Q1 Market Outlook: Markets, Interest Rates, Inflation, and More

Thank you all for joining us. We’re pleased today to be doing our fourth quarter of twenty twenty five market recap and our twenty twenty six outlook. In particular, growth, debt, interest rates, and more, and I know and more is really gonna be covering a lot today.

I’m Kara Duckworth. I’m a partner here at Mercer Advisors. I’m very pleased to be joined by Don Calcagni, our Chief Investment Officer, and we have a lot of information that we’re gonna be presenting today.

We should note in particular that none of this information should be construed as personal advice to your own situation. Any particular personal financial advice should be taken to your wealth adviser on those specifics. So this is all informational and educational in nature.

As we do every time when we do these reports, we appreciate all of you submitting your questions in advance, And we’ll also be taking live questions here during the broadcast. So if you have a question that you would like to submit, please use the q and a function on the bottom of your screen. We will get to as many as we possibly can.

And I know that there’s lots of interest as you can tell from all of the words that are here on this screen for what that we’ve taken from what you submitted to us in advance. There are many things going on, the news headlines, what’s going on with the market, what do we do about investment strategies, and how are we thinking about interest rates and the news. So, Don, I’m gonna turn it over to you to kinda get us started and, take us through some of these important updates.

Great. Well, you, Kara, for kicking us off there, and thank you for everybody who’s giving us some of their precious time today. As is our usual format, I’m gonna kick us off and go through a number of slides to give us a very high level broad overview what’s happening in the economy, interest rates, and so on, as well as what’s happening in financial markets, stocks, and bonds, and so on. And then from there, we’ll open it up for some some some q and a. So so just just high level, if we just look at the U.S. economy from a real high level perspective at the moment, a couple of key things. We see that inflation is still hanging at around two point seven percent, still above target. We’ll talk about that here in a few slides.

Not exactly where the Federal Reserve would like it. We’d like it to be lower, but still has come down dramatically from where it was just a few short few short years ago. Interest rates. Interest rates, definitely a hot political topic, but also a hot economic topic.

Right? There’s lots of interest around what should interest rates be given where we’re at. We can see that rates have come down. The Federal Reserve is actually meeting today.

They are not expected to cut rates or increase rates. They’re we’re expecting at the moment no change to interest rates, but they have come down from where they were several several years ago. Mortgage interest rates have come down just a little bit, still not where they were back during the the good old days of, I guess, COVID, you know, when you could get a two and a half percent mortgage, Kara. I those days, I think, are gone.

I whether or not we actually return to those, I I don’t know.

But we’re we’re somewhere around six, six and a quarter percent for a thirty year mortgage. Just this morning, again, the S and P five hundred index hit an all time high. So U.S. equities continue to do, quite well despite some, I’ll say, some storm clouds perhaps that are out there on the horizon.

But even better are non U.S. stocks. And so we’ll we’ll take a good look at those. Unemployment has ticked up slightly here. It’s been one of these, you know, economic talking points here over the past year.

We’re gonna talk a little bit about that. Why do we think perhaps that might be ticking up? And then I think one of the most powerful stories, most important headlines has been the decline in the value of the U.S. dollar relative to non U.S. currencies. So Kara will touch on that as well.

So let’s dig into economic growth here a little bit a little bit more. At least as of the last official measurement, we were at about four point three percent annualized GDP growth. That’s gross domestic product. That’s the U.S. economy.

We actually don’t think we, meaning economists, financial economists, we actually don’t think that we’re actually growing at about four point three. We actually think it’s something less than that. There’s some messiness with the data. Recall that we had a government shutdown last October.

So there’s there’s some gaps in our economic data. But there’s also a lot of confusion and a lot of uncertainty around trade data.

The the Trump administration has really turned global trade on its head. We can we can talk about that here in a little bit. But that naturally, I think, is is leading to some confusing indicators with respect to how the economy the economy is currently forecast to grow at about one point nine, maybe two percent over the next over the next twelve months. And indeed, the congressional budget office predicts about two point two percent GDP growth, one point nine percent annualized GDP growth through twenty twenty eight.

