A Global Perspective on Where Stocks Might Be Headed Next

Jeffrey Buchbinder (00:00):

Hello everyone and welcome to LPL Market Signals. Jeff Buchbinder here with Kristian Kerr. It is Cinco de Mayo, May 5th, 2025. Hope all of you are doing well and are going to go celebrate the holiday, which I guess is a little bit of a made up holiday <laugh>, but hey, it's fun anyway, right? Kristian, how are you celebrating?

Kristian Kerr (00:25):

Maybe some Mezcal later, Jeff.

Jeffrey Buchbinder (00:28):

That sounds good. That sounds good. I'll have to partake to celebrate that. And it's my brother's birthday today, so it's a little after 12:00 East Coast time as we're recording this on the, on the fifth, here's our agenda for today. We're going to recap the markets. Last week, probably the most exciting thing to start on a positive note is that the S&P 500 was up nine straight days, and we're actually trying to get to 10. It's going to be tough, but it's within striking distance here, intraday. Next Kristian, you've pulled about what is it? Four charts, four or five charts to sort of walk through where we are after the rally. It's a global perspective, so, we'll you know, I think the message is going to come out of that is that which we've been saying we're not out of the woods yet, and the next leg up is going to be tougher, certainly tougher than the last leg.

Jeffrey Buchbinder (01:26):

Next the Weekly Market Commentary this week is on municipal bonds. So even though I'm an equity guy I guess Kristian, you have a little more of a bond background than I have. We're going to try our best to walk through the value of municipal bonds. This piece was written by Lawrence Gillum, our Chief Fixed Income Strategist. And then we'll finish up with a quick preview of the week ahead, which is really going to be the Fed and earnings while we continue to wait for trade deals, which according to the White House are coming potentially this week. The market seems to be comfortable with this. Wait and see, because we've made a lot of progress off the lows. All right. So last week I mean, Kristian, I think it was really three things that drove stocks higher. We were up almost 3%. You had trade deal optimism. We haven't gotten any deals, but we've got trade deal optimism. Related to that is talk from President Trump about cutting China tariffs and starting talks. Then you had a good job report on Friday, and you've had pretty good earnings results so far. Would you add to that list? What are your thoughts on the market strength last week?

Kristian Kerr (02:41):

Yeah, I think it's fair. I mean, I think since we, you know, had the 90 day reprieve, you know, markets have essentially kind of viewed things a lot more optimistically just because, you know, they see pathways to get off kind of the way we were going. So, you know, I think the markets just think we've maybe kind of reached peak negativity. So anything that we get now, it's kind of being viewed from a lens of, well, you know, it's not as bad as it was, and we're kind of making our way back towards something more normal. So, you know, I think everything you kind of mentioned fits into that kind of lens that we've had over the last three weeks. But basically, you know, if you look at things like the uncertainty index, you know, we basically peaked a few weeks ago, so I think it's just that kind of overarching thing is really what's been driving the market higher here, the last few weeks.

Jeffrey Buchbinder (03:38):

Yeah, we don't know where tariffs are going, but I think the market is comfortable pricing in a better worse case scenario than what it saw a few weeks ago. And, you know, coming from oversold levels, that's been enough. This you know, this is our first podcast in May or, you know, since the end of April. And it was actually one of the biggest monthly reversals ever. We were within about three quarters of a point away from reversing a 10% intra month low. That's never been done before in the history of the S&P. I don't even think it's been done by the S&P 90, pre 1957. So we were close, but actually the NASDAQ did that. The NASDAQ was down over 10 and ended the month higher. And we've completely erased all those, all those losses, so really nice from April 2nd. So a really nice comeback. It's been led by the sectors that led the way down and the sectors that are hit hard, or some of them that are hit hard by tariffs. So you've got technology a leader last week, you've got industrials, a leader last week, communication services as well. I think the only sector that doesn't fit this pattern is energy. because energy led the way down, but it has, has also struggled on the way back up again. And Kristian, that seems to be about OPEC supply, pressuring oil prices.

Kristian Kerr (05:08):

Yeah, there, I think there's that. There's also you know, in terms of earning revisions, they've revised kind of the most downward as well. So I think that's put a little bit of pressure on the sector, at least from an equity standpoint. But I, you know, in terms of what we've seen and what you want to talk about, impressive, it's been things like on the international side given the reverse we had last month, you know, the DAX is basically within striking distance of new all-time highs, right? So we've rallied 26% off those lows to where, you know, like, very close to a new all-time, very close to a new all-time high breakout in some of these international indices, which I think is very telling in terms of kind of a bigger picture, what's going on. But you know, very, very impressive price action, some of these foreign indices where it's you know, doing quite a bit better than the S&P.

