Q2 Market Outlook: The Fed, Stocks, Inflation, and Portfolios in an Election Year

Well, Don, looks like we’re ready to start. So welcome in, everyone, to our second quarter market outlook.

Today, we’re gonna be talking about the Fed, stocks, inflation, portfolios, and election year, I’m sure, all things that are top of mind for each of you.

We thank you for joining us. My name is Kara Duckworth. I’m the managing director of client experience here at Mercer Advisors. I’m very pleased to be joined by Don Calcagney, our chief investment officer.

As I’m sure you are all aware, the information that we are providing today is for informational purposes only. This content is not to be construed as personal investment advice, or any specific financial planning recommendations for your own personal situation.

We are gonna be taking questions today. We know that there are a lot of topics on everyone’s mind. So if you do have questions during this presentation, please enter them in the Q and A. You’ll find that button on the bottom of your screen.

We have a lot of questions that were submitted in advance that we’re gonna be covering, and we’re also gonna be answering some questions that you’re submitting live. So please do, go ahead and enter questions into the q and a. We’ll get to as many of them as we possibly can.

Today, we’re actually doing a slightly different format. We heard from all of you from the surveys that you submit when you watch these, the feedback of which we are very appreciative of, that you would like to hear Don’s thoughts on things that we know are top of mind. I know, Don, you and I both spent a lot of time speaking with our advisers, with our clients, and you can see a lot of the questions that we know there. So Don’s gonna start with, just some thoughts and on all of these major topics, and then we’ll spend the second half of our of our time here together doing, questions and answers. So on that note, Don, I’m gonna turn it all over to you. I I know you’ve got a lot of things to cover, so let’s jump right in.

Well, thank you, Kara. Appreciate the, the the kind introduction. And thank you everybody for for joining us today, and thank you for those who submitted questions ahead time. Like Cara said, we actually spent a a lot of time going through each and every one of those questions that you’ve submitted, and they were quite voluminous.

Right? I think there was well north of a hundred questions. So I will do my absolute best to try to touch on the these questions. And and, and, again, Cara will be monitoring the q and a function.

So please please feel free to, submit your your questions. So we have a lot of content that we wanna cover, and let’s just touch on some of the high level themes that we’re seeing in all of your questions. And and I perhaps no really no surprises here. Right?

Inflation, the presidential election, you know, geopolitical crises, unfortunately, continue to dominate the headlines.

On a more positive note, you know, stock market’s actually done fairly well so far this year. April, not so much. We’ve given back about three percent or so of the returns thus far this year. But interest rates and diversification and the fed and gold and I’m sure there’s gonna be a few questions on crypto and Bitcoin and all that other stuff. So I am gonna do my best to touch on on all of this as much as as much as I can.

So let’s begin with this the first, this this topic on how the market has done broadly so far for the year. The S and P five hundred has done amazingly well so far this year. So this is coming on the heels of very strong returns last year in in the stock market.

If we go back a couple of years in twenty twenty two, stock market was down nineteen percent. We recovered those losses last year, and then we’ve added to those gains that we earned last year. We added to those thus far this year. And at the moment, the market is up somewhere around five percent.

Through the end of March, it was up around ten. We’ve given some of that back here in the month of April. So by and large, stock markets have done very well. Bond markets are flat to slightly negative, and we’ll touch on this in a few moments.

That’s largely because the Fed, even though the Fed had begun to telegraph the prospect of interest rate cuts back in December, They have not cut interest rates yet. And indeed, there’s economic data that suggests that they shouldn’t be cutting interest rates. Inflation still continues to run hotter than, than desired.

The economy continues to do very well by most objective measures, and I’ll touch on some of these data points here in a few moments. But inflation has come down from its high back in in, in June of last year. We’ve seen inflation come down quite nicely, but it’s still too high. And, again, we’ll do a deeper dive on inflation here in a few moments. Alright?

Couple other data points here before we move on. I know there were a couple questions on the US dollar. What I would like to highlight is the US dollar, at least over the past couple of years, is actually up in value relative to other currencies around the planet. That’s not true when you compare it to all currencies around the planet.

There have been some, you know, the Mexican peso, for example, is actually up about fifteen percent against the US dollar. The dollar has come down a little bit since its November high. So we’ve come down a bit, but again, over the past couple years, the US dollar remains quite strong. So if you’re planning that trip to Italy, you’re looking to travel, you know, I think now is probably still a good time to consider to consider doing that.

So in terms of some of this high level economic data, I know a lot of us are asking ourselves, well, why hasn’t the Fed cut interest rates? They said they were going to. They said that they were expecting to.

Well, it’s because inflation continues to run hot. And in fact, in April, we actually saw inflation start to pick back up again, and that’s coming from some really weird areas like automobile insurance and, you know, energy, which is what you would expect, usually drives inflation. But automobile insurance, insurance rates have gone up quite significantly, pushing up inflation.

But inflation continues to run hot, and the economy continues to do well. And to be fair, this this has been very surprising for a lot of economists.

Right? We didn’t expect the economy to continue to do so well after the Fed raised interest rates from close to zero to where they are today, which is somewhere between five and a quarter and five and a half percent. That was one of the most rapid increases in interest rates that we’ve observed since March of twenty twenty two, in in American history. So very, very significant increases in interest rates, and yet the US economy has continued to motor along. GDP growth coming in at three point four percent. That is a real GDP growth rate number, meaning that is after we net out inflation.

Alright? Unemployment remains low.

Home prices continues to be a sticky spot. Lots of reasons why home price is sticky. Just not a lot of supply on the marketplace. You have a lot of homeowners that have locked in those two and a half, three and a half percent thirty year mortgages, and they are not interested in moving.