So where does economic growth come from? And this is a headline, Kara, that I think we’re gonna we’re gonna hear a lot more about in the years ahead. And economic growth ultimately comes down to two things. Despite all the fancy models and all the fancy terms that everybody talk about, it really comes down to growth in your workforce.

Right? How many workers do we have?

And then how good are they at producing stuff? Right? So, the blue here is the growth in workers. The growth in workers comes from really two sources, and that is native born citizen, native born working age people.

Right? But also immigration. And naturally, it’s been in the headlines. There’s been a very significant crackdown on immigration.

But separate and apart from the administration’s crackdown on immigration and by the way, the administration has also cracked down on legal, not just illegal, but legal immigration. They’ve actually really tightened it to make it harder for legal immigrants to come to the United States.

And just yesterday, Kara, we actually saw the U.S. Census Bureau actually came out with some data showing that U.S. net immigration has actually come down by about seventy five percent, and so it’s come down dramatically. And so that’s gonna make it harder for the U.S. economy to grow going forward. You know, putting aside whether or not you agree or disagree with the administration’s policies, the fact that we have fewer workers coming to the United States to contribute to our economy, it is gonna make it harder for the U.S. economy to grow in the years ahead, to fund our deficits, to fund Social Security, to pay for Medicare. All of those things are reliant on healthy economic growth. The gray piece here is this other headline that we see often related to AI technology. How do we make our workers more productive? How do we produce more stuff with the same amount of workers?

And so going forward, if if the blue is gonna shrink dramatically, then we really need to get as much as we can out of that gray part of the bar. And that means we need to keep investing aggressively in technology. And certainly many many U.S. companies continue to invest very aggressively in artificial intelligence and all kinds of other technologies naturally, to make our workforces more more productive.

In terms of inflation, just moving on here. Inflation has come down naturally from its peak in June of twenty twenty two. We can see that that’s come down. Kara, this is probably a place where I always like to stop and explain, wait.

What is inflation? Right? And I wanna be very clear. We’re talking about the change in the rate of change.

Right? We’re talking about growth, the growth in prices. Right? Even though inflation has come down, this is what we call disinflation.

Right? So the the rate of growth has declined, but the price level has still continued to climb. I I do grocery shopping with my wife. I see those grocery prices.

Let let me be very clear. Prices have not come down. I’m still really upset about how much it cost to buy a bag of Doritos right now. Totally totally unrealistic.

So but so while the rate of growth in prices has come down, it is still above the Federal Reserve’s goal, which is two percent. So inflation is still running a little bit hot. We can debate why. It’s being subsidized a little bit by deflation in energy.

I think it’s fair. If you go to the gas pump, you’ll see that, you know, all things equal, depending on which state you’re in, of course, that, you know, gasoline prices, for example, have have have come down. Alright? So but again, I think the takeaway here is inflation is still running hot relative to where the Federal Reserves, would like it to be.

We’d like it to be at two percent. It’s a little bit closer to three percent, and declines in the value of the U.S. dollar are probably gonna push that a little bit higher, in the months, ahead.

So debt and deficits, definitely a a huge topic. I always like to begin with how much are we putting on our credit card every year. Right? As citizens, you know, we send folks to congress.

Naturally, we have our presidential elections, and these are the folks who ultimately get to tap the credit card for all of the different spending that we want to do. But it’s not just the credit card that actually pushes up our deficit. It’s also when we choose to stop generating revenue, meaning tax cuts. Tax cuts are a form of spending.

Okay? So I think everyone on this call should keep that in mind when we go to the ballot box. Right? If we’re gonna collect less revenue but still keep spending, then naturally that gap only gets bigger.

So we have a deficit currently of about one point seven, almost one point eight trillion dollars. That’s with a “t”. Right? Very big number that we continue to accrue every twelve months.

This is every twelve months. Right? So the deficit is the new debt that we accrue in a twelve month period during the fiscal year. The U.S. government debt, which is the total summation of all prior year deficits.

It’s the total debt that we have outstanding. That stands at somewhere around thirty seven, thirty eight trillion U.S. dollars. So very big, very big number that naturally is costing us quite a bit. If we go back to the prior slide here, we can see that our net interest expense in terms of like, what’s just the interest that we’re paying.

