Key Market Undercurrents Keep Stocks Stuck in a Range

Jeffrey Buchbinder (00:00):

Hello everyone and welcome to LPL Market Signals. Jeff Buchbinder here, your host for this week, back from vacation with my friend and colleague, Kristian Kerr. Kristian, thanks for joining. How are you today?

Kristian Kerr (00:13):

Good to be here, Jeff, and welcome back.

Jeffrey Buchbinder (00:16):

Well, thank you. Yeah, I don't know if you can tell I got a little, little tan last week down in the Caribbean for a few days but still good to be back, even though a little colder here in <crosstalk>. Oh, little, little <laugh>. Well, thankfully it warmed up while I was gone. So we're at 40, not 20.

Kristian Kerr (00:37):

Okay.

Jeffrey Buchbinder (00:37):

Big, big difference. <Laugh>. Big difference. So thanks for jumping on here. It is February 24, 2025 as we're recording this Monday afternoon after a down day to start the week's trading. But hopefully we'll get some buy the dip here later in the week, which has certainly been the market's tendency. Here's our agenda for today. Of course, as we always do, recap the market last week, which is kind of interesting because how often you get, you know, highs during the week, and then at 2% pullback before the end of the week. That's certainly not common. Little bit of a growth scare late in the week with some of the data. Next Kristian has identified some market undercurrents, you know, some little nuggets that maybe people aren't thinking about that are interesting in helping us figure out where this market might go from here.

Jeffrey Buchbinder (01:38):

Next we'll talk about the Weekly Market Commentary, which is about the debt problem in this country, and certainly something we've talked a lot about in the past, and probably unfortunately we'll be talking about for quite some time in the future. And then we'll close with the preview of the week, as we always do, with NVIDIA earnings on Wednesday and the Fed's preferred inflation measure on Friday. So let's get into it here. So Kristian, I guess we'll start with just how much of a growth scare was it last week? Because well, I guess particularly on Friday, right? Yeah. S&P was down sharply on Friday, what is it? 1.7%, and that was basically the decline for the week. That's, that's how I would put it, growth scare. Was there more going on than that? What do you think?

Kristian Kerr (02:31):

I think it was a little bit of the growth scare. I think it was people searching for reasons too. I think another big aspect is it was option expiration and there was just a lot of strange things going on and really the weakness in the equity market really happened right before the cash open on Friday. So, you know, I think part of it was the growth story, but I think a lot of it was just, you know, good old fashioned internal stuff, you know, with respect to options. I think it's interesting that if you look at like volume figures you know, it was more in the cash market where things were happening versus futures were actually relatively low amounts of volume for the move that we saw. So it suggests that it was a big portion of that was option related.

Jeffrey Buchbinder (03:12):

Hmm. Okay. Interesting. Yeah, I mean, the market wanted to rally on Monday. We were off to a really strong start, but it seemed to me that the tariff headlines maybe took some of the steam out. And then we have you know, headlines about Microsoft maybe pulling back on its data center investments was another thing that seemed to cause the market to lose a little bit of steam here on Monday. So you know, I guess, you know, part of the reason why I say growth scare well, I mean, we had weak data on Friday. The S&P PMI data, especially on the services side, was weak. And then some of the consumer data was weak. And then I think the market was maybe all a little bit fragile already on Thursday because of the Walmart news, right.

Jeffrey Buchbinder (04:04):

Pretty weak, yeah. Outlook from Walmart and that stock was down, I think seven percent on Thursday. So you know, there were some jitters. And that I think, you know, on top of that, you had the defensive sectors do quite a bit better than the cyclical sectors last week. So again, that is reflective of maybe some growth concerns. You know, I don't know if the German election had anything to do with the trading in Europe. I guess generally speaking, we've gotten the outcome that I think markets expected. So you know, the German market held up Okay, last week is holding up okay today. Generally speaking, Europe continues to outperform the U.S. this year. Anything there you think's worth calling out Kristian, in terms of last week?

Kristian Kerr (04:55):

Yeah, I mean, I think we did see a little paring back of risk in European equities, you know, precisely because there was the election coming up and just some taking, you know, taking some bets off the table, if you will. But it was fairly moderate. You know, and I think I agree, I think kind of what they were, what the markets were looking for as kind of a realistic outcome was what happened. I think, you know, we have to be careful because you know, it's a parliamentary system over there. So just because you know, the election's over doesn't mean that it's not going to be wrangling going on to see what, how the government's actually set themselves up. So I think there might be a little bit of risk going forward for, you know, a little bit of noise or headline volatility. You know, in terms of the international thing I'd point out is just China keeps, continues to be really, really strong. You know, particularly led by tech post the DeepSeek announcement, right? You know, some big moves and things like Alibaba over the last few weeks. So, you know, just highlight that continues to be another kind of big area of international interest.