Right? They don’t wanna move out of a two and a half percent thirty year mortgage into one that’s at seven, seven and a half percent. So there’s not a lot of supply on the market. So simple economics here pushing up the, the price of of residential homes.

Commercial real estate, not so much. That’s an entirely different story. We have lots of employees still working from home. Commercial real estate continues to be under a lot of stress.

Market volatility is low. Interest rates have largely normalized. Right? These are the highest interest rates we’ve seen in over a decade.

And at least for many of you I know who are perhaps retired or close to retirement, we’re we’re loving earning four and five percent on our short term bonds and our money markets. And so, again, when I look at this data, when most economists look at this data, it’s really hard to make a compelling case that the Fed should be cutting interest rates, especially when inflation is still too hot.

Now in terms of market returns, I’ll I’ll just touch on this briefly. At least through the end of March, the S and P was up about ten percent. We’ve given some of that back depending on the minute. Somewhere between we’re up somewhere between five to seven percent at the moment on the S and P five hundred index.

There was a question that came in, with the registration. You know, is the stock market recovery what we would have expected given the sell off back in twenty twenty two.

Yes. This is what we would have expected, and I have some data to substantiate that to show you what that has looked like historically here. I’ll share that with you in a few moments.

But what we are seeing inside the market is a little bit concerning.

Inside the market, what we observe is that there’s a very small handful of stocks.

Some of you referenced the m seven, the magnificent seven in some of your questions.

We are seeing very concentrated market leadership driven by a very small handful of technology and AI related stocks.

And in fact, today, market concentration is actually the highest that it’s been in probably over a hundred years. Right? So this is a little concerning because the S and P five hundred, it’s what we call a capitalization weighted index. And so what that means is the really big stocks movements and their prices have an outsized influence on the actual index. So what we’re observing is that there’s only about five to seven stocks that are dragging the market higher. The majority of the stocks in the market, they’re they’re still positive, but only about three percent.

So we’re seeing a big disconnect. And so many of you and many of our client other clients and many of our advisors often ask, well, gee, should I be buying all of those those those m seven stocks? Why should I not own more of those if they are doing so well? Well, where you need to be careful is that those big stocks typically give back their gains.

Right? Rarely does one company or one group of companies remain the leader for too long. I think a great example that I like to highlight is Sears. Sears was the Amazon dot com of the twentieth century.

Sears today is a bankrupt company. Right? It has been replaced. For those of you who are a little older, there was a time when there was a company called Netscape that dominated Internet search. Right? My kids don’t even know what Netscape is. Right?

It was replaced by Yahoo. Yahoo was replaced by Google. Right?

So we wanna be careful not to build portfolios that put too much capital, too much of your life savings in a very small handful of very recent leaders in the stock market. You know, Tesla’s another great example. Few years ago, Tesla was all the rage. Right?

I I had some some friends that would say, Don, you only need to own one stock. Elon Musk is the man. We’re gonna put all of our money in Tesla. Right?

Well, Tesla, candidly, is down sixty five percent from its high just a few short years ago. Alright? This doesn’t mean that Tesla isn’t a great company. It doesn’t mean that Tesla doesn’t, perhaps great, sell wonderful cars.

I don’t know. I don’t own a Tesla.

But, but it doesn’t change the fact that yesterday’s leaders often become today’s losers. This is why it’s important that we build diversified portfolios. Two years ago, there was no one who was forecasting that Tesla stock price was gonna crater sixty five percent over the next twenty four months, yet it did. So this is why we diversify, not to not to profit from what we expect to happen, but to protect against what we don’t. Right? This is why those investors in Tesla, hopefully, they diversified their portfolios.

Now I made a comment a few moments ago around stock market returns after a, I’m sorry, after the market hit new highs. Right? So there’s a there’s a there’s a question here in the in the queue. I wanna make sure I’m trying to answer all your questions. That, Don, if the market’s at new highs, do we expect these new highs to continue?

It’s a good question.

Well, when we actually look at market history, right, when we actually look at the data, right, the real world data, what we observe is that after markets hit new highs, that in the one year, three year, and five years that follow markets hitting new highs, well, the market returns are actually pretty good. So there’s no evidence that just because the market hit a new high or the market is close to new highs, that you should suddenly be running for the sidelines. In fact, quite the opposite. If you did that, there’s a huge opportunity cost to doing that. Instead, you should work with your advisor, make sure you have a diversified portfolio that supports your financial plan and the degree to which You should definitely continue to do that.

Alright?

There were certainly no lack of questions around the Federal Reserve and whether or not interest rate cuts are coming, and if so, when? Well, let’s begin with looking at the New York Fed’s recession probability model.

If we actually look at the New York Fed’s model, they still forecast, shockingly, I think, in the minds of many economists, they still forecast about a fifty eight percent probability that we may have a near term recession in the United States.

They may be right, but what I would say is this model has been chronically wrong for quite a long time.

Alright? But again, when we look at the data, we have an inverted yield curve, which means that short term interest rates are higher than long term interest rates. When we look at inflation, right, there are some arguments, some data points that suggest that, you know, it looks like we should be heading towards a recession.

We have not seen that in the data. Right? The US economy continues to expand. Unemployment remains low. Doesn’t mean those things can’t change. Doesn’t mean they won’t change, but rarely do they change overnight. Alright?

But when we look at the data, the economy continues to do well. So, again, back in December, Federal Reserve chairman began to suggest and the Fed actually began incorporating into their projections several interest rate cuts throughout twenty twenty four. However, as we entered the first quarter of twenty twenty four, what we started to see is that inflation had stopped coming down. Prices were still growing at about three and a half percent year over year.

That means looking back over the past twelve month period, inflation prices were still creeping up. The Fed has a two percent inflation target. That’s what they’re aiming for. Whether that number is right, or wrong, there’s lots of debate.

