How the Growth Scare Affects Portfolio Strategy

Jeffrey Roach (00:04):

Hi, and welcome to the latest edition of the Street View podcast from LPL Research. Joined today with Chief Investment Officer Marc Zabicki. I'm Jeffrey Roach, chief economist. We're gonna talk about six hot topics. We'll share the load between the two of us, two hot topics on the macro level, and then we'll talk sorry, three hot topics on the macro level and then three topics as it relates to portfolio strategy. What do we do with all this information? Yeah, Marc, you're gonna answer some of that. So, let's get right to it. Marc.

Marc Zabicki (00:36):

Sure. So let's start by setting up the basis for this conversation. So, it starts with the economy. Most generally, some of the market activity we've seen has had a little bit of a growth scare element to it. So talk to us about consumer confidence and how it relates to the growth scare and the tumult we're seeing in the equity and capital markets in general.

Jeffrey Roach (00:59):

Just about six weeks ago, we saw yields in the 10 year pretty high. Pretty elevated. We had a little bit of a scare because confidence was a little bit of a mixed bag. So the conference board puts out something every month that tells us a good snapshot on how the consumer's feeling about spending, how they're feeling about the job market how they're feeling about future purchases of big ticket items like houses, cars, et cetera. And we had a little bit of a scare. That's where the growth scare started, and that's really when particularly the bond market adjusted to those reset expectations. And it was fairly rosy in terms of current conditions, but expectations six to 12 months out, not so rosy

Marc Zabicki (01:43):

And consumer confidence has weakened just a little bit, which lends one to believe that maybe consumers are intent on pulling back on spending. Is that fair?

Jeffrey Roach (01:53):

Yeah, that's right. So when the consumer and the business is uncertain about the future, confidence gets shaken a little bit and there's that temptation to just kind of pull back and retrench. Yeah. And just wait and see.

Marc Zabicki (02:05):

Talk to me about the GDP now forecast that the Atlanta Fed puts out. So right now the reading is calling for a negative GDP, U.S. GDP in the first quarter. I know you don't necessarily believe that. Talk us through that a little bit.

Jeffrey Roach (02:18):

Right. So it depends, you know, on how deep you are in the jargon. So our listeners may be just a normal business owner, aren't necessarily in the weeds, but if a lot of people that are in the financial advice space, they look at something that hits the press every month, and actually more frequently than that, and it's comes out of the Atlanta Federal Reserve. So the Atlanta Federal Reserve puts out a piece and they call it the GDP Now. So it's a now cast versus a forecast. And the reason why markets got a little bit freaked out about it is because it went from estimating and saying, 'Hey, the economy's gonna grow about 3% if not more than 3% in the first quarter.' That's what they were saying in the beginning of January. Now as we're recording here in the early days of March, they're saying, oh, GDP is gonna be negative to something.

Jeffrey Roach (03:11):

That's a huge switch. Yeah. I think it's really helpful for Mr. And Mrs. Smith on Main Street to understand this doesn't take into account anything about future data and future activity. They're really focusing on what data do we have on hand now. For example, we know spending back in January wasn't really strong, so let's assume that that's gonna be the same throughout February and March. That's why we got a strong negative number and we would say, well, why would anybody want to assume the same thing that happened in January would continue in February and March.

Marc Zabicki (03:46):

You don't necessarily wanna extrapolate that going forward.

Jeffrey Roach (03:48):

That's right.

Marc Zabicki (03:49):

So one of the big subject matter elements that people are talking about not only in the market but also just in the economy broadly comes up on the news every evening, is the subject of tariffs. Right? So, we can talk for a long time about, you know, the policy implications of tariffs but let's relate it to the economy and the inflation rate. Are tariffs inflationary? If so, why? If not, why?

Jeffrey Roach (04:17):

Right. So if you think about our economy, there are 1,001 pressure points going on businesses and on the consumer. And so what's really difficult in this environment is to say, okay, what will tariffs do to the economy? Well, that's one of those 1,001. It's probably more than 1,001 factors. Right. I think a key point here when you think about tariffs, you might say, okay, yes, it's a tax. Yes, it has a negative impact on growth and yes, it also will provide an upward impact on prices. Hands down. That's a truism. Where the rubber meets the road is how do markets respond. I'm gonna ask you some of those questions in just a minute, but I think you take a step back and you say, well, what are the more important and most important factors going on right now? And I think there are other factors that are more important than tariffs perhaps.