Jeffrey Buchbinder (06:00):

Yeah. You could see the impact of those big Asian tech names in the Hang Seng right up 20% over the last three months. Wow. big move. And then the MSCI EM Index was up two points last week while the market in the U.S. was down. So you know, pretty good relative strength there. We actually recently wrote about EM saying that, you know, the outlook is better, no doubt, but we still don't have a lot of conviction that that outperformance is going to be sustained. And of course we have tariff uncertainty that we still have to worry about. Another reason you know, that I think growth scare was a big part of the market decline last week is because of the bond market strength, right? We had a pretty big move, the Bloomberg Bond Index up 0.3%.

Jeffrey Buchbinder (06:50):

You basically took, what, like seven, eight bps out of the bond market out of the 10-year yield last week, pretty quick move from kind of the low four fives to the low four fours. And yeah, I mean, the good news is it's not pricing in more inflation, but if you get less growth and certainly that, you know, can impact corporate profits and then, you know, that of course can lead to market weakness. So it's not maybe something to celebrate, but you know, all else equal, certainly good to see the bond market kind of cool off a little bit last week. Turning to commodities, I mean, big move in natural gas. Anything here you think worth highlighting, Kristian? Either, you know, energy metal?

Kristian Kerr (07:40):

Yeah, like you said on nat gas, it's been it's been a weather trade. You know, I think at one point last week, 77 weather stations recorded record low temps, right? So, you know, it started to come off a bit. Gold continues to, you know, strong outperformer on the week. You know, there's a lot of cross currents there for sure. You know, crude tends to struggle. What I would point out is that, you know, we're seeing a really big move in the Bloomberg Commodities Index, and it's one of the rare times where it's not being driven by crude, it's being driven by everything else. And that is just rare because you know, energy tends to be such a big portion of the index composition that it's just telling you there's a lot of interesting kind of other commodities that are starting to rally quite a bit.

Kristian Kerr (08:29):

And in currency land you know, it's interesting as well, because there's short-term momentum there has been getting kind of, there's been a lot of whipsaw with respect to currencies. There's a lot of talk now about this, like Mar-a-Lago Accord potentially, where, you know, the administration wants a weaker dollar, you know, I don't know if that's really a factor, as I'm not sure people actually know what that would look like, but we have been seeing kind of the dollar start to weaken a little bit more than people thought. I think a lot of it too is just headline fatigue with respect to tariffs and things like that, but starting to approach some levels that matter. The yen was interesting because the yen, you know, broke under 150. That's been a big level. So a little bit concern as well about, you know, does this kickoff potential risk-off period like it did in August. You know, so there's a few things going on in kind of the currency commodity land that's worth paying attention to.

Jeffrey Buchbinder (09:22):

Yeah, certainly. The yen is always interesting to watch with, you know, the Bank of Japan being on just a totally different cycle from most other major central banks or all other major central banks that are cutting. So we'll watch that. But there are some interesting things, positive, interesting things going on in Japan, so that market still looks fine to us. So let's go into these undercurrents or kind of interesting, below the surface nuggets, now, Kristian. I think you know, I like these charts that you did because I mean, they're all so different and bringing something, I think to the table that we haven't really talked too much about. So first, this is I guess a measured move study on the S&P 500. So what is this telling us?

Kristian Kerr (10:09):

Yeah. Well, first off, I mean, you know, we are a little past the halfway mark, you know, of the first quarter. So I just think it's a good time to discuss some of the, you know, these undercurrent themes that we're seeing in the stock market, right? And I think it really does help explain what's been going on, and that really is that equities have been stuck in this range and generally well supported, but unable to get any upside momentum and breakout too, right? So we've kind of seen these opposing forces keeping it, kind of keeping it tampered down. But you know, last week you know, we had the new all-time highs in the S&P 500, but then there wasn't any follow through, which I think people were struggling to kind of really understand. And I think a big reason for the lack of follow through was technical.

Kristian Kerr (10:49):

You know, the S&P 500 has been struggling around the 6,100 area for a while. You know, there's a big level here that the market's been respecting, and that is this measured move of the 2020 to 2022 price advance. So measured moves for anyone not familiar you know, they basically measure the distance of a previous price move, and you project that forward in order to try and identify an area of resistance. They were very popular among pit traders back in the day, and a lot of books been written about them, et cetera. Now whether there's anything to it or it's just a self-fulfilling thing, I don't know. But when you take the amount of S&P points from the 2020 low to the high in 22 in the E-mini contract and add it to the October 22 low, you get resistance, right?