I don’t think there’s anything especially sacred about up two percent. There’s a lot of debate in the Fed and within academia around whether or not that’s the right target. But for now, that is what they are aiming for. Right?

So at three and a half percent inflation, still much higher than what they would like to see. So that has forced them to stall, to delay actually cutting interest rates on top of the fact that the economy continues to still expand. Typically, you would expect the Fed to cut interest rates when inflation is really low and when the economy is contracting.

That’s not happening. The economy continues to expand. Alright?

Now that said, if we look at the current data, if we look at the Fed’s own forecasts, they themselves are forecasting interest rate cuts.

Let’s saw let’s say one interest rate cut between now and the end of the year, maybe two interest rate cuts over the next nine months.

That’s what they are forecasting. That’s what the market currently expects to happen.

Alright?

So that’s what that’s what is in the forecast. That doesn’t mean that that’s actually going to happen. Alright? So but this is what they are planning at the moment.

All of this can change. Right? The Fed tries to be data dependent. As new information comes in, they are going to course correct and adjust their forecasts.

But at the current moment, really hard for them to make a case for cutting interest rates. Like I said, unemployment’s low, inflation is still high, and, and the economy continues to expand. So if you if someone were to ask me, Don, do you think the Fed’s gonna cut interest rates by June? I would say no. I just don’t know how they make that argument with a straight face.

So, Don, given given what you just said, we’ve got a question that came in in our live q and a about someone want interested in purchasing a new property. If you’re thinking that they’re not gonna be, decreasing rates in the short term, they’re asking, should they lock in interest rates now?

Yeah. I mean, absolutely.

Right? And here’s what I would say. Right? Like, if you’re gonna buy a home, right, I mean, don’t be wrong.

I expect rates to come down at some point, but buying a home and and my answer to your question is really, what I put on my financial adviser hat when I answer your question, not my chief investment officer hat. And that’s because when you’re buying a home, for most folks, that is a very significant purchase. And the last thing you need is there to be some sort of cataclysmic surprise where your interest rate rises because you didn’t lock in your interest rate. Right?

Rarely can can most American households stomach that sort of volatility in their budget. Right? So just from a good financial planning perspective, you know, if you’re a young couple and you’re looking to buy a home, I would lock in a thirty year mortgage interest rate right now. Why do I say that?

Well, because you can always refinance out of it later. Right? Talk to your parents. They’ve refinanced out of multiple thirty year mortgages over the past twenty, thirty years.

Right? Maybe even longer. Right? So as long as you have no prepayment penalties, you can refinance out.

And even even if there is a prepayment penalty for twelve months, I don’t think that’s the end of the world. So my answer to that question, Kara, is more more through the lens of a of a financial adviser.

Absolutely. Thanks, Don.

Yep. It’s a great question.

So in terms of interest rates and its impact on the budget, this is an election year. I know this is you know, Cara, this is these are, like, the toughest years when you do what we do. Right?

Absolutely.

No matter no matter what we say, we tend to tick off half of our clients.

Actually, we’re gonna tick off all of them, no doubt, before the end of the year because we’re gonna tell both political parties things they don’t wanna hear. And so, but in terms of interest rates, in terms of the federal budget, let’s go through this very quickly.

On the right hand let’s actually go let’s start with the left hand side of the screen here.

This is government spending. We spend we, meaning our government, right, the the people we send to Washington, we spend over six trillion dollars a year on a variety of different things.

We can debate whether those things are wise or not, and this is why we have elections. Right? Not all of us agree on what we should be spending our money on. But these are the things we spend our money on, Medicare, Medicaid. Right?

Social Security. Right? Defense spending, nondefense discretionary, interest. I wanna highlight this one. Interest on our debt.

Right? Our debt today stands at about thirty four trillion dollars.

That is the sum total of all of the prior deficits from years past. The deficit is the shortfall between money that comes in and money that goes out. The deficit is that shortfall in any one fiscal year. The debt is the accumulation of all those deficits, over the course of our history.

Now if we look at what how much money is coming in, we see that we have about a one point seven trillion dollar shortfall. So our debt is growing by about one point seven trillion every twelve months.

So, you know, I’m not a politician. I don’t know exactly what the answer is to this, but I would say that this does not work.

Alright? Putting on my financial planner hat here. You need to find a way to bring down, all of this credit card spending. We are spending seven hundred billion dollars now just on interest.

Interest on that thirty four trillion in debt that is outstanding. So as rates stay higher, that will put more pressure on the federal government’s checkbook. Alright?

So this is a challenge. This is a challenge. Now I would also add to this just because I wanna make sure I give a fair and balanced view here.

Tax cuts are a are a form of spending. Alright? So when we cut taxes back in twenty seventeen, we could not afford that tax cut, and that added to the debt. Now we can debate, is that a good thing to do, a bad thing to do?

This is why we have elections. Right? And I think you can make strong arguments both ways. Okay?

So there are times when cutting taxes naturally helps business, helps to fuel economic growth, but at the same time, that’s less money coming in to pay for all of these programs that I think many of us as Americans, you know, we like Social Security. We like Medicare and Medicaid. I I think we all value our defense spending, especially in a very uncertain world. So, anyway, I just think it’s interesting to give some data, especially given that we’re in an election year.

Inflation, definitely a char highly charged issue. It has come down significantly from its high back in, June of twenty twenty two. That’s when it peaked. It has come down. Cara, this is a place where I think we need to define what exactly is inflation.

Right? Because I because I hear folks come to me saying, Don, there’s no way inflation has come down. Prices are still high. You’re misunderstanding.

Inflation is the growth in the general level of prices across the economy.