Jeffrey Buchbinder (06:03):

Yeah, good point. Clearly pricing in a pretty optimistic trade scenario whenever that comes. So here's the bond market and commodities and currencies. So here, you know, yields have ticked higher, they ticked higher last week. They're ticking higher a little bit today. I mean, we do have the Fed meeting this week. I don't think the Fed views have changed a ton lately, but we did maybe unwind a little bit of cuts after the jobs report on Friday. So I think that's part of this. And then there's probably some tariff expectations here that are slightly increasing the risk of stagflation. That of course is treasury negative. What are you seeing Kristian, either on bonds or well, commodities, currencies? I think you have to talk about currencies.

Kristian Kerr (06:53):

Yeah. I mean, on bonds, you know, the bonds, you know, we got some pretty big brief steepening last week you know, led by the long and after that, that quarterly treasury refinancing announcement. So, you know, that was, that's somewhat interesting. And in currency land you know, Friday we got basically a three Sigma event in the Taiwan dollar, which is not here. But you know, that ties in the bonds as well because they you know, their life insurance companies in Taiwan are big buyers of treasuries, and a lot of that's been unhedged. So, you know, essentially it's a managed float, and it got a little bit out of hand on Friday to where essentially we're starting to see those life insurance companies have to have to start hedging their exposure. So bring up their hedge ratios, kind of the more dire scenario is that if this were to get a little bit more out of hand, then they would be forced to actually sell treasuries, which put yields higher. Doesn't seem like we're, we're quite there yet, but that's certainly been kind of the big news over the weekend has been trying to understand kind of what's going on with, with that dynamic and, and whether that spreads other place in the region. You know, Korea has a very similar profile in terms of foreign assets that they hold a little bit in Singapore as well. So that's kind of been one of the more nuanced things happening in the currency macro world the last few days.

Jeffrey Buchbinder (08:13):

Yeah, I saw the Taiwan dollar at its biggest intraday move in three decades, so that, that tells you how unusual that is, and that it's actually meaningful. We don't talk about Taiwanese currency reserves or treasury holdings very much. We're always talking about China and Japan, but the numbers aren't small. So that is certainly something we'll have to follow. My, my question on that, Kristian, is does that potentially give the U.S. more leverage in discussions around China? Or does it work the other way? I mean, <laugh>, it seems like our, what we're doing is putting more pressure on Taiwan.

Kristian Kerr (08:50):

Yeah, that was kind of the talk. You know, there were a few interesting reasons people were giving as to why it happened. Some are saying that it might have just been an accident like along a fat finger. Others are saying that it was part of some sort of potential trade negotiation as, you know, the U.S. generally wants you know, currencies of trade stronger versus the dollar. You know, it's tough to know right now, quite frankly. I mean, I do think the fact that it is a managed float, right? So somewhat manipulated you know, so it can trade freely, but within a, within a band, I think the fact that we saw such a big move, you know, suggests that you know, something's going on. I don't necessarily think it was intentional.

Kristian Kerr (09:36):

You know, like I said you know, a lot of times the simplest answer is the answer. And I just think the fact that, you know, over the last few years we've had this kind of U.S. exception trade. You know, you've had kind of their institutional system there wanting to, wanting to earn the extra carry-on treasuries. So they had, you know, they were doing it on hedge. I think that's probably the real reason. And you know, you start to see the, the move and the currency and, you know, the natural next move or reaction to that is to up your hedges, right? And I think that's what we're seeing. You know, I don't think it's a, it's a huge problem just yet, but I, you know, it would be if they start actually selling the underlying assets, which seems a ways away, but you know, something, just keep an eye on you know, watch that currency you know, kind of a little closer than you might have, because, you know, they could have implications for you know, the bond market here if it does start to get a little bit out of hand.

Jeffrey Buchbinder (10:33):

Yeah. It's certainly not as big as the yen carry trade. And it, you know, the way that translates back here is you're right through the treasury market, probably more than anything else. Most people aren't out there trading currencies in, Taiwan at least not, not in the circles that we run in. So thanks for that Kristian good stuff. So let's move on. You know, where we stand after the rally, a global perspective. I, you know, maybe you have a common thread here as we go through these charts. They're really you know, I think collectively they give us a good feel for where we are. So we'll start with the NASDAQ 100 here, which is spacing resistance. So is the S&P 500 you know, 5,700 range is very, it is going to be difficult to break through. And I think you can say the same thing about the way this chart sets up for the NASDAQ.

Kristian Kerr (11:31):

Yeah, I mean, listen, we've had what, a 22% move in the NASDAQ 100 you know, over the last three weeks, as you mentioned, kind of the longest streak in basically two decades. And you know, that's put us into some pretty big levels where the bears are going to say, you know, this is kind of where the rubber meets the road, whether we're going to, you know, get a reversal here or not. And I just kind of flagged a few key levels kind of in that white box. But, basically, you know, that yellow line is a 200-day moving average. You know, it started to slope lower. So you know, after going so deeply below it and when you come back and retest it, you'd expect to see kind of a little bit of resistance.