Right? All of our debt is interest only.

We pay about a trillion dollars a year right now just in interest on U.S. government debt. And this is one of the things that is making it really hard for congress naturally to get closer to a balanced budget. I don’t think we’ll even get close to that in the years ahead, but it makes it really hard naturally. Right? A trillion dollars going out the door just on interest on our debt is is putting, it’s a pretty heavy burden on on the treasury, which is also why I think the president has been pushing naturally for the Federal Reserve to lower interest rates. Naturally, if those interest rates can come down, it lightens the load, makes it easier for the government to finance finance its debt.

And if we look at where interest rates are today, and again, we’re gonna hear later today from Powell, chairman of the Federal Reserve, they have they have been coming down. Right? So they they they have been cutting interest rates.

But the president and and certain members of his party would like to see those interest rates come down faster.

And there’s lots of debate around whether or not that should actually happen. I think the current consensus is no. Interest rates are probably fine where they’re at. If we lower rates too much, it could spark more inflation.

And remember, we’re still above our inflation target. And as all of your advisors will tell you, inflation is a very real clear and present danger to our economic freedom. So we have to keep a very close eye on the purchasing power of the dollars that we’ve accumulated. Now all of that said, the Federal Reserve themselves, financial market participants on Wall Street, all of us think that interest rates are going to come down over time in the years ahead.

And that’s this downward slope that you see here. Right? Really a question of timing. If you go too far too fast, you spark inflation.

Alternatively, if you keep rates too high for too long, you could be choking off much needed economic growth. And so I think that’s naturally a concern. Now another concern here that we as Americans have to pay close attention to is a significant amount of our debt is coming due in the next twenty four to forty eight months. Now if you think about what that means, this is debt that needs to be refinanced.

Right? So just in twenty twenty six, we have ten trillion dollars in U.S. government debt that comes due. Right? These are these are interest only loans.

And when the when the debt comes due, we have to pay back the principal, ten trillion dollars in principal.

Well, I can tell you the government doesn’t have ten trillion dollars sitting around unless they were to fire up the printing press. And so they have to refinance that debt. And so what that means is other countries, me, you, all of us on this call, the Social Security Trust Fund, we all are gonna be refinancing that debt by buying those bonds. And so it’s important to make sure that we do not alienate our lenders, even if they are small lenders like the country of Denmark, even though they only perhaps own a hundred million in U.S. treasury bonds. I would argue we want all of our lenders to be very happy with us so that they will continue to refinance our debt as it comes as it comes due.

So in terms of who owns our debt, if we just look at who owns it, fifty six percent of that thirty eight trillion or so that’s outstanding, all of us own. U.S. households, investors, and perhaps in your portfolios.

Intra-agency, intragovernmental debt, so that would be perhaps like the Social Security trust fund that would own some U.S. treasuries. But you’ll see that twenty four percent of that thirty eight trillion in debt is financed by other countries. Japan is by by by quite a bit the our biggest lender, but so is the United Kingdom, China, Belgium, Canada, many other countries. I know Denmark’s not on the list. Denmark’s been in the news.

But Denmark is one of those countries that finances some of our of our debt. So that’s who currently owns our debt. We need these countries to continue to finance our debt. If for some reason these countries were to have a buyer’s strike and stop financing our debt, that naturally would push interest rates much higher, perhaps in a perhaps significantly higher. So that’s something we have to pay very close attention to. I’m sure the U.S. Treasury is paying attention to that. I’m sure the U.S. administration is hopefully paying attention to that as well.

So, Kara, I’ll I’ll close it out here with just an overview of, hey. What happened in the market last year and, you know, what do things look like so far so far this year?

And so I’ll draw our attention to this upper right hand box here.

U.S. stocks hit about seventeen percent last year on the whole, but non U.S. stocks really knocked the cover off the ball. Emerging market stocks more than delivered more than twice that of U.S. stocks, developed market stocks. I mean, basically, the entire world did better than the United States. Almost every single country except major country except for India had a much much higher stock market return than U.S. stocks.