Kristian Kerr (11:35):

Right above that 6,100 area where we've been struggling to get through since December. And I like using the E-mini because it kind of captures all the emotion given it's open essentially 24 hours. But any event you know, this 6,130 area, it's clearly an important level of, you know, for the market. And I think you need to really see that broken more convincingly in order to spark any sort of real momentum. Like last week was a marginal high, but we didn't really take out that resistance. And I think that explains why, you know, we kind of have you know, haven't seen the momentum people thought we would after we after we challenged those all-time highs.

Jeffrey Buchbinder (12:14):

Yeah, you know, the market was up about 4% so quickly that running into resistance is also consistent with our house view that maybe we'll get a high single-digit kind of return year, maybe a low double-digit return year, not you know, 4% every month <laugh>. So, I think, you know, this slowing down a little bit makes some sense. So, interesting look there. Alright, next. So, next chart. This is implied moves by the options market, right? For the S&P 500. So, what's the message here?

Kristian Kerr (12:51):

Yeah, so to kind of explain it, you know, it really just reflects how much the index is expected to move from its current price based on current market option pricing. And you can see there's been, you know, it's been a pretty tight range of late, but starts to expand as we get into March. And I think it just reflects that the markets have been waiting on a catalyst, which we have this week with the NVIDIA earnings on the 26th. You know, the option market is pricing about a 1% move from NVIDIA after earnings in the S&P, and about an eight to 9% move in NVIDIA itself. So, you know, we're expecting some volatility this week. And then after that we have NFP next week and CPI the week after that, and both are expected to have about a 1% impact on the S&P.

Kristian Kerr (13:38):

Then we have the March FOMC, which is expected to cause more than a 1% move in the index. I'd say interestingly, the government shutdown date in mid-March isn't really pricing in to be too much. But any event, I think the reason we've been kind of choppy, you know, in this choppy go nowhere market the last few weeks has just been that the market's kind of gearing up for the known catalyst coming up. And kind of, you know, another factor kind of explains this choppy supported market that we have in the broader indices.

Jeffrey Buchbinder (14:07):

Yeah. Another call we made in our 2025 Outlook was for more volatility. So here you go. The market is, you know, pricing in some bigger moves here. We'll see if we actually get them. They're just expected. You don't know if they're going to actually come. But certainly again, if we do get some big moves that would be consistent with our expectations for this year versus last year. And we certainly got a big move on Friday, right? That was the biggest down day of the year for the S&P and the Dow. So hopefully we'll calm down from there, <laugh>. But certainly some big events coming up. So next up is buybacks. And this gets a little bit of attention. It's not like a totally below the surface kind of a thing going on, but I don't think, you know, a lot of people are talking about just how big these numbers are right now.

Kristian Kerr (15:01):

Yeah, yeah. So I mentioned before that even though equities, you know, equities at the index have lacked momentum that, you know, they're still pretty well supported. And I think, you know, some of that support's coming from these corporate buybacks, right? I mean, the chart shows just how big they've become, you know, 10 years ago they were around $500 billion a year, and now they're forecast to be over a trillion, that's trillion a t. And that comes out to a little less than $5 billion a day in just natural demand for stocks. Now companies have blackout periods where they can't really run their buyback programs like leading into earnings announcements or things like that. So you get these periods throughout the year where you get a greater impact from buybacks when a lot of companies are outside of that blackout period, and you get less impact when the vast majority of companies are in blackout.

Kristian Kerr (15:53):

And really, since the early part of this month, we've been in a high impact period where the amount of buybacks jumps to about an estimated $7 billion a day. And this will continue for about to about the middle of March. So, you know, for me, this has been a clear positive factor that's been kind of keeping the equity market generally well supported and kept the indices straying too far away from the all-time highs. So, kind of what I've been saying before, this range that we've been in, you know, it's a range towards the highs, and this has been one of those factors that's been keeping the market elevated. So if we get sell-offs, we tend to not sell off too hard. You know, I think this buyback particularly the period that we're in is probably one of the reasons that we're seeing that type of price action.