Kristian Kerr (12:12):

It's actually kind of where we peaked on Friday. So that's a big level. And then those lows from the beginning of the year you know, support could turn to resistance. That's another kind of big level. And then lastly, it's, you know, we talked about this kind of in the S&P kind of where we peaked out, you know, this idea of a measured move. So basically the move from 2020 to 2022, you take that move and then you, you kind of forecast it forward from the 22 low that got us kind of roughly where the S&P peaked you could do the same thing on shorter timeframes and smaller levels. And the same thing kind of comes into play here, right around the 200, a moving average in the NASDAQ and the S&P so call it, you know, that that 20,200 to about 20,500 is kind of a big resistance level where, you know, given how fast this move was, you'd expect a, you know, at least a little bit of stalling out.

Kristian Kerr (13:09):

But if we can get through here and, and ideally see this turn into support, you know, from above, so, you know, kind of break through that 20,500 level in the NDX and then kind of come back down and hold it, you know, that's a, that would be a really big positive and suggest, you know, we could probably go back to all-time highs again here pretty quick. So, you know, all I wanted to really highlight here is that we're at a big inflection point for the chartists and you know, a lot of times these things are, are somewhat self-fulfilling, so everyone knows this is kind of a big level. So, you know, expect there to be you know, this to be kind of a somewhat important week for the market just because we are at such a big level after we've you know, after we've had such a big rally you know, this, you know, a lot of investing trading is observation. So observing how we react around here I think is going to be really significant from a medium-term picture.

Jeffrey Buchbinder (14:00):

Yeah. So I mentioned that the, you know, the S&P didn't quite reverse the interim month losses in April, but the NASDAQ did. It was the third best inter month recovery in the history of the NASDAQ 100. That is you know, that's a big deal. And if you look at historical patterns like this, you know, you're talking about like 87, right? I've seen studies, 87 looks a little like this, 2011 looks a little like this. 1998 looks a little like this. Some of these really sharp down moves that rebound quickly tend to resolve higher. So if you just follow the historical pattern here, you'd say this market should be up, you know, another 10% over the next 12 months, maybe more. And we'll see. That's certainly more than possible.

Jeffrey Buchbinder (14:49):

Yeah, it's a manmade problem, obviously. It's tariffs and so we'll just have to wait and see what Trump says.

Kristian Kerr (14:54):

Yeah. Yeah. And just point out, you know, we've had you know, Adam Turnquist, our Chief Technical Strategist work on it, but you know, it's not, it's not unusual after you get those kind of, that waterfall decline we had in April post, you know, the tariff announcement that that, that you kind of turn into a wide choppy range before you end up kind of really resuming an uptrend. Mm-Hmm <affirmative>. So, you know, these levels in the NDX, is this the top of the range? You know, that's kind of the big question mark for the markets. because You know, we could easily kind of go back towards the middle of the range fairly quickly if it does hold a resistance. So that's what we're trying to figure out. You know, is this more of a v bottom or is it more of kind of a range trading bottom? We have another leg down. You know, these are all the, the things we're trying to figure out. And like I said, I think this week's going to be pretty, pretty important one way or another from a technical perspective.

Jeffrey Buchbinder (15:44):

Yeah, no doubt. And we still want to wait and see how, how the fundamentals play out, but the technicals sure look really interesting here. So next this chart shows ownership by these different segments, I guess, of the investment population that, that we can track Kristian. So what's, what's the key message here?

Kristian Kerr (16:06):

Yeah, I mean, it's the total combined U.S. equity position among you know, all basic major investment types. So, you know, basically we're looking at exposure across mutual funds, hedge funds, vault targeting strategies, systematics and, and even self-directed retail. And it's, it's a Z-score. So it measures the, you know, the number of standard deviations that we are away from, kind of the mean value. And you know, we can see the stocks are still very under owned even after the big rally over the last three weeks. And, you know, we closely watch positioning just because, you know, so often markets are more about what institutional participants are forced to do, not necessarily what they want to do. So it it's that, that so-called pain trade. And, you know, there's plenty of potential pain for, you know, the institutional investor community at large, if this market keeps going.

Kristian Kerr (16:58):

Because you can see on this chart, you know, we are basically at, negative two standard deviations terms positioning. So, you know, they don't, they aren't that close to the benchmark as they'd like to be. So that tends to hurt if we continue to see a rally. And I think this chart really explains a lot and again, why we look at positioning is it does kind of tell, you know, where, you know how people are prepared, are kind of sitting for moves in the market and kind of what forces them to react. But, you know, market basically peaked out in early December. If you look at like the NDX, it did, the New York Stock Exchange composite Index peaked in in December, and then we ended up getting kind of the secondary high in the all-time high in the S&P.