A lot of that’s because of the decline in the value of the U.S. dollar. Last year was a very tumultuous year in terms of global trade policy, and all of that naturally pushed down the value of the U.S. dollar. And and that and by the way, and that that trend of non U.S. stock outperformance actually continued in the last quarter of last year. So this isn’t something that just happened in April of last year after the Liberation Day announcement.

This is this was a trend that we saw persist throughout the whole of twenty twenty five.

We also saw positive returns in bonds. We saw several interest rate cuts last year. That was a nice tailwind that continued to push bond prices higher and actually deliver positive returns to our investors, whether they’re investing in U.S. taxable bonds or municipal bonds. Across the board, we saw pretty attractive returns for bond investors.

Like I said, virtually every country stock market delivered phenomenal returns last year. Even some of the most heavily tariffed countries like Brazil, China. You know, Brazil was up over fifty percent last year. China was up thirty one percent.

So very strong, stock market returns around the globe. You know, Kara, we’ve we’ve long been proponents of global diversification. This is one of the reasons one of the reasons why. Right?

That strong powerful non U.S. outperformance last year helped our portfolios to outperform somewhere around three to four percent for the year on a on on a gross basis. So very, very lucrative returns on our portfolios in large part due to that outperformance in non U.S. non U.S. stocks.

Now the big tailwind here in terms of what really was pushing the value of those non U.S. assets higher, it was really this decline in the value of the U.S. dollar. We saw the value of the U.S. dollar decline about ten percent last year. It’s down another two percent so far for the for for twenty twenty six for the month of January.

And then subsequently, we’ve also seen or I should say, consequently, we also saw that so far this year, non .U.S equities have continued to outperform U.S. stocks. So we’re starting to see somewhere between four, five, six percent outperformance between U.S. and non U.S. stocks so far just in in twenty twenty six. What does this really mean for us as investors and as consumers? As the value of the U.S. dollar declines, what it logically means is that any imported goods or services that you purchase are gonna be that much more expensive.

So if you wanna go to Italy, well, it’s gonna be more expensive. Think a few years ago, Kara, when the U.S. dollar had risen so strongly in value, we were telling our clients, go to Italy. Now’s the time. Go to Italy.

I think it’s always a good time to go to Italy, by the way.

Me too.

But this is a this is a powerful trend that’ll likely persist heading into twenty twenty six. There’s lots of reasons for this. Part of this is we should if we zoom out a little bit, Kara, the dollar actually spiked quite dramatically in the aftermath of COVID. And so if you look at where the dollar is today, it basically just takes you back to early twenty twenty two before all those interest rate hikes that the Federal Reserve embarked on to rein in inflation.

So this really just kinda rewinds the tape, kinda wipes out the last several years of big strong dollar gains, but it is a powerful tailwind. We also have had significant changes in global trade policy. We’ve also had some geopolitical stress in the system here recently with the president’s threats to to acquire Greenland, and I think that has put pressure on the value of the U.S. dollar as as well.

So I’m gonna Kara, I’m gonna close this out with a discussion on valuations. A of questions we’re getting from clients right now, Kara, are around, well, aren’t U.S. stocks trading at, like, near all time valuations? And the answer to that is yes, both on an absolute basis, and, you know, the S and P just hit seven thousand this morning.

But in terms of valuations, the multiple of their earnings, right now, the S and P trades at about twenty two times its next year’s forecasted earnings. Right? So that’s that’s what we call the price to earnings ratio, the forward price to earnings ratio. And you can see that to get if you look back in history, the last time we were this high was during the dot com bubble.

So I don’t wanna scare everybody. But, yes, these are high valuations. Right? This does not mean that suddenly gravity is gonna take over and look out below.

I’m not saying any of that. And I’m not saying any of that because you can bring down the price to earnings ratio by increasing earnings growth through through earnings growth. Right? And last year, we saw about eleven percent earnings growth for S and P five hundred companies.

That’s very good, by the way. And that’s actually projected to grow to about fifteen percent over the next two years. So as long as we have strong economic growth, we have strong earnings growth, that can help bring down those valuations on a relative basis. So this is the good way that we as investors want to see valuations come back down to planet Earth.