Jeffrey Buchbinder (16:38):

Yeah. You get, you know, after companies report and they come out of that blackout period I mean, you lose the earnings support, right? As we move past earnings season, you know, in recent years, that's been a little bit of a trickier period for markets, but then when you add the buyback support that comes in sort of offsets that. So yeah, I agree with you. I think buybacks have been a pretty powerful driver here over the last few years. And you know, that's a big number <laugh> that a trillion dollars a year is a meaningful piece. So, we'll keep watching that. Although, you know, some people talk about buybacks as a contrarian signal, right? Because company's records of timing buybacks is terrible.

Kristian Kerr (17:26):

Yeah.

Jeffrey Buchbinder (17:26):

So, you know, how would you, how would you respond to that? Do you think this high buyback number is maybe a sign that market's going to peak?

Kristian Kerr (17:35):

Yeah, I think it could be. You know, I think it, there's probably a tipping point. I don't know. I don't think we're there yet, but the fact of the matter is, like you were kind of alluding to, I think buybacks has been one of the number one factors in terms of stocks moving up. If you go back and do kind of, you know, factor analysis of what drives equities, it's been kind of one of the number one factors you could be trading on, right? But where that tipping point is, you know, I'm not sure, but I do kind of, I do buy into that, that idea or that notion that maybe there is a number where it gets too big, where you start, you know, having people using it for the wrong reasons. But, you know, in terms of that's here or not, you know, I don't know. I suspect we're not there yet. You know, but we'll see it in the price action, I'm sure.

Jeffrey Buchbinder (18:22):

Yeah, it's kind of like margin debt. It goes up as stocks go up <laugh>, but it doesn't really tell you anything about when stocks might drop. So, but interesting, interesting topic. Let's go to this one. It's correlations. So you know, my first response when I saw this chart from you was to think was that active managers benefit, right? When this line goes down, it means that stocks are moving in different directions, and that makes it easier for active managers to pick winners. If all the stocks are moving up or down together, it's very hard for active managers to differentiate themselves and pick out the winners, and they end up in most cases, underperforming. But you, so I know that was one of your points, but there's another point here to consider as well that I thought was interesting.

Kristian Kerr (19:16):

Yeah. I've been talking a little bit about kind of dampening effect, dampening factors and supportive factors. And I think what we're seeing with implied correlations or realized correlations actually is a dampening factor. But this is a one month chart of realized correlation in the S&P. So it's basically showing, you know, how closely the components of the S&P are tracking against one another. You know, the low level indicates, like Jeff said, that many stocks are trading independent of broader market factors, and they have really little correlation to the index and essentially showing how stocks and the S&P aren't moving broadly together. Now, what's interesting is that it's only been lower a handful of times over the last few years. This indicates, you know, quite a bit of dispersion and it's very much a stock pickers environment as Jeff was saying.

Kristian Kerr (20:02):

And actually, I've seen statistics just over the last couple days showing that a majority of active managers are beating the benchmark in their benchmarks to start the year. Now, reason I'm showing this is that the side effect of all this is that it tends to dampen moves at the broader index level. And I think it's been one of the primary forces, you know, keeping the indexes contained. And another thing worth pointing out is that when you get to these levels of, you know, realized correlation, you tend to not stay there for very long. And volatility starts to rise as things get more correlated. So something to watch out for, and perhaps, you know, I think maybe part of the reason we saw that move that we did last Friday is there did seem to be a lot of a bit of unwinding of, you know, types of trades that would be kind of these dispersion type trades as well.

Jeffrey Buchbinder (20:55):

Yeah. So again, you, if you're going to make a big move higher, you probably want stocks moving together. Which, you know, of course we're not seeing because you're getting a lot of the dispersion, that's actually related to another chart that you have here, which is on momentum, right? In a momentum market, you're going to have a lot of stocks moving together, right? You would have high intra-market correlation between stocks. So is this just kind of another way of looking at the same point?

Kristian Kerr (21:27):

Well, no, I would actually say, you know, the realized correlation was a dampening effect, and this has been a supportive factor, right? So basically around the middle of January, you started seeing a big jump in individual investor inflows into these momentum stocks. Now according to some of the trading desks that we talked to, they've seen some of the largest buy imbalances from retail traders over the last few weeks of all time. So this has been an important factor, keeping the market supported. For instance, there's that huge demand from individual traders in NVIDIA, after the DeepSeek announcement, you know, we gap lower. So that helped halt the decline. So it's been important but it's also started to taper off. And what's interesting as well is that there tends to be a seasonal aspect to these types of flows.