Kristian Kerr (17:37):

But, you know, if you look at this chart, we were kind of the other way in terms of submission, where we had kind of max exposure to the market. And then kind of as we got the DeepSeek news, you know, international started to invest less in the U.S. and then that got, you know, basically accelerated with the news from the tariffs. And we saw kind of that de-risking to the point where the markets now are, you know, or the participants in the market aren't, aren't as heavily exposed as they were. So you could make the case that this is this is a pretty bullish setup. And again, I think we can get through that resistance that we talked about in that last chart. You know, just given how under owned equities are, by and large you know, there's fuel for this move to continue. You know, just given that, that de-risking exercise we went through in April you know, most participants outside of retail are basically near levels where, you know, they may be forced to buy stock here if the rally continues.

Jeffrey Buchbinder (18:37):

Yeah. So this begs the question of what's driven the rally off the lows. Because you know, I mean, you're, I'm sure you're get, you're getting machines buying on technical developments, but that's probably not enough to move this market as much as it's moved. I know retail's been resilient. How would you respond to that? What's driving this?

Kristian Kerr (18:58):

Yeah, I mean, we closely watch retail, but the fact of the matter is they're not a very big overall participant in terms of, in terms of size. You know, I think a lot of what's driven it is in early April, when that, when we got the tariff announcement, we kind of had the big de-risking. Liquidity essentially, you know, collapsed, right? You know, across markets you know, is if you look at things like the bid-ask spread in the S&P futures you know, the amount available to buy or sell or move S&P futures was basically at, you know, decade extremes on the downside. So I think, I think kind of that we've seen this big rally, it's been because we came off of levels where there wasn't much liquidity, so it doesn't take much, you know, the same way, it didn't take much to move the market down because of the lack of liquidity.

Kristian Kerr (19:45):

It doesn't take much to move it back up in a lower liquid environment. So as we get back to more normal levels of liquidity, it gets harder to move the market from a percentage standpoint as much. But I think kind of, you know, call it April 7th onward you know, since this rally kind of started, there hasn't been as much liquidity as there has been. And it's kind of easier to move, you know, to, to have impact on the market with lesser amounts. I think that's part of the story. And there obviously has been some kind of forced buying back, but you know, I know like the hedge funds were pretty short into this so a little bit of buying back here and there, but I think by and large it's a story about liquidity or lack thereof that's helped drive it. But you know, like I said, if we get through kind of those levels and it starts to look more and more like a bull market resumption, and the fact that, you know, the majority of these investor types that run a lot of money aren't as positioned as they'd like to be that could very easily be a driver for, for another leg higher.

Jeffrey Buchbinder (20:47):

Hmm. Yeah. And, and certainly if we get better news on trade, then you have the fuel to turn this back into a sustained bull market run. I absolutely agree. So, but that all flies in the face of the rising recession odds though, which we're showing here on poly market. So 60% plus odds of recession right now, that seems high given the recent market behavior.

Kristian Kerr (21:14):

Yeah. Yeah, I mean, I want to kind of flag kind of where we are, how we got here, and then kind of look at some of the risks and some of the opportunities. So, you know, this is definitely a risk, right? I, you know, I talked about you know, kind of when we bottomed in early April, you know, that was basically because the left side tail risk have kind of been eliminated to a certain degree, are basically kind of the worst case scenarios. Were kind of being taken off the table. So, you know, I think a lot of the, a lot of the participants in the market are still worried about, okay, one was the uncertainty factor, and then now we're facing the, okay, does that, do we get a delay? Is there a mismatch in terms of what could drive this market down?

Kristian Kerr (21:51):

So now do we start getting the uncertainty? Does that lead to, you know, a slowing down in the real economy? You start seeing hard data catch up with the soft data, we start seeing unemployment rise. And I thought it was interesting because if you look at some of the economic metric models out there, you know, they're close to 30% odds of recession. But the poly markets, this is the betting markets, the people actually putting real money on the line you know, they've stayed right around 50%, 60%, you know, right now around 60%. And it hasn't really come off when the market's been rallying. So there is this idea out there that you know, we will start seeing kind of the hard data come off, and then does that mean that we get a growth scare, right? And I think that's kind of the, one of the bearish arguments right now is that we will so that's kind of where we are in terms of, you know, another potential risk or another leg down would be coming from kind of that growth scare.

Kristian Kerr (22:40):

And you don't necessarily need to actually go into recession. You always talk about 2022 and at the lows in 2022, you know, kind of, which coincided with that LDI crisis in the U.K., You know, the, the models were, we're calling for an 80% chance for recession in the next six months. We didn't get it. But the markets are pricing that in, so the markets even just start to price in more aggressively recession. You can start to get you know, kind of the equity start to come under pressure. So I think that's, that's real risk here is that, you know, over the next few weeks, we're going to start seeing that hard data start to start to catch down with the soft data, the sentiment data. And that's the big question for the markets. And, and I think that's why, you know, a lot of people have, have kind of called this, you know, one of the most hated rallies we've ever seen in the stock market because I think so many people are worried about this potential, you know, catching down from the hard data and a potential growth scare at a minimum from, you know, all that's transpired in the in the first quarter of the year kind of actually turning into an actual slowdown in the economy.

