach (30:24):

And it gets complicated to your question about the will we get PCE if we get CPI? They're, they come from two different bureaus, which are under two different departments, right? You got the Department of Labor with the BLS and you got the Department of Census, right? Which is that gives us retail sales, for example. And then you have department of Commerce, which is giving us a different data point. So <laugh>, unfortunately, it's not straightforward,

Jeffrey Buchbinder (30:54):

No. And we're probably not getting claims. We haven't been getting claims. That's one of our favorite measures of sort of real time labor market information and conditions. I just star that to make the point that we're not going to get that, or at least most likely we will.

Jeffrey Roach (31:14):

Right.

Jeffrey Buchbinder (31:15):

Very good. And University of Michigan's private, so we will get that. So that'll be interesting at the end of the week. In terms of earnings, we're off to a really good start. I mean, the banks were great at the start of last week. The beat rate is, is around 84%. We're tracking to a 9% earnings growth number now. We think that's going to go up at least a few more points as the reports come in. And so far, estimates have held up quite well. So we'll obviously learn a lot more about corporate America as earnings season continues, especially when we get the, the biggest tech names. But our, our bias at this point is that we're going to get low teens earnings growth, and the estimates are going to hold up well, and we're going to start a quarterly series of, or continue a quarterly series of double digit earnings gains that could last for several more quarters or even longer. So pretty good earnings environment bolstered by AI. So with that, we'll wrap. Thanks Jeff, so much for joining this week. Really interesting to hear your take on the economy, especially given we are, let's say we're flying vision impaired, not blind. So appreciate your insights there. Thanks to all of you for listening to another edition or watching LPL Market Signals. We'll be back with you next week. We will see you then. Thanks so much. Take care.

Jeffrey Roach (32:42):

Bye now.