Kristian Kerr (22:15):

Like at the beginning of the year, people, you know, get paid bonuses or, you know, receive you know, matchings you know, retirement matchings, and that money positively impacts, you know, the stocks that the individual self-directed traders like. But then as you start to approach tax time, it starts to taper off. And arguably, you know, we're starting to see that kind of happen now. So while it's been a supportive factor, it may start to be less, especially as we get closer and closer to April and the when, you know, when the tax man cometh.

Jeffrey Buchbinder (22:46):

Yeah, I mentioned, you know, buybacks as a contrarian indicator. You know, sometimes companies don't time those very well. Well, here's another potentially contrarian indicator is retail tripping all over themselves to buy momentum stocks. <Laugh>, it doesn't sound like the type of market that would have maybe a ton of upside. I'm not trying to sound overly bearish. You know, we think this is more of a high single-digit type market, not 20% market like we've had the last couple of years. So maybe that excess enthusiasm for retail is a reason to think that maybe we're due for a little bit of a sell off. By the way, the, you mentioned breadth. We've had weaker breadth metrics lately. That's another reason that Adam Turnquist, you know, who was on here last week, has been talking about is a reason to maybe expect a little bit of a dip. What do you think?

Kristian Kerr (23:41):

Yeah, I mean, I think the lack of breadth kind of goes back into what we're seeing with the correlations, right? I think that's all part of the same trade. I would just point out that, you know, you can have momentum doing okay in those types of markets because, you know, that could be part of the subset of the index is doing okay. So, you know, like the retail traders have done okay with some of these momentum names, but I do wonder if it's, you know, they've changed their behavior a bit over the last several months, you know, particularly last August with what happened with that kind of unwind to start, you know, they're aggressively buying on dips all the time. So, you know, I do wonder as the money starts to lessen as we get in the tax time, if that supportive factor starts to be kind of a negative factor as they start to kind of take a little bit of money out of the market.

Jeffrey Buchbinder (24:33):

Yeah. And the defensive low vol stocks aren't as big of a segment, certainly not as big as tech. And I don't think that's as big of a segment as momentum. So it's hard for that group to support the market all by itself, so that's when you start to see pullback. So we'll see when it comes, but certainly I think it's fair to say we're due for a pullback, and I don't think 2% counts, which is, yeah, <laugh>, which is all we've had here in the last few days. I mean, when it comes, when 2% comes in a day, it feels worse than it is now. We've got two and a half percent off the highs roughly in the S&P 500, that doesn't quite count. But yeah, it's been a buy the dip market for retail for quite some time. You know, the only meaningful pullback we've had recently is that August 2024, 8 and a half percent pullback. And that was over so fast <laugh> that was bought so quickly that you know, not many people had a chance to take advantage of it. So, next supportive factor I know is or actually it's moving the other direction. Another factor that you say Kristian is losing support for the S&P 500, right? Or causing that to diminish is what's going on in international, right?

Kristian Kerr (25:59):

Yeah, a hundred percent. Like the you know, Europe's had its best start to the year since, you know, I think 1990. China, and particularly Chinese tech, has been undergoing a strong rally since the DeepSeek news, you know, stocks like Alibaba, 60% on the month at one point last week. So a lot of this move in international has been driven by optimism on the news front with respect to tariffs and potential, you know, Ukraine ceasefire. But I suspect there's probably also been a fair amount of allocator rebalancing impact just given international stocks do scream cheap. You know, jury's still out, like we're talking about earlier on, whether this is still the, you know, this is the start of a bigger rotation or something more temporary, but whatever the case may be it probably has had a bit of a dampening effect on U.S. indices with really just less money chasing after the U.S. exceptionalism theme than we've seen in prior quarters, right?

Kristian Kerr (26:53):

So that's kind of what I was pointing at, and again, talking about, you know, we're in this range, it doesn't break out, but we still are supported really high. We don't dip more than a few percent. And I think you know, this has been on the top side kind of keeping things from single momentum breakout in these U.S. indices, is the fact that international has had such a good start to the year that we're just not getting the same money inflow either from investors, you know, investing from there to come to the U.S. or even U.S. portfolio managers maybe allocating some money away from U.S. into international. I think that's having a bit of a dampening impact on U.S. indices.

Jeffrey Buchbinder (27:32):

Yeah, and at this point, it's not as likely that NVIDIA is going to reignite that whole U.S. exceptionalism AI theme all by itself, because we've seen, you know, as I mentioned, the, you know, Microsoft reportedly pulling back on data center investment, and we've seen kind of mixed results from the Mag Seven here during this earnings season. I mean, it's possible, NVIDIA's big enough. But you know, the case to go international has gotten stronger, or the case to move away from the Mag Seven has certainly gotten stronger lately. If big tech doesn't work as well in the U.S. that gives international a chance to keep up. And when you add a weak dollar on top of that, then that really creates the conditions for some international outperformance when they're so cheap. So this is certainly something to pay really close attention to.