What we mean to say is that the growth rate has come down. Not that the growth rate is negative and that prices have come down, but the rate of growth has come down. Right? This is actually what we call disinflation, which is when you go from growing at nine percent a year to say three to three and a half percent per year. Deflation is when prices actually decline, and we can see that, you know, energy prices have actually been in deflation.

They’ve gone down at least until recently. They’ve gone back up here in the past month, month and a half.

K?

Don, before we move on, we we’ve got a couple of questions, but I I think it’s a good point that you’re putting in about inflation. And really important to talk about in our process, when we’re building financial plans for all of our clients, we put inflation assumptions into your plan. So if you’re concerned that you’re seeing inflation in we’ve got a couple of questions here in the in the chat here about or excuse me, in the q and a about if, the economy is doing so well, how come people are struggling, especially with cost of housing and grocery prices? So it’s important, I think, to know when we’re building your financial plans for all of our clients, we’re putting in, as our inflation defaults, a three percent inflation, for living expenses for kind of our general core assumptions, but we’re also including, a four point five percent inflation rate over education costs and a five percent, inflation rate on medical and health care costs.

So, I think that’s really key and certainly talk with your adviser about your particular plan. But important to know that we consider inflation critical in, planning for your future cash flow. But on on that question, Don, maybe you can address, some people are noting that they’re feeling like there’s a disconnect. We’re talking about how the economy is doing well, but people are struggling.

Is it is it housing? Is it grocery prices? Maybe we talk about circumstantial things for for people that they’re experiencing.

Absolutely. And I think I think part of this is understanding that, prices are still much higher than they were just merely twelve to twenty four months ago.

And they certainly have not come down overall. Right? And in fact, they still continue to creep up. So, again, the rate of growth has declined, but they’re still growing.

I mean, you know, just if you go to eat out or you order takeout, it’s amazing what it costs Yeah. For for things that were significantly less expensive just a few short years ago. So I think it’s important to highlight that just because inflation’s come down doesn’t mean prices have come down. Right?

They’re still very they’re very high. The other thing is that the consumer price index is this fairy tale basket that economists have cooked up. Right? It’s a basket of goods and services.

Well, we don’t all purchase, the same amounts of goods and services that are in this sort of fairy tale basket. So for example, many of our clients, their homes are paid for. They have no debt. Right?

Well, a big part of the inflation over the past couple of years has been shelter. It’s been this rise in rents. Most of our clients own their own homes, not all, right, which I’ll get to in a moment. But my point is that inflation does not impact everybody equally.

If you own your own home, if you don’t rent, naturally, the CPI number may or not be, relevant to your situation.

If you if you you know, I I have two kids in college. I’m feeling that inflation rate on higher education right now. Right? But, you know, in four, five, six years, I won’t.

Right? So it just depends on who you are or where you’re at in your life. If you’re a young couple and you’re trying to buy a home right now, yeah, unfortunately, you’re feeling that. Right?

Mortgage interest rates are a lot higher. Home prices have not come down in response to high mortgage interest rates. I I touched on that earlier. So I think it it depends on who you are, but I think I think we’re right to acknowledge that, yeah, there’s pain out there.

Even though the economy has done well, prices are still pretty elevated.

So you know, related to inflation, I often get these questions around energy, energy independence. You Here it’s an election year, we’re gonna hear lots of sound bites around whether the US is energy independent or not. Let’s put aside the sound bites. Okay? Let’s just look at data. Right? That that that’s what I get paid to do, is to look at cold hard data.

So if we look at US energy production since twenty nineteen, what we observe is that it it it declined in twenty twenty. Well, that was COVID. Right? So naturally, we all stopped driving. We were all working from home for for quite a while, and so energy production had come down.

But if we look at where we are today and where we were just last year, US energy production in terms of crude oil production is actually about fourteen percent higher than it was in twenty nineteen. So it is objectively true that US energy production, at least in the form of crude oil production, meaning that we could export a little bit more. The meaning that we could export a little bit more. The US is a net exporter of oil.

We still import oil, but that’s due to, you know, economics and chemistry. Right? Not all grades of oil are created equal. Some is sweeter than others.

Some is, lighter than others. And so there’s reasons why we will export some and continue to import some, but we consume less oil today than we did in twenty nineteen. This is largely, an effect of having more fuel efficient vehicles. We we’re also seeing an ex a very significant expansion of US renewable energy production in the form of solar and wind and title and so on and so forth.

So, again, energy production has increased. Whether or not the US is energy independent, I think that’s a bit of a subjective claim. I think that depends on how you measure energy independence.

Again, I just wanted to look at the cold hard facts. The facts remain that the US today produces more oil than it did merely, four or five years ago.

Alright. This is where I know I’m gonna I think I’m gonna see most of you drop off at this point because I’m getting ready to talk politics.

What I love about what I’m about to share with you is I have something in here for everybody. Alright? So let me start with my my friends who are Democrats.

Let’s look at the US economy. And there’s this question, well, gee, which political party is better for the US economy?

Well, over here, if we look at the data, what we observe is when the Republicans have full control of government, which is the White House and Congress, What we observe is that the US economy grows has grown historically at two point eight percent in real GDP.

Okay. That’s not too bad. Hey. It’s actually probably higher than what we’re gonna do over the next twelve months. But when the Democrats controlled government, the economy grew in inflation adjusted terms by four percent. So, you know, if you’re one of my Democrat friends, you could look at that and say, see, We are better for the US economy. Now when government is divided, what we see is the US economy actually grows by about only two point seven percent or again, at least it did historically.

This is not meant to be a law of physics. The future could look very different. Okay?

Most of the time, however, we as citizens prefer a divided government, and that shouldn’t surprise any of us. Right? We we swing back and forth across the political spectrum and, you know, one year the Democrats win, the next year the Republicans win. Now when we look at the stock market, Right? This is where my Republican friends are gonna say, this is where we are better. We are better for markets.