We don’t wanna see it through a decline in price. We’d like to see it through an increase in in earnings. And so far, knock on wood, if we look forward over the next twelve to twenty four months, most of the forecasts are showing some pretty good earnings growth for S and P five hundred companies.

So in terms of the key takeaways, and then Kara, we can open it up for some questions here. I think a couple of key points. The U.S. economy continues to grow. I know it’s been a tumultuous year.

Lots of lots of alarming headlines to be to be fair. But at the end of the day, the U.S. economy continues to grow. Alright. That’s so that that’s good news.

Valuations are high, but earnings growth, forecasted earnings growth looks very healthy. And so I would argue there’s actually some good reasons why U.S. stocks continue to trade at these higher prices, and that’s because they’re they’re showing good high quality earnings growth.

But that said, would say everything in moderation. Kara, this has not happened in a very long time, but I’ve had a number of clients come to me and say, Don, non U.S. stocks are doing so great. Why don’t we put, like, half of our portfolio in non U.S. stocks?

And I would say, calm down. Right? Everything in moderation. Diversify. Diversify. Diversify. Right? You know?

So this is all about not going all in or getting too crazy or over allocating to anything, but to just build a very high quality, very low cost, very well diversified portfolio. That’s the name of the game.

And then finally, it is an election year. And there’s a lot of changes right now that are foot in the global economy here at home.

My best advice to folks is tune out the noise. Do not mingle politics with your investing decisions. I understand we all have opinions. I understand that some of the headlines have been very alarming.

But I would encourage us, let’s keep the two separate. Best advice I can give investors right now, Kara, tune out the noise, stay focused on your long term plan, and focus on the things that you have control over. Make sure you’re well diversified, hitting your savings targets, managing your spending, reviewing and revisiting and updating your financial plan. Those are the things that we should be doing as we enter twenty twenty six.

So I’ll stop here, Kara.

Well, Don, this is a great overview and we’ve got so many questions that are coming in here. So I’ll I’ll try to group some of them together so that we can cover them in in sort of relevant topics here. I I’m seeing a lot on bonds here. So, I’m gonna combine a question here from James and Jean.

The question is, can you talk about how bonds may affect the stock market?

And does that mean I should convert to all bonds? Because that will lessen my risk.

Okay. So what I would say is the interest rates affect the value of all assets.

Right? So if if interest rates decline on bonds, it means a couple of different things. It means that we as bond investors are gonna receive less income. And so as a as a retiree or as a conservative investor, you gotta ask yourself, is that okay? Right? You’re going to go from four percent, five percent yield down to say three. That’s a pretty big reduction in your return.

What does that mean for stocks? Well, companies, corporations, they finance their debt in the bond market. And so to the degree that they have lower interest expense, right, it’s it’s less expensive for them to finance factories and equipment and all that other stuff that actually pushes up the value of their stock. Right?

So there’s a generally, at least historically, you know, there’s a little bit of an inverse relationship here. Right? The correlation is far less than one between stocks and and bonds, and that’s why you often hear advisors say, hey. We wanna diversify across both stocks and bonds.

So that’s, like, the high level implication. Also, if interest rates are lower, what it means is we, as consumers, can whip out our credit cards or we can go buy homes and buy new new vehicles and things like that. So that helps to fuel economic growth, which can also help fuel inflation. If you have too many dollars chasing too few goods, that could push inflation higher.

Now whether or not, Kara, any individual investor should be all bonds or all stocks or something in between. I think most mere mortals are somewhere in between. Right? Fifty fifty, sixty forty, seventy thirty.

That’s really a financial planning question. What I would say is you need to be careful. While you may reduce your portfolio risk by moving more heavily into bonds, you could actually be putting your financial plan at greater risk of failure. Right?

All of your financial plans, mine, everybody, I don’t care how big your balance sheet is or how small your balance sheet is, all of us have a return target that we need to earn in order to achieve our financial objectives for our families. And so if you allocate too heavily to fixed income to bonds, you run the risk of actually your financial plan failing. So there’s different types of risk. You should definitely discuss those with your advisor.

There’s inflation risk. There’s plan failure risk. There’s portfolio volatility. I think the question, Kara, is really looking at that one type of risk, but there are other types of risk that they should discuss with their advisor.