Jeffrey Buchbinder (23:42):

Yeah, I mean, it's certainly the data doesn't give you much clarity right now. It's pre tariff, so it's backward looking, even though we got a negative GDP number, it was all trade, it was all rushing to bring imports into the country to be tariffs. In fact, if you take that out, the GDP number was pretty strong. <Laugh>, actually, that's a, I think what you saw the intraday rally last week after the market digested those numbers. I think the annualized increase in capital investment was 22% in that report. The consumer spending number, I think was 1.8%. Those are solid numbers, you know I guess home building, if you add home building to those other two big pieces, I think you get closer to three. So really solid GDP report, this economy's doing just fine, which tells you that a lot of these recession odds are, are tariff related.

Kristian Kerr (24:42):

Yeah, I think that's fair. And you know, listen, we haven't really dealt with these level of tariffs in a hundred years, so I think, you know, the markets are, there's just that uncertainty factor. And, you know, the administration says uncertainty won't cause a slowdown. You know, others believe that, that eventually this translates, you know, corporate CEOs not being able to make decisions they'd like to do they start, you know, making, making cuts on the jobs front, those types of things is that we're going to be dealing with kind of over the next, call it six months. And that's really kind of where markets are a bit of a standstill in terms of are we going to get that, that growth scare from what, what happened in the past? And that's, that's kind of the, the tough question I think markets are facing right now.

Jeffrey Buchbinder (25:26):

Yeah. It's one of the biggest rallies on peak uncertainty <laugh> that I've seen in my career, but we'll take it. So I didn't put the regular S&P chart in here because I knew we had the S&P in Euros. So Kristian, is this trying to, to show what European investors are experiencing if they're buying the S&P?

Kristian Kerr (25:48):

Yeah. You know, talking about, you know, these two charts are kind of the risk. I think the other big risk for the market is just this whole idea of de-dollarization, of, of an unwind of U.S. exceptionalism. And, you know, we tend to be very focused on what the S&P is doing, but like I mentioned earlier, you know, the DAX has been screaming, you know, up 26% in Euro terms, basically about to make a new all-time high. And, you know we've talked about this, but you know, basically, depending how you look at it, with cash plus derivatives, you know, foreign investors own somewhere between 20% to 30% of the U.S. equity market. And, you know, after that first quarter performance, I think they've started to say to themselves, okay, you know, we, we got a little bit overweight U.S. underweight our, our domestic benchmark, so we need to get a little bit back more in line.

Kristian Kerr (26:31):

I think that's kind of what we've been seeing. You know, we've done some work on it, and there's probably, you know, you look at your average European real money investor, so institutional investor, they're probably holding somewhere around a 10% net overweight to U.S. underweight to their benchmark at home. And you know, I want to put this chart up that, you know, put yourself in the shoes of a, you know, a German pension fund manager in Frankfurt. You know, this is your biggest position is this S&P in Euro terms. Because the fact of the matter is, you know, U.S. exceptionalism was the only trade in town for about a decade. It was, and really over the last five years, and as that was the case, hedge ratio started to come down because the dollar was so strong.

Kristian Kerr (27:12):

So, you know, essentially the norm would be to hedge the currency to take that aspect out. And over the last five years in particular, we started to see that kind of drop to 20% or less on average. So, you know, looking at a chart like S&P, yes, we've had a big rally, but in Euro terms, you know, you're talking about something that's closer to 13% off the lows. You can see on this chart here, it's not as strong from the technical perspective as kind of the, that NDX chart we showed, which is already back up against the 200-day, you know, threatening some major levels. You know, this basically is just, you know, back to where we broke down from. And again, a 13% rally versus an 18% rally in the S&P. So, you know, that's the concern here is that, you know, foreigners were such big buyers, particularly over the last year.

Kristian Kerr (27:58):

You know, I've talked about how, you know, the S&P was up roughly what, 25% last year, you know, 21 percentage points of that came in the overnight session. So you can attribute a lot of that to foreign investors buying of U.S. equities. And then they were doing it quite aggressively, you know, cresting last year. So, you know, after things like the DeepSeek announcement after things like the German elect, the German election where you got the constitutional changes to be able to implement more fiscal people got more positive on Europe. And, and we're in a situation where if you have less money kind of chasing the U.S. can it be as strong as it was perhaps in the past where that was probably the, the primary driver? So that's, that's the question mark. You know, if they start to go back a little bit towards bench, they start selling U.S. equities, you know, roughly call it, you know, if the Europeans were to, you know, take down their benchmarks by, you know, go 5% back towards bench, you know, you're talking about roughly a trillion dollars in U.S .equity selling.