So when we look at, the S and P five hundred index, that’s up almost thirteen percent historically under, when when the Republicans had full control of government. Under Democrats, it was nine point three percent, and under divided government, it was eight point three percent. So, again, what I love about this slide, Kara, there’s something here for everybody to to go to their to the to the, you know, to the their friends’ barbecues and they can say, my CIO said that we are better for the market. Again, historically, that doesn’t mean all the time.

Right? And I think one of the big mistakes here is that we look at this, and I say this as an American, not as a Democrat or a Republican, is that it would be misleading to take away from this slide that somehow one political party is better for the stock market or the economy. I don’t believe that that is true. Right?

You really have to get into the weeds on their economic policies. The economic policies today, I would argue, that the Republicans stand for are very different than the economic policies the Republicans stood for just ten, twenty, thirty years ago. And I can say the same exact thing for Democrats. So I think you gotta be really careful, trying to draw sort of these cause and effect relationships between the markets, the economy, and who controls government.

So well, that doesn’t doesn’t look like anybody has, has hung up yet, Cara, so I’m I’m gonna keep keep going.

I think we’re I think we’re doing well, and that covered a lot of questions there, Don.

I see there there are about twelve or fourteen questions on those alone.

So, hopefully, we covered, what you were looking for with that.

And I’m sure we’ll have might have a few follow ups here. And I think the takeaway is, look, markets have done well over time under a variety of presidents. Right? Markets have grown over time.

You know, I believe capitalism works. The American form of government works. Right? The American economy works despite all the sound bites, all the negative.

At the end of the day, this remains the world’s best economy. It’s the most dynamic economy. It’s where most people on this planet candidly would prefer to come and contribute their efforts. That’s why we have so many immigrants who want to come to the United States to live their lives and contribute their blood, sweat, and tears to our economy.

So, I again, I and it’s a very patriotic comment on my behalf, but I do believe that. Right? So regardless of who wins in the fall, and I know that many of us don’t believe this, but regardless of who wins in the fall, I do believe that the American economy will continue to motor along. We will always hit potholes.

That’s just part of capitalism. Right? We have we have our ups and our downs. But, again, I think the US economy remains the world’s, really the envy of the world.

So I think I’m gonna stop on this point here, Kara, and then we can maybe go through some of the questions that are coming in. We can look at the questions that were submitted. But related to elections, there’s this concern around, gee, how could the market respond? What would happen if perhaps there was another serious geopolitical crisis?

You know, I think it is it it it’s fair to say that the US is marginally entangled in a few different hot spots around the world, Ukraine, you know, what’s happening in Gaza and, at least as of this morning also in southern Lebanon, you know, the tension with Iran, the tension between China and Taiwan. And so I think I think it’s a fair question. How has the market historically responded to big crises?

Right? And so what we did is we went back to nineteen eighty seven, and we’re just looking at market returns one, three, and five years after the the crisis, that impact.

And what we observe is whether it’s the savings and loan crisis, you know, many of us on the call probably don’t remember that.

In September of ninety eight, Russia defaulted on the ruble. Right? Kicked off something called the Asian flu.

We had the dot com crash. We had the the tragedies of nine eleven.

September of o eight, right, when Lehman Brothers filed for bankruptcy, the entire global financial system went into massive cardiac arrest. Alright?

US government debt downgrade. And then, of course, COVID just a few short years ago. And I think when we look at the data, what we see is that with time, markets recover. Markets do well over time.

Right? And this gets back to my prior comment. Regardless of who controls the White House, regardless of who controls which chamber or chambers of Congress, the US economy is very dynamic. Right?

We we are a very innovative people. We have a very innovative and very well governed economy. I know we we we fight over these issues fiercely around whether rates should be higher, whether they should be lower, you know, whether, taxes should be higher, whether they should be lower, whether we should have more environmental regulations or less.

At least we have those debates.

Right? We have those debates. We have them well. Hopefully, we can have those with civility.

Right? But the US economy, US markets over time always find a way to to motor forward. So and again, this is just looking at the actual data. We have had some brutal crises over the past twenty or thirty years.

Right? I mean, I I vividly remember when Russia defaulted on the ruble.

I vividly remember every moment of nine eleven as I’m sure many of of you do. I remember I remember the very morning that Lehman Brothers filed for for bankruptcy. They actually filed for bankruptcy at eleven fifty nine Sunday night, the night before.

And I I know all of us remember COVID. So I I just think this slide really speaks to how dynamic and how robust markets can be. So so, Carol, I’m gonna stop there. Why don’t we open it up for some queue? And I know we have a lot of other questions on gold and Bitcoin and a bunch of other stuff, so take it away.

Yes. Absolutely. So looking at the at the questions that we have coming in in the queue, matching up with a lot that we’ve had previously submitted. So, yeah, let’s start with with gold.

And we’re seeing, I’ve got quite a number of questions on it. Is gold a good investment? Is it hedge for inflation? And in particular, a question from John, and this is very timely because I noticed the news as well.

When Costco was selling gold bars now, you know, it seems like if everything you need to buy is at Costco, does that mean we should be buying gold bars at Costco? So if you could talk about gold and its place in in portfolios, if it’s a good hedge, and particularly about the Costco question because it is pretty interesting.

John, I love your question because right away, I asked my wife, like, have you been to Costco? Are they selling gold bars, and how much are they charging? I I don’t even know. And so and she’s like, oh, yeah. But I don’t know. I don’t look at any of that stuff.

So so what I did, John, we just went back and looked at some data. Right? And I said, okay. Well, let’s just go back over the last twelve months. Well, how did Costco do and how did gold do? Well, you’re right. I mean, gold here gold was actually pretty flat until just about a month or so ago and then really took off quite quite dramatically.