Yeah. That’s a great point, Don. And, again, every situation is unique and that risk tolerance is gonna be different for everyone.

Correct.

Well, we’ve got a couple questions now about UST bill. So question from David is, can you address the effect of the dump of a hundred million dollars of T bills onto the economy? I’m assuming that that’s kind of generated by the headlines in the last few weeks.

Yeah. I mean, so there was a Danish pension fund that sold about a hundred million dollars in U.S. treasury bonds as a result of the, you know, the president’s, you know, threat to use military force to acquire acquire Greenland.

Naturally, the president has since walked all of that back, but it but there I think there’s been some damage that’s been done, at least with among our friends in Europe. And so, yes, this Danish pension fund sold a hundred million off.

And then I and then I noticed the treasury secretary, Scott Bessent, made a comment that, oh, that’s irrelevant. I actually disagree with the treasury secretary. And I’ll I’ll I’ll give you a couple of reasons why. Like I said earlier, you never wanna alienate.

You don’t wanna make your lenders mad at you. Right? Even if they’re only lending you a little bit. So, like, that’s like my like, in principle, like, if you need to borrow money from the bank, you don’t go in there into the bank and and call the bank president names.

Right? You’d want to be polite and try to and try to butter them up. But number two is actually what happened in Japan last week. Right?

In Japan, we saw a very dramatic move, a quarter point move, twenty five basis point move in the Japanese long bond. And actually, the catalyst for that and there’s a lot of different catalysts arguably. But believe it or not, there was actually a bond auction on Monday, Martin Luther King Day, for two hundred and eighty million dollars worth of Japanese bonds.

And it was that bond auction for two hundred and eighty million. And and the Japanese bond market is a seven trillion dollar market. Right? So it’s not small by any objective measure, but it was actually the relative failure of that auction that pushed the rates higher by a quarter point.

So a hundred million may not sound like a lot, but if the timing works out to where there’s not a lot of liquidity, maybe it’s a holiday weekend or something along those lines, a hundred million could actually be surprisingly material. And that may seem odd when you’re thinking, no, Don. You just told me it’s a thirty eight trillion dollar U.S. treasury market. There’s a lot of other dynamics that go into setting interest rates, and sometimes the timing could actually work against us.

So I think the bigger case though, Kara, is on principle. You don’t wanna alienate your lenders. Right? You want more people to lend you more money and help keep those interest rates lower.

Yep. That makes that makes sense, Don. And and related to this, Steve is asking, are there concerns that U.S. treasuries are becoming, and I’m gonna put this in kind of air quotes, less safe or more volatile in the current environment?

Well, I think think it is true.

So first off, high level, U.S. treasuries, I think, remain the safest asset on the planet. Right? When you look at sovereign debt, you know, debt issued by governments around the world, the U.S. government is still by far, I think, the best the best credit.

Now that said, I mean, we have had a deteriorating balance sheet. Right? We’ve cut taxes. We continue to push spending higher.

So I do think that there are risks that investors increasingly are asking themselves, hey. Should we be pricing this in to the value of U.S. government debt? Right? We saw the incoming administration last year basically take the last seventy years of the global economic and military order and throw it out the window.

Whether you agree with him or not, that was a massive change that financial markets have now had to digest and ask ourselves, well, wait a minute. Put aside one’s political views, what does this really mean for the value of U.S. government debt? Can we trust them to repay us in full and on time? And I think there’s a growing legitimate debate around that, Kara.

I mentioned that our economic growth is gonna be more challenged because of our current immigration policies. It’s also gonna be more challenged because just Americans are not having as many children as we did in prior generations. Right? So we have a lot of headwinds.

If I wanted to make the bearish case, the anti U.S. government debt case, it’s it’s actually pretty easy to make a strong case that there’s a risk premium that investors arguably should be pricing into U.S. treasuries. Now before everybody calls their adviser and says, Don said to sell my treasuries and go buy something else, I’m not saying that.

And I’ll go back to what I said a few a few moments ago. U.S. treasuries, by far, remain the most deeply liquid and one of safest assets on the planet. I would argue there really isn’t a good alternative to U.S. government debt, not the Swiss bond. Right?