Kristian Kerr (28:53):

So, you know, I think that's a risk. I do think there's a lot of you know, there a lot of the headlines have, have sensationalized what's going on. You know, they talked about this kind of hate selling of us assets. I don't think that's really what this is. This is just people that got a little bit overweight versus their benchmark coming back more in line. We're not talking about them going to 50% underweight their bench or things like that. It's just a normal kind of rebalancing exercise. But you have to understand, you know, these types of investors move at a glacial pace. They move very slowly. Probably some of them are just having their investment committee meetings now talking about this. So this is a factor or a variable that could, that could be weighing on the market for quite some time as this money doesn't move as fast as say, hedge fund money or what have you. So just something to be thinking about in terms of, in terms of the S&P in terms of U.S. equities, you know, this could be kind of an overhanging factor for the next several quarters very easily.

Jeffrey Buchbinder (29:49):

Yeah. A lot of folks chase the winners and you know, no doubt the international equity markets have done better this year. So even you know, you're seeing U.S. investors shift from from U.S. assets to international assets while these folks in Europe are considering pairing back. You know, that combined with the fact that we're at a technical crossroads here on U.S. equities, especially the S&P 500 as we near that 5,700 level of technical resistance good chance that that we pull back a little bit here.

Kristian Kerr (30:25):

Yeah. Now we even argue, you know, if you look at, if you look at what's going on in the DAX right now, you know, say you're an institutional investor trying to get back towards bench, you know, when you're in an up market and uptake like we've been the last three weeks, it probably makes more sense that they're focused on getting back in line on in terms of where they're underweight, right? Which I think helps explain why the DAX have been doing so well, or why European indices have been doing so well. It's that, you know, in an up market, you're underweight, your regional benchmark or what have you, and, and you're probably chasing that more, trying to get that in line and then, you know, you start getting into a down tape than, than where you're overweight starts to matter more. So I think there's probably a, there's a component to this that's, you know, the legging in legging out of it trying to get that back towards benchmark, which I think we have to kind of think through as well as a potential kind of factor that could, that could exacerbate up markets and down markets in different ways.

Jeffrey Buchbinder (31:19):

Yeah. And we're talking about that very thing in our investment committee meetings about, you know, regional exposures and you know, where are we underweight? Where do we maybe want to think about taking that off? Yeah, so that actually, I mean, I'm referring to emerging markets, which is a nice segue to this chart. China's been doing quite well. There's this whole narrative out there. I'm talking about the markets, not necessarily the economy, but Chinese stock market's done quite well. There's a narrative that, you know, as companies move their manufacturing out of China to avoid tariffs, they might end up in, you know, for example, Vietnam and or Mexico, and that that could be very bullish for those economies. So it's possible those economies could end up better off because of the whole trade war tariffs thing than they were before. How's that strike you, Kristian?

Kristian Kerr (32:13):

Yeah, I agree. I mean, you know, I want to show this chart to say I think there is some opportunity here with emerging markets ex-China you know, for the simple reason that, you know, I really want to highlight first with this chart. You know, the, you know, the red line is MSCI China, and you know, that's the biggest component within the emerging market index. And, you know, that's where been what's driving it. And a lot of that came after the DeepSeek news. You know, then when markets got hit in, in April, you know, it got hit pretty hard too. But it's still, you know, clearly leading. And then kind of some of these other countries would call it, you know, Taiwan, which you talked about South Korea, you know, to an extent countries like Mexico and Brazil, you know, they've, they've done okay this year, but they probably haven't done as well as you thought they would have given, given this whole de-dollarization narrative that's kind of taken hold after, you know, the start of the year.

Kristian Kerr (33:01):

And I think a lot of it has to do with the fact that quite simply, you know, these countries are considered kind of levered or exposed to China, and as kind of the trade tensions with China have ratcheted up, they've kind of been casualties of that. So, you know, I was thinking in terms of an opportunity, well, you know, we live in a world where there's a lot of pathways we can take, right? So it's interesting when you have kind of an idea or a thesis that could do well in a few different scenarios, right? And I think that is the EMX China because if we get any sort of meaningful you know detente with respect to, to China on trade you know, these countries should do well, right? Because they would be clear beneficiaries because they've kind of been penalized for their exposure of China.

Kristian Kerr (33:47):

You know, so again, if, if we start seeing kind of trade go in a more positive direction, these countries could do, okay, I think, you know, if this de-dollarization theme continues, so this kind of glacial pace of money moving out outside of the U.S. looking for opportunities you know, in international equity markets, they could do very well too because you know, they haven't done as well and these markets just, there aren't that many places to go that are liquid enough to be able to you know, accept large pools of capital. So I think, you know, in a scenario where we get kind of this multi quarter de-dollarization theme play out you know, these, a lot of these countries are arguably quite cheap. And you know, another way would be if what the administration in the U.S. is doing is actually working, right?