But I actually think you would have been better just buying stock in Costco. Right? So if they’re selling it, part of me is asking, like, well, why are they selling it? Right? If it’s so good, why why is Costco in such a rush to unload it?

So they’re they’re clearly profiting. Of course, Costco sells lots of stuff and not just cold bars.

But, I I I share this chart a little bit in jest because I’m thinking, wow, you know, Costco, they get a lot of my money on a regular basis. So so, anyway, Costco’s done amazingly well. But the more the more serious question is really, you know, what about gold? And I think I saw a couple questions here come in on silver as well.

Mhmm.

I don’t I don’t think that was John’s question, but there’s a there’s a question here on silver as well. And, again, I like to look at the data, so we go back to nineteen eighty. Right?

I do this because it’s not fair to cherry pick.

Right? Everybody likes to look at what has done well over the last ten minutes or the last month or the last three months and say, how comes I don’t own that?

Well, let’s look at the longer term trajectory. And so what I’m doing here is I’m asking this question, you know, gee, does gold really hedge inflation? And full disclosure, we we not everybody on our investment committee, we don’t all agree on this. We have lots of very healthy, very lively debates on gold, whether it should be portfolio.

And again, this is the beauty of having a very large, you know, and I’m biased, but a very talented investment committee. We have some really, really great people on the committee that really challenge us in our thinking. But, again, when I look at the data, right, this is data, you know, real world data. We’re looking at gold.

You know, gold candidly from nineteen eighty until, sometime in here, somewhere sometime sometime around two thousand three, two thousand four, actually delivered negative returns to investors. So think about that. Right? That’s twenty some years, twenty three, twenty four years of chronically negative returns on gold.

Most mere mortals would not be able to hold on to something for twenty some years if it was giving them negative returns. At the same time, inflation continued to rise unabated.

Right? So inflation actually outperformed gold quite significantly over this period of time. It wasn’t until really the lead up to the global financial crisis here and and even then, gold sold off quite dramatically. We saw massive losses in gold holdings here between, let’s say, twenty eleven and twenty sixteen.

Right? This is very volatile. Not what I would consider to be a reliable store of value. Right?

I often hear those words used with gold or even Bitcoin. And when you look at the standard deviation, which is a measure of volatility, how much things bounce around, gold is very volatile. In fact, it’s actually more volatile than stocks. So it’s not a very reliable, stable store of value.

And, again, when we just look at the data, now here we are, right, thirty some years, forty some years on since nineteen eighty.

Gold has yet to outperform inflation over that period of time. We can cherry pick certain periods where gold did, but it’s not true that gold is a reliable hedge against inflation. It’s It’s not objectively true. You can see it right here on the chart. K?

We may change our view on this. Right? As more information comes in, different ways of thinking about this, who knows? We may we may change our view.

At the moment, our investment committee’s consensus view is no. This does not make sense to add to a portfolio. Alright? And and I know my grandfather would be really upset to hear me say that because he he loved gold.

But I do not own gold.

Well, Don, now now you’ve caught caught exactly where the questions are catching up here. We’ve got question here from Elmer, another from Robert, about crypto. What are your views on that, and should it be in a portfolio? Maybe commentary, similar along the gold lines as a hedge.

Yeah. I mean, and and it it it’s a fair question. The, you know, the the I have the same challenge I do. And, again, we’re we’re very healthy debate on our investment committee. I think our investment committee is probably a little bit more aligned around crypto not yet being something that we should seriously consider.

But, you know, I keep coming back to, well, what what is Bitcoin? What does Bitcoin claim to be? I hear folks say, well, it’s a hedge. No. It’s not.

Not if you look at the data.

It’s been anything but a hedge against stocks or interest rate hikes or inflation. Right? And it has certainly not been a reliable store of value. I often hear Bitcoin and other cryptocurrencies being used within the within the context of it as a replacement somehow for the US dollar.

Well, how would you like it if the value of your US dollars declined by seventy three percent in purchasing power between just November of twenty twenty one and January of twenty twenty three. I mean, that that’s what? Thirteen, fourteen months. Right?

Now to be very fair, Bitcoin has done amazingly well since it was launched. I mean, it’s up thousands of percent, right, and has done amazingly well this year. Now that the big Wall Street firms are permitted to sell Bitcoin ETFs, suddenly there’s been a a pretty big run up in the price. But the fact that it’s had a run up in price here recently does not automatically negate the fact that it is extremely volatile.

And as an investor, it’s not entirely clear to me what you actually own.

Right? When when we are when we’re putting our clients’ wealth to work, we wanna own assets where we have rock solid legal protections, where we can enforce our claims in a court of law. Right? We wanna have a legal title to something. Could be earnings, profits, dividends. It could be factories, property, plant, and equipment.

Right? With Bitcoin, it’s not clear to me that you actually own anything.

So for those reasons, at least at this moment, to to quote, you know, the sharks from Shark Tank, for that reason, I’m out. Right? So, at this point, I reserve the right to change my mind as new information comes in. But as of now, this is where I’m at.

It’s very helpful, Don. I I’m seeing a similar amount of questions here about AI on a on a couple of different varieties here. So maybe let’s first talk about AI and a question from Tommy about, if AI is growing in things and how dependent is kind of that magnificent seven that you talked about earlier. So if AI cools, will that have a major effect on the on the Magnificent Seven?

You know, it’s a so first off, the Magnificent Seven, I think that ramp in those stocks is highly dependent on this excitement around AI. And I think the excitement around AI is very analogous to the excitement around the Internet in the mid to late nineties. Right? I think there’s a sense, and I think rightly so, that AI represents a a significant leap forward in our computing power and ultimately in the ability of businesses and governments to do their respective jobs better.