Not the UK bond. They they don’t even come close. And so so we still recommend U.S. treasuries. We think they’re a great asset to continue to hold.

But to the spirit of the question, Kara, the answer to that is yes. Investors bond investors should be asking ourselves, should we be pushing yields higher? Right? There’s also this question around the independence of the Federal Reserve.

I actually think that could be a real catalyst that would push interest rates perhaps violently higher if the U.S. Central Bank suddenly becomes an appendage of the congress or the executive branch. That could be a real problem.

Yeah. Well, that’s a great transition here, Don, because I’ve got a couple of questions about the Federal Reserve. Scott’s asking your view on the administration actions regarding the Fed and the potential impact on investors. And then we’ve got a couple others saying headlines about the Federal Reserve of this, but Jerome Powell’s term is going to be up. And, a, can you maybe just talk a little bit about I I know that the Fed is is often focused on the chair, kind of how it is set up and the individual governors, but then also your view on what those changes about the Fed or about the individual governors could have an overall impact on on investors.

So definitely a lot in there to on to unpack. So, so so high level, let’s I’ll I’ll take the first part of the question. I think it is no secret that the administration, has disagreed with the Federal Reserve’s slower relatively slower approach to bringing down interest rates. The president would prefer that the Federal Reserve move a lot quicker and cut a lot deeper, faster.

I I think most most, Fed watchers like myself, other executives on Wall Street, other executives that I speak with, I think it’s pretty clear to all of us that the allegations against, chair Powell, is really just a pretext for trying to get him to, to resign. Alright? Now remember, while the president is appointing a new chair that’ll come in in May, Jerome Powell’s, term does not actually expire until January of twenty eighth. So he will still be a voting member, one of twelve, on the Federal Open Market Committee.

That’s the FOMC. It’s a it’s a it’s a committee within the Federal Reserve Bank that votes on setting interest rates. And so so so I think my my sense is and I’m not a political scientist, so full full disclosure. But my sense is the president would like to push Jerome Powell out so that he can appoint somebody to fill fill to fill out the remainder of Jerome Powell’s term.

And that would give the president relatively more votes, arguably, more people that he had appointed to the FOMC. Now there are seven appointees on the FOMC. There’s five the other five because it’s a total of twelve. Seven are appointed by the president, confirmed by the senate.

The other five are the regional bank presidents. There’s actually regional bank presidents. You know, there’s a Philadelphia reserve. There’s a Dallas Federal Reserve.

Their presidents are currently voting. I think so is Chicago’s and and then New York Fed. The New York Fed has has a permanent vote on on the FOMC. So the president doesn’t control all of the members on the FOMC.

And while the president may get to replace the chair, the reality is Jerome Powell is still a voting member through January of twenty twenty eight.

I think it’s dangerous to not have an independent Federal Reserve. I’m certainly not alone in that view. I think almost everybody on Wall Street would argue that it’d be very dangerous for politicians to have con direct control over interest rates. Right?

Because what do politicians want? They want they all wanna get reelected. They’re gonna wanna push interest rates lower. That would spark inflation.

We’ve seen this happen in banana republics around the world, and it’s just it it never it never ends well. So I have a very strong view. The Federal Reserve absolutely needs remain independent. The president should not be setting monetary policy nor should congress be setting monetary policy.

To be fair, the Fed is accountable to congress. Congress created the Fed by an act of congress in nineteen thirteen.

And the Congress does set what the Fed’s goals are. So price stability, that two percent inflation target we talked about, as well as full maximum employment. Right? They want people to have jobs.

And so the congress can provide direction to the Fed. The president appoints members to the FOMC, but they have to be approved by the senate. The senate has now several members of the senate said they are not gonna move forward with any presidential appointees until the till the criminal investigation into Jerome Powell is is finished. So so we’ll see what happens.

But, again, I think for all of us as investors, Kara, we should all want the Federal Reserve to be very, very independent and insulated from political influence. And indeed, that’s how Congress designed the Federal Reserve System back in nineteen thirteen. They at least back then, they had the wisdom to say, look, we should not be you know, we we should create something that’s very, you know, insulated from political influence. Influence.