Kristian Kerr (34:35):

So, you know, this whole idea of regional restoring well, you know, in that type of world, I could see Mexico and Brazil doing quite well. And you know, we've talked about Brazil quite a bit. You know, at the index level you're talking about an 8% dividend yield, you know, trading at single, single digit multiples. So there's a lot of value to unlock if we were to go into a scenario where you know, this regional reshoring is happening and you know, and I can see this market's doing quite well. So just wanted to point out, there's a few ways we're kind of EMX China can, can perform this year. And it's not relying on one specific thing happening. There's kind of a few different pathways that it could, it could find ways to perform in.

Jeffrey Buchbinder (35:20):

Yeah. And certainly the better performance of Latin America lately has, I think reflected some of that. So yeah, China's a big chunk of EM, but it's not quite half <laugh>, so you've got actually more non-China EM and the benchmark. Then you have China, although we recognize of course, that some of those Southeast Asian nations are dependent on China's economy. So there's of course economic spillover but still the, you know, the non-China EM index is, you know, a pretty big chunk of that. So really great insight there, Kristian. So we'll be watching that. I mean, EM's still cheap too, by the way. So a lot of these markets, they aren't trading like they are going to be a big recipient and end up better off than they were a few months ago. So keep that in mind. All right, let's switch gears and we'll listen to the equity guy talk a little bit about bonds.

Jeffrey Buchbinder (36:22):

You'll have to help me out here Kristian, but don't worry people, because I am going to read some snippets out of Lawrence Gillum's weekly market commentary this week, which you can find on LPL.com, which is about municipal bonds. And I'm only going to give you the stuff that I really understand. So trust me, this won't be that painful. So first, municipal bond yields are attractive versus history. So for you know, for the muni bond index, your yields in the fours, but if you add the tax benefit, you actually get to around seven, right? If you're in the highest tax bracket here, we assumed a tax rate of 40.8%. So that is a very attractive yield, certainly a high hurdle to think that equities would do better than that. A very attractive yield. Munis are cheap because they've been getting hit by several things.

Jeffrey Buchbinder (37:12):

So obviously the treasury market has been weakened, has been weakening a little bit lately and been volatile lately. So that's spilled over the Fed kind of locked into higher for longer is part of this less foreign demand. There's that theme again, Kristian, less foreign demand for Munis. Some folks have gone to cash to, you know, avoid the potential losses in the bond market if rates rise. We've had, there's a number of factors. There's hedge fund to leveraging that came from you, Kristian, in that theme. And then and then illiquidity, there's that word again. So all those things together have weighed on the muni market and created this attractive opportunity in terms of in terms of valuations. Another headwind has been issuance. So this chart shows you the path of issuance this year. So this is supply, right?

Jeffrey Buchbinder (38:06):

So if you have more supply, the supply and demand balance tends to lead to lower prices, which is higher yields. So here you see the path of issuance is ahead of 2024, and 2024 was a record year for Muni issuance. I actually have the number here, 18%. We are tracking 18% ahead of last year's issuance year to date, and last year was a record. So there is a lot of supply out there that again, has created a cheap Muni sector that therefore has made what we think is pretty attractive opportunity. So we like Munis the fundamentals of Munis are, are better than corporates, at at least measured by default rates. So here I have another stat for you. Since 1970 10-year cumulative default rates for investment grade Munis barely above zero, so hardly ever default for similarly rated corporates, the rate is about 2%.

Jeffrey Buchbinder (39:05):

So you get a better default profile when you're in Munis versus corporates, even in, in high grade. And then if you look at high yield Munis versus high yield corporates the default rate is 75% less in munis. So just a better credit profile. So you have better fundamentals, very attractive valuations, the tax benefit, right, which gives you tax equivalent yields of seven. It's really attractive we think right now within the bond space. So I guess my question for you, Kristian, is did any of that make sense as an equity guy talking about bonds?

Kristian Kerr (39:43):

It did. Yeah. I mean, I'm a simple guy, right? And the way I view these things, whenever you get dislocations in the market, like we had last month, investors tend to throw the baby with the bath water, right? To use that expression well seen, right? And I think, I think, you know, what we saw in municipal bonds was exactly that, right? You know, I mean, I noticed that we had, you know, I like to look at closed end funds of municipals and we started to see, you know, some fairly high quality closed end funds that have quality municipal paper in them kind of trading below NAV. So you could literally buy these bonds below their intrinsic value, right? And I think that's a natural function of markets like we had where, you know, it just becomes about de-risking volatility and, you know, being able to think through that, understand, you know, what's going on and there's going to be opportunities here. You know, it makes a ton of sense. What we're seeing that, that Munis are, you know, a place of opportunity right now probably less than they were a few weeks ago, but you know, kind of makes complete sense. You know, kind of what Lawrence was talking about, just given the veracity of the move that we saw kind of in the early half of last month.