Jeffrey Buchbinder (28:28):

I mean, the good news is more stuff's working, right? Used to be at least over the last couple years, there was a diversification penalty, right? If you moved out of the S&P 500, you got hurt no matter where you went. Well, now it's pretty much the opposite. No matter where you go, when you leave the S&P 500 this year, you're doing better. So, that certainly you know, is positive. We'd love to see 20% returns from the S&P every year, but that is of course not realistic. Hard to do <laugh>. Yeah, very hard to do. Although in the late nineties we did four in a row, right? Yeah. I think we almost did five years in a row of 20% for the S&P. But that certainly that is a tough few year rally to match.

Jeffrey Buchbinder (29:12):

So we're not going to expect that. Hope we get it, but not the base case. So, let's switch gears and go to the Weekly Market Commentary this week, which is on the debt problem. Unfortunately, we've had to write about this a bunch. And it's not just the debt problem. It's also, you know, the debt government shutdown risk. We've got to fund the government. We've got to raise the debt limit again. And that is certainly all a challenge, but the biggest challenge is no doubt, this seven and a half trillion that we have to refinance. So our chief fixed income strategist, Lawrence, who was on with Adam last week writes in the piece, which you can find on lpl.com, I think it's called Refinancing ZIRP, zero interest rate policy, where sort of, you know, the bills coming due for all those years of zero rates because when cheap debt matures and you have to refinance at higher rates that can be expensive.

Jeffrey Buchbinder (30:15):

So, you know, Lawrence thinks it's manageable. I generally agree with him and I'll get to your thoughts in a minute here, Kristian. But this is a big challenge. So you know, we all know we've got a lot of debt in this country, right? The, you know, this chart just shows you how quickly we added the last 12 and a half trillion, which was a lot faster than the previous 12 and a half trillion that we added. We're now at 36 trillion or thereabouts. A lot of this has come on since 2009. I guess the good news is we only have to reverse maybe, you know, a year or two of this, and we can make some good progress. But as we're seeing with, you know, Elon Musk and DOGE, it's not easy to cut big numbers. I mean, there's debate about how much we've cut so far but you know, it's not really making a dent, whatever the number is, so we really have to get spending down so we can cut into that debt.

Jeffrey Buchbinder (31:17):

Here's the a chart of the maturity wall. We're looking at, if you include T-bills, 9 trillion matures in 2025. But the coupon securities, so the, you know, the notes Treasuries are you know, maturing at a slower pace, but still we've got seven and a half trillion of coupon securities that mature in the next three years. And the problem here, and Lawrence goes through this in the piece, is that when you roll over at higher rates, it's like a hundred billion in additional interest costs per year. That is a big number, right? So if you do nothing, if you just keep costs, you know, keep the debt levels constant, keep our spending constant, you're going to, the problem's going to get worse and worse. So, really, the time to take action, and I give, you know, the Trump administration, Elon Musk credit for recognizing this is a real problem, and the time to act is now and certainly you know, they are making some progress.

Jeffrey Buchbinder (32:23):

You got to start somewhere. But we're going to need a lot more than just a little bit of discretionary spending cuts. This is a chart showing T-bill yields that reflect there is some delayed payment risk. So this is, we got to raise the debt limit. If you trying to figure out how to explain this in simple terms. So we have the way the debt limit works is, you know, you can hit it and then you can use extraordinary measures to extend out the point at which you can't pay your bills. Okay? We've committed to these, to the spending, but we have to have the debt limit raised to actually pay off these debts that we've already incurred, right? So we can use these extraordinary measures so there's no impact from not raising the debt limit until July or August.

Jeffrey Buchbinder (33:28):

But at that point, you can see here in the T-bill market is pricing in a little bit of disruption. Now, we always raise the debt limit. There's hemming and hawing. We'll raise it again. So we're not saying that you should base your investment decisions on this chart, or, you know, go to cash because of this risk. We're not saying that at all. We're just saying that the market might be a little bit volatile around this. And even though the Republicans have the majority, it's going to be tough. They got to do reconciliation. We got to extend the tax cuts because we don't want a big tax hike in 2026, and the majority is so slim in the House, and you've got, of course, different factions that it's tough to agree on how to do it. So I'll stop there, Kristian, and let you weigh in. What do we need to do to make more progress on the debt problem? Is it making Ukraine buy a hundred years zero coupon bonds <laugh>, right? I don't know what we need to do. Give our listeners some confidence that we'll be able to manage that. And then, you know, should we worry about the debt ceiling?