Right? To to help us I was just listening to a podcast this morning on how how they’re using AI in biomedical research. Right? To, identify different factors associated with aging and how we could reverse aging, which would be amazing.

But the the reality is that what what makes AI valuable, just like with the Internet companies of old, isn’t necessarily those companies. Right? There will be other companies. There already are many other companies coming to market that are gonna compete with NVIDIA and Microsoft and all the other, AI leaders at the moment.

Right? So they will certainly like I mentioned, the Netscape, for those of you who remember Netscape from the mid nineties.

The companies that are the leaders today, if I had to guess, they’re probably not gonna be the leaders of tomorrow.

That doesn’t change the fact that the technology is really exciting, and I think the technology will transform business in a broader sense just like the Internet has. Right? The Internet has impacted firms like Mercer Advisors and lots of other firms that you interact with on a regular basis. So I think AI will help business do a better job to, to be faster, better, and cheaper with respect to the products and services ultimately that we deliver to clients. So I’m very excited about AI. I’m less excited about the current AI leaders in the marketplace. I don’t fall in love with any of our investments.

So it’s the worst thing you could do. They won’t love you back.

Yeah. Well, and more on AI. You mentioned it just briefly, Don, on on the impact the AI is having on Mercer. We’ve got a question here from both Robert and Bob about how is Mercer using AI.

Yeah. I mean so first off, I mean, if you think about what AI is, it it a lot of it is mathematics and predictive modeling. Right? So, we’ve been using predictive modeling in the form of multiple regression and rolling regression for for the better part of a decade, at least since I became chief investment officer.

In terms of the actual technology, like, we are actually there there are things we are doing in in internally where we’re actually creating a chatbot that we’re gonna use internally for training and for different things. And so we are using AI, working with several data engineering companies to help us think through, you know, what does the structure of our data need to look like, in order to, really build more more reliably predictive models. And so we’re we’re using that for everything from investment data to client data, and so on and so forth. So is is, really trying to incorporate that information, this new technology to ask ourselves, hey.

Can we derive better insights with respect to companies in our portfolios or earnings? Or what are the what are the different factors that are reliable predictors of future returns? And so we’re using AI along many of those dimensions. What I would say, just to temper folks’ excitement, is AI, at least within the investment profession, thus far has not done a very good job.

There’s actually a number of funds that are managed using AI. We don’t invest in these funds, but they’ve been around since about two thousand eighteen, And, the returns are actually quite bad. So at the moment, we’re not we’re using it, to help us understand, but we’re not at the point where we’re where we’re where we’re ready to say, great. Just let our chatbot tell us what to invest in and call it a day.

We’re I don’t actually ever see that day coming, but, if you actually look in the marketplace, AI has not done a good job from an investment perspective.

We’re gonna we’re gonna change tactics here, Don, on another trend that’s popping up here.

I see questions from Robert and Brianna and Steve all about taxes.

So can you talk about what your outlook is on, tax rates going forward? Do you see that the tax cuts will be extended or any changes? And and, obviously, that’s gonna inform a lot of the decisions that, our advisers are making with their clients on, future financial planning.

Look. I mean, you know, certainly, at least in the short run, you know, if you look at the Tax Cuts and Jobs Act, which was passed in late two thousand seventeen, I believe it was, or late yeah. I think that’s when it was. Mhmm.

You know, those tax cuts are scheduled to sunset here, next year. And so that that’s current law. Now if there if if if, if the Republicans win in the fall, it’s very likely that they would sustain, at least in my view, they would sustain those tax cuts, at least for another two to four years depending on what future elections look like. If Democrats win, probably not. They’ll probably let it sunset. They might tweak a few things.

But, here’s the reality. Like, put aside who wins in the fall. Okay? The reality is is we have an aging demographic. There’s more stress on Social Security, Medicare, and Medicaid. Right?

We naturally live in a very dangerous world.

Alright?

I don’t see US government spending coming down. I think it’s it’s it’s, you know, a lot of us like to say, well, we should just cut government spending. That is so much easier said than done.

And the reality is is we have thirty four trillion in debt. We have some big bills that are coming due. We have like I said, we have an aging, demographic in this country.

I just don’t see mathematically how we don’t raise taxes at some point. I’m not saying I’m a fan of that. Right? I don’t like paying taxes more than anybody else.

But but I do like the fact that, you know, people I love that they get their Social Security checks and that they have Medicare or Medicaid for those who are, of more meager financial means.

So there you know, I gotta admit, I’m I’m I’m I’m of two minds. I don’t wanna pay taxes. But, again, just looking at the raw arithmetic of the federal budget, I just don’t see how we make this work without increasing taxes.

Got a couple of questions here and and kind of tangentially related to the tax question and maybe some of the magnificent seven questions. It’s a question about when you have a concentrated stock position. I know that some people may have held a particular stock for a long period of time. Perhaps they now have stock options that are coming, into their portfolios. And so what are their options about if you have a concentrated position, what are some strategies that people can use for those?

Yeah. And and I saw the one question here in the queue that was related to that but within an IRA. And and what I would say is there’s no reason to hold on to concentrated stocks in an IRA. You have no tax hit associated with diversifying that.

So, you know, my view, the wisest thing you should do if you own it in an IRA or or four zero one k is diversify, divers diversify that. There’s no good reason to hold on to, a concentrated position. Now in a taxable environment, there’s lots of great things you could do. You can put work with your advisor to put in place a capital gains budget where you slowly sell down that position over time and stretch out the tax hit over multiple tax years.

At the end of the day, the goal has to be to diversify that position. Holding on to concentrated positions, for those of us who’ve done this long enough, is you’ve seen this not end well. That’s very dangerous.