Jeffrey Buchbinder (40:56):

Well said, well said. So let's move on. That's a great piece from Lawrence. And you can find it on LPL.com again. So previewing the week, it's about the fed and earnings this week, Kristian in addition to just watching the headlines on trade, of course, which we now are getting very accustomed to having done that pretty much all day, every day for a month. The, you know, the FOMC, Powell, and the Fed are really in a tough spot, so I don't know that we're going to get anything too interesting for them this week. What do you think?

Kristian Kerr (41:29):

Yeah, I mean, the market's kind of priced out. You know, what, I think we're what looking July at the earliest for a cut. But I think the markets will be looking for a little bit of a shift in tone from Chairman Powell. So maybe getting a little bit more, more dovish or double dovish inclination I think is kind of what, what the main thing. So it'll be a little bit of looking at the text and trying to figure out kind of where, where the tonality is changing. But, you know, other than that, I don't really see much coming from this because yes, they are in a kind of a little bit of a tough spot at the moment. You know, claims have been ticking up quite a bit recently or a little bit to where it's worth noting. So I think that's kind of on people's radar as well, just given this whole thing we were talking about earlier of, you know, is the hard data starting to catch down with kind of sentiments. I think that's probably you know, one to be looking out for kind of later this week as well.

Jeffrey Buchbinder (42:23):

Yeah, that, that's a good point. 241 was, was the last claims number. So you've probably got a little, maybe a little DOGE creeping in there. And then just trade uncertainty of course, which is probably the biggest piece that's you know, pushed that number a little bit higher. But as we all know, from Friday, the jobs report for April was just fine, better than fine, really. So you know, job market is clearly cooled. We, we can all agree on that. But maybe, maybe you have a little bit more cooling yet to come. I think the other big story this week is the earnings. And you know, the numbers have been really good. The, probably the best news for me is the hyperscalers, you know, the big tech companies have maintained CapEx guidance. The capital investment on AI for that group is still growing at 30% plus.

Jeffrey Buchbinder (43:20):

That is a huge number. So even if you don't get a lot of capital investment from the rest of the S&P 500, those numbers are just so big that they can really drive earnings higher. In fact, I think half of the earnings growth this quarter in Q1 has come from the big tech names and you only need six of them. because Tesla didn't grow earnings, so we'll call it the super six. Half of the 12% or so of earnings growth in the S&P has come from those names. So they are really important in driving earnings, driving capital investment, and you know, keeping this S&P 500 index supported because they're just such a big piece of it. So we'll be watching for more on CapEx from other companies. Certainly that's important. But otherwise, I, I would just say it's, we're not getting a lot of information.

Jeffrey Buchbinder (44:09):

Because a lot of the guidance has been sort of conditional. We're getting guidance from a, I'd say a surprising number of companies, but a lot of it is, you know, either without tariffs in it or they give, you know, one outlook with tariffs, one outlook without tariffs and their wide ranges. So I just am not sure how hopeful that is, and I think it's delaying the process of getting estimates down to where the market can believe them. So I, you know, frankly, we, I mean, we really just don't know if we're going to get 260 in S&P earn 500 earnings this year, or 250, heck, we could get more than 260. It's just really difficult to say when tariffs are so meaningful. So Kristian thoughts on earnings?

Kristian Kerr (44:57):

Yeah, I mean, listen, you know, I think what we've gotten particularly from, from some of the mag six names has been very positive, right? You know, kind of, you know, I echo your thoughts on the CapEx and, and kind of this whole AI narrative kind of remaining strong, you know, I think it's somewhere around 50%, maybe a little less at actually given of, of the companies that reported have given guidance. But, you know, given where we were a few weeks ago, I mean, take it right, you know, it's been stronger than I think we would've expected. And I think that's been, you know, like you said, part of the driver of this kind of historical route we've been seeing in stocks the last few weeks. It's that you know, anytime you kind of have the market expecting something a little bit more dire and you get something kind of coming in above those expectations, it's going to help. It's going to help things. And we're certainly seeing that. So, you know, I just want to see it continuing.

Jeffrey Buchbinder (46:00):

Oh yeah. Earnings is an expectation game. Yeah, no doubt. Alright, very good. So with that, we'll go ahead and wrap. So thanks Kristian for all those great insights. Really some, some interesting charts that I think when you've put them all together you've got a market that may have a little bit of a struggle here, making another move higher, but certainly so much is dependent on trade that we're really just going to have to wait and see. So hopefully we'll have more answers for you next week. Hopefully we'll get some trade deals over the next few days, which the White House has been signaling, we will see. So thank you for listening to another LPL Market Signals. Really appreciate it. Everybody have a great week and we'll see you next time. Take care.

Kristian Kerr (46:44):

See you later.