Kristian Kerr (34:40):

Oh, first off, remind me not to come on the week that the fixed income strategist writes the Weekly Market Commentary going forward. <Laugh>

Jeffrey Buchbinder (34:47):

Doom and gloom. Yes, it is a little doom and gloom, but he says it's manageable. Yeah. Says it's manageable. So I give him credit for.

Kristian Kerr (34:54):

Yeah, I mean, I agree. I think, you know, like I give credit to what DOGE is trying to do, but when you look at the numbers, like you got to, you have to go after the entitlements. And that's a very difficult thing to do politically. So, you know, that's what concerns me on that front. I mean, I did like the way Lawrence wrote the piece in terms of, you know, all this, yes. Like, it'll make things more volatile. There'll be a lot more headlines around this, but in the end, there's still a lot of opportunity within fixed income. You know, I think this is, you know, serves a big reason why, you know, our duration view is the way it is. You know, we think there's opportunities in kind of the short to five year kind of terms and fixed income to really lock in some nice yields that are historically high.

Kristian Kerr (35:37):

Because 10 years ago, the, you know, the concern when it came to bonds, you couldn't really make them work in a portfolio because they were yielding, you know, very little mm-hmm <affirmative>. And now you know, at least we're in a period where you can actually kind of take advantage of that. And that's kind of where, you know, let's step back, look at from investment perspective, like this will be you know, it will be manageable over time. There'll be more headlines about it. But you know, there are probably some opportunity for it for people from an investment standpoint to take advantage of some very high quality paper. You know, we wrote a lot in our outlook. This is a very good environment for coupon clipping. And I think that's right because you can start kind of taking the fixed part, you know, the fixed income part of bonds and start making that work in portfolio.

Kristian Kerr (36:23):

So now it's, you know, a time to start doing that. And I think, you know, with this potential x-date, you know, I think a lot of people have been very comfortable using shorter dated paper like T-bills, and there's probably going to be a little risk on a rollover standpoint. So now it probably makes a lot of sense to start locking in a little bit longer maturity. So you know, that's kind of my take away from it, is that, yeah, okay, there's going to be a lot more volatility, particularly around headlines on this. But it does set up some opportunities to start making fixed income work in portfolios a little nicely here, I think, going forward.

Jeffrey Buchbinder (36:57):

Yeah, no doubt. Great point. And then you know, if you do get volatility around this stuff, it's probably going to be resolved in, especially the debt ceiling. So probably volatility that you want to take advantage of, probably dips that you'd want to buy. And then, you know, another reason to not be too concerned about the debt problem, at least not right now, is you know, Scott Bessent has, and President Trump, right, have talked about targeting the five-year yield. I mean the 5% 10-year Treasury yield.

Kristian Kerr (37:30):

Yeah. 10-year yield, yeah.

Jeffrey Buchbinder (37:31):

Right. The 10-year yield. So that is, I think that's the right answer, right? I mean, that's certainly the rate we pay the most attention to. I mean, the Fed will probably still cut, but even if they just pause for extended period of time, that's still enough. As long as inflation doesn't reaccelerate still probably enough to allow Bessent to keep the 10-year yield down below 5%. There's some things they can do mechanically within the market, I think, to help that. As long as that 10-year yield's below five, I think it's pretty much a green light to buy dips. Is that too bullish? Would you agree, Kristian?

Kristian Kerr (38:09):

No, you know, I think, you know, I was going to touch upon it at the beginning, but I think, you know, since we've gotten, you know, the Bessent put you know, we've seen bond yields coming off, so I, you know, I think the market wants to believe in that to a certain extent, right? I mean, maybe obviously they'll get tested at some point and we'll see. But I think right now, and as kind of you alluded to a little bit of a growth scare maybe starting to happen here, I think those two factors, you know, probably mean bond yields come under a bit of pressure. So, you know, I don't think it's too aggressive, but, you know, I think we're still trying to figure out what Bessent really wants to do. You know, there's a lot of strange talk about, you know, I mentioned the Mar-a-Lago Accord and all these types of things out there. I think we're just starting to get a handle on what this all means, and it'll get clearer and more speeches and all that. But I think you know, I don't think it's too aggressive what you're saying is because I think the markets have been already trading on that.