Right? And so you wanna diversify those positions. Absolutely. So some sort of staged drawdown strategy could make sense. There’s something called an exchange fund, which is not to be confused with an exchange traded fund. These are very different things. An exchange fund is a private partnership where you can contribute your concentrated stock to the partnership.

The partnership in turn owns hundreds, sometimes over thousands of companies, right, to diversify.

And then you now have an undivided interest in the partnership. That’s actually a tax free exchange. You should talk to your adviser about it. Okay?

Doesn’t work in all situations. A lot of times, these funds don’t want your stocks. It depends on the company and couple of other things, but you should talk to your adviser about that. You know, another very powerful strategy, Kara, that I see a lot of advisers use is some sort of, like, charitable remainder trust where you can contribute that stock to a a charity that’s near and dear to your heart.

You get an immediate tax deduction. The charity sells part of or all of the concentrated stock. Charities are tax exempt. So they basic you basically avoid all of the capital gain, and you get a tax deduction, and the charity then has to pay you an income stream.

Could be for life, could be for twenty years. Right? Those are some of the details. Your adviser can help you with that.

Our legal team, our estate planning team, all of our estate planning attorneys, they could always help you with that. But those are probably the three most popular strategies, Kara, that that I see.

Great.

Interestingly, Don, there is a question that, would Mercer from Dave here. Would Mercer ever advise clients to pull out of the market?

You know, I would never say never.

Right? It’s it’s, I think it would be hubris to say absolutely not. No. Never. But I what I would say is it would have to be a very, there would be a very, very high standard of evidence before we would ever recommend that somebody do something so draconian, so dramatic. Right?

And I, you know, the longer I’m into this business, the more the more and more I realize that, you know, investment advice is really something that needs to be highly personalized. Right? There rarely is there one recommendation that applies equally to everybody.

You know? And this question assumes that everybody should be running for the hills. I’ve never seen that. I mean, candidly and I Carrie, you and I have seen our fair share of financial crises. Absolutely. We we could write books on those.

And the reality is even at the darkest of times, there were very good arguments for continuing to believe and invest in American capitalism.

Right? That’s when valuations were down. Right?

Even the tragedy of nine eleven, even the global financial crisis.

I mean, there isn’t an investor today who doesn’t wish they could have gone back and bought during those very dark days. Look at COVID, March of twenty twenty, stock market was down thirty five percent in the span of three weeks.

Yes.

Those were those were dark days.

But, man, I I wish I loaded up on more stocks than we did in in March of twenty twenty. We we rebalanced our portfolios back then, and we were selling bonds and buying stocks. But, again, just in hindsight as a as a human, I look at that and I say, wow, I really wish. I I wish I would’ve, like, bet the farm and just went and bought a bunch of a bunch of stocks. Right? So, so I I I wouldn’t say no to this particular question, but I would say I don’t think it’s likely.

So probably no, probably never, but I don’t know. I’ve got more gray hair, and I’m losing my hair these days. So I try I try to keep an open mind, on all things from Bitcoin to stocks to, to even gold.

That’s great.

And maybe we can touch our our last question on on different sectors. We’ve got quite a quite a number here.

Teresa, three three people who are in an anonymous talking about REITs. What is your outlook on a REIT, or maybe just commercial real estate investment in general?

So, so, yeah, it depends on the REITs. Right? I mean, not all REITs invest in the same things. Right?

So you really need to look under the hood. Is it commercial real estate? Are these mortgage REITs? You know, what what are they?

What are they doing? Right?

Specifically on commercial real estate look. My my personal view is that that entire sector still has yet to go through a very significant repricing.

We’re seeing a little bit of it now. I just heard of a of a building in New York that took about a forty percent markdown, in its price to where it was a few short years ago. So commercial real estate concerns me, just because we’re not seeing a lot of transaction detail with prices coming down yet. And it doesn’t make sense to me given what’s happened in the wake of COVID, the work from home movement, given where interest rates are at.

You can’t convince me that commercial real estate prices have not changed. They’ve absolutely changed, but you need there to be transactions. I still think that we’re gonna see, some markdowns in commercial real estate here over the next several, probably the next several quarters, maybe even the next year or so. So, so that’s probably of all real estate, that’s the one area that probably gives me the most pause at the moment.

I could say something similar with with residential. It’s just that just that there is a supply and demand dynamic there that is pushing, continuing to keep those prices relatively high.

Well, we’re at the top of the hour, so I’m gonna end with what I think is my favorite question. And I think Howard and I have the same view as Don. Would you ever run for president, please?

You’d have my vote. That’s for sure.

If I did that, I would need to hire a very good divorce lawyer. My my wife has been very clear that if I ever run for office that she would divorce me and, you know, and that was even when I expressed some interest in just running for the school board. So, so, I appreciate the kind settlement, but, no. That’s not it. I don’t think that’s in the cards.

Fair enough. Fair enough. For for all of you that have put in questions about if this, presentation will be available later, the answer to that is yes. This is a recorded presentation.

It will be posted in about three days on our website at mercer advisors dot com under our insights tab, so please feel free to look for that. In addition, you will be getting a survey, following this broadcast that asks for your opinions of how it went, the new format that we’re using with this brief in the front end questions after, and also asking you if there’s any topics for future webinars or presentations that you would like to see. I I wanna let you know we take those comments very seriously. They’re result reviewed by, many, many people on our teams to make sure that we’re optimizing what we present to you, so we appreciate your time in filling those out and giving you, the opportunity to let us know what you’re thinking.

So, Don, thank you so much for your insight today. Thank you to all of you that participated in the presentation, and we look forward to seeing you next time.

Great. Thank you, everybody. Thank you, Kara.

Take care.