Jeffrey Roach (05:13):

And it's currency markets, it's relative growth around the globe. Is it the U.S. Still growing relatively stronger than Germany? Yes. Argentina, yes. China, well, our trajectory's better than some of those other countries. So I think it's fair to remember this, this stat and then we'll move on. But for our listeners, when you think about terrorists, think about this. And I'll just pick on Mexico for example. You know, we import a ton of goods from Mexico, but remember, only 25% of our imports from Mexico are consumer goods. 75% are industrial inputs. Things like machinery and things Yeah. And capital items that go to businesses. So again, your things that are going into the production process, not necessarily final consumer goods. Yeah. So when you think about tariffs, you gotta say, okay, what's the main impact? Will the government allow any businesses have exclusions, that's really important. And will currency markets offset some of the pressures of tariffs? That's another key factor to think about.

Marc Zabicki (06:19):

So not immediately inflationary as you read it through the economy, probably

Jeffrey Roach (06:25):

The economy, I like to say this, you've heard me say it before, the economy is a cruise ship, not a jet ski. Yeah. Meaning when you got pressures on an economy, it's gonna take a while for things to kind of show up and feel that impact. Yeah.

Marc Zabicki (06:39):

Yeah. So let talk a little bit portfolio strategy and maybe some fixed income and how actually international markets have reacted.

Jeffrey Roach (06:48):

Yep. Yep. So that's where I want to head to you. So, here's the landscape, what do we do about it? What's our portfolio strategy?

Marc Zabicki (06:56):

Great question. Overall, and as a matter of fact, at LPL research, we're kind of set up for it already, 'cause we went into the year with the expectation of pragmatic optimism. So we thought that we're likely not going to see a repeat of the equity market that we saw in '24 and '23. So far out of the gate, we have indeed not seen that, the market's been a little bit more tumultuous than probably some had expected, but we're right in line with that expectation. Meaning that we're getting effectively what we thought we were going to get. Hence that the reason why we've added a little bit more to alternatives. So the general point is, and I'll try to make this relatively short, is there, there's no real reason based on the two months that we've seen in 2025 to really alter definitively anything you're doing from a portfolio strategy perspective.

Marc Zabicki (07:45):

But I think it does make sense to make sure that you take a look at your portfolio and say, okay, was I overweight anywhere that I probably shouldn't have been in '23 and '24. And if we're expecting not as robust of an equity market in '25, perhaps a little bit more volatility, which is indeed what we're expecting, you know, what should I do with my portfolio as a result of that? And we suggest that because of the rise in volatility that we've seen some of and will likely see more of in 2025, you just wanna make sure that you're not too far over your skis in any, any place in the equity market or capital markets. Period.

Jeffrey Roach (08:22):

So when you think about emerging markets develop markets, internationals, U.S. What do we do there?

Marc Zabicki (08:29):

Yeah. Well, I mean, and interesting about EFA markets and EM markets. They've done fairly well recently. And the question we had, we discussed it this afternoon in our asset allocation meeting, was is that likely to continue? Is it gonna be sustainable? We still favor U.S. Markets over the rest of the world. I don't know that that's gonna change anytime soon. We may have seen some strategic buyers come in and kind of reposition their overall allocation slightly in favor of EFA and EM a little bit more, but tactically it's not really a bet, you know, the rest of the world over the U.S. that I think we're wanna make at this point in time. So we're still U.S. centric with our bias in terms of the way we're allocated today.

Jeffrey Roach (09:16):

Excellent. So before I get to the next question and final question just for our listeners to remember, EFA, EM, it's developed international, EM shorthand for emerging markets. Exactly. So fixed income.

Marc Zabicki (09:28):

Yeah. So fixed income is something that doesn't get a lot of attention. It's been a bad market in fixed income for the last couple years. We're seeing some rebirth in fixed income over the last, you know, two months of, you know, the first two months of 2025. We think there's some sustainability to that. I mean, especially if you're an income oriented investor and you're putting money away to generate that regular income stream, fixed income is a good place to do it. We think fixed income is rather attractive here, especially from a risk adjusted return perspective. There's no real reason to go outside of core bond exposure. High yield spreads are a little tight. The rest of corporate spreads are relatively tight. So, you know, investment grade corporates, mortgage-backed securities, treasuries three easy places to look in terms of fixed income allocations. So from a risk adjusted return perspective, fixed income does make some sense here.

Jeffrey Roach (10:31):

Yeah. Excellent. So as you can see, a lot of exciting movements in the global capital markets. And we always like to remind our listeners work with a financial advisor as you look for ways to optimize your portfolio. And as our chief investment officer often says, allocate wisely.