Jeffrey Buchbinder (39:06):

Yeah, I mean, certainly something geopolitically could get in the way, but yields are probably the most important thing to watch, at least day to day. So thanks for that, Kristian. Let's move on to the preview for the week ahead. And you know, NVIDIA earnings, you already talked about markets pricing in a potentially big market move from those results. I mean, we, you know, we're not NVIDIA analysts, so we're not going to make a call on whether it's going to be well received or not. We'll just say that it's a really big deal. I think the consensus is looking for 62% earnings growth. Now, that's a slowdown, believe it or not. It's hard to believe for a company that size that we're talking about slowing growth to only 60% earnings. Still a huge number. I think revenue growth consensus is even 70% plus the big numbers. So that'll be, I think, the biggest event of the week. But we also have core PCE, and you know, here come the base effects that our chief economist, Jeffrey Roach has been talking about. I think we're going to get a little bit of a benefit from the comparison to last year here and hopefully core PCE cools off just a tad. What do you think, what should we watch in this week, Kristian?

Kristian Kerr (40:26):

Yeah, so I, you know, I'm a macro person, right? So, you know, when I look at NVIDIA, I'm thinking about, you know, how's that going to impact broader equities? You know, we touched upon that a little bit earlier. You know, I think they're looking for about a nine, eight or 9% move, the option market is from NVIDIA. That's a big move for, you know, the second biggest stock in the S&P 500. So yeah, it's going to be a mover, I think, you know, the index anticipated moves about a percent, right? So, I think that's the event of the week. You know, core PCE, you know, I think it's important, but I think we've got CPI coming up that'll be a bigger number. It is interesting that some of the Fed surveys, you know, showing the prices paid moving up quite a bit, and that tends to be correlated to inflation. So, something to pay attention to, but I think from an economic standpoint, it's really about NFP next week. That's going to be the big number, especially with kind of a little bit of a tremble on growth. That's going to be kind of the next big econ data point that the markets are going to probably fixate on.

Jeffrey Buchbinder (41:28):

Yeah, I mean, we wrote about it in the Outlook. We've been calling for it for even longer than that. You know, we published the Outlook in December. We are calling for an economic slowdown several months before that. It really hasn't happened yet.

Kristian Kerr (41:41):

Cooling off, cooling off, not a, a little, yeah, a little

Jeffrey Buchbinder (41:46):

Small slowdown. And we haven't really gotten evidence of it until now. I think the evidence now has gotten pretty compelling that we will see slower economic growth. I haven't seen what the, you know, Atlanta Fed GDP Now trackers at, you know, this week, but, you know, it was down in the, it was down below 2%, I believe a couple of weeks ago. So yeah, we're going to slow down, but that's good news because that's going to help keep rates down and help keep inflation down. We don't want it to be too dramatic, but I think we're going to get this, you know, I'm kind of going out of my lane here but I think we're going to get some evidence in the coming weeks, more evidence that this economy is slowing. And as you alluded to earlier, that'll help keep rates down.

Jeffrey Buchbinder (42:39):

Yeah, so, you know, fairly bullish, so don't get too scared off by slower growth. That's really I think the prescription for lower inflation, lower rates, which is really important because what we just talked about servicing the government debt and then also you know, supporting multiples because reaccelerating inflation, Fed rate hikes, you know, higher 10-year yield. These are, these can derail this market pretty quickly. Maybe not cause a bear market, but certainly could derail gains in a hurry. We certainly don't want to see that. So we'll be watching this data even maybe more closely than we have been over the next couple of weeks. So with that, I think we'll wrap. So unless you have any closing comments, Kristian, I'll go ahead and end it there, so thank Yeah, no, go ahead. I'll leave it.

Kristian Kerr (43:34):

No, I'll leave it there. It was a good discussion. I think we hit a lot of interesting points on the market that would be useful.

Jeffrey Buchbinder (43:42):

Yeah, I think so too. So maybe a little bit more volatility. Still comfortable with our tactical neutral view. You know, for those of you in a 60/40 kind of a portfolio, that's probably a good place to stay but maybe you know, watching for signs of weakness to potentially buy a dip. I think that's probably the concise way to put our, you know, tactical views here. And certainly you can see at the end of all of our Weekly Market Commentaries, we share our latest high-level views on tactical asset allocation. So you can follow those as well. So with that, Kristian, thanks for joining. Really good discussion. Some stuff we don't normally talk about. So it's good to bring some fresh perspectives. To all of you out there, thank you for listening. Appreciate your support of LPL Market Signals. We will be back with you next week. Take care, everybody. Bye.