Well, you you just mentioned that the Fed is focused on full employment. So now I’ve got a question about employment from George. He’s asking, I’ve heard headlines that employment is, and he put in quotes, headed in the wrong direction unemployment.

Is that due to fewer job openings or more people looking?

So I would say, yes. I mean, it’s it’s increased. So, yes, we don’t like that. Right? Higher unemployment is less desirable. So, yes, that’s the wrong direction.

It’s actually coming from both of those areas. Right? We’re we’re not seeing as many job openings. Right?

We’re not seeing companies hire. I mean, let me back up. There’s lots of openings that get posted, but I think we all know that there’s a number of companies and perhaps a significant number that just post openings just to build up their resume their resume banks. Right?

So what we’re actually seeing is we’re not seeing a lot of hiring. And what that means is if you do lose a job, it’s taking those folks a lot longer to find a new one. And so we are seeing a number of companies really step back on hiring and investing because of the current environment. Right?

I think there’s a lot of concern around tariffs, global trade policy, things like that that I think many many business executives, many chief financial officers have stepped back and said, hey. Let’s cool the jets on hiring or building new factories and things like that. Forget all the political sound bites you you you hear. That’s noise.

Right? When we actually look at the data, what we see is businesses have largely stepped back on making these kinds of investments. And naturally, hiring is one of the I think probably one of the first areas to get cut when executives are feeling uncertain about the future. Now combined with that is you still have people graduating college.

Right? My son graduates here from Penn State University in May. And it’s like, well, him and all his buddies are all job hunting. And it’s unfortunately, it’s not a very good job market.

So to the to to the to our client’s question. Yeah. I mean, there’s more people out there looking for jobs. That’s that’s true.

But we also have companies that have really stepped back and reduced their hiring.

Great.

So, and talking about kind of the data here, we have question from Robert who asks, how much confidence do you have in the predictions of inflation levels? Better or worse than historical confidence? Now you mentioned that, you know, we had a government shutdown, and there are maybe some gaps in the data. So this might be related to that. So how how are you feeling about that data that we’re getting done?

So I’m gonna give two answers to this one because, to first off, that’s an awesome question. And I I I think about that question almost every day is can we really trust the data?

I I used to always say that when we would get data out of China. Can we really trust the data? Right?

But I increasingly ask that now with respect to U.S. government statistics. And to be fair, among our investment committee, even on our investment team, economists that I have relationships with in the industry, some that work for government, we all disagree on this one. And I’ll be fair. I’m probably a little bit more in the minority. I grew up in Philadelphia, I’m a bit of a cynic, and I’m certainly skeptical. So so I’m probably I’m probably a little bit more concerned around the quality of data that we get out of government agencies these days than I was perhaps a couple of years ago.

But that said, to be fair to those who disagree with me, there’s lots of private market data that we can source from outside of government that largely corroborates, confirms the data that we get from, like, the Bureau of Labor Statistics. And so I I think I think we can still have pretty good confidence around it. I do think we should continue to be a little bit skeptical, not just because of perhaps political interference, but from a methodological perspective, folks who really understand how CPI is calculated, folks who understand how we measure job openings and unemployment and and things like hiring, those survey methods, are notoriously, I don’t wanna say inaccurate, but there’s a lot of variance in the data that they that they get from businesses.

They they they physically send out surveys to businesses, and the response rates that they’re getting back these days are a lot lower than they were in prior years, certainly before before COVID. So from a methodological perspective, we see a big variance. But I think if we look at the data we’re getting from the U.S. government, compare that to private sector data, I think we are getting a pretty fair and accurate picture of what’s generally happening happening in the economy. So I I would I I would not support some sort of conspiracy theory view that it’s all wrong.

I think that’s that’s going way too far. But I do think that as investors, we should always be a little bit skeptical looking at the data and ask ourselves, wait a minute. Is that really accurate? Does private sector data corroborate that, or does it conflict perhaps with what we’re seeing coming out of, out of U.S. government, agencies?

Great. Now I’m gonna I’m gonna turn to the stock market here. We’ve got a bunch of questions, obviously, of great interest to our audience. So, this week is a big earnings reporting week. Again, we’ve got the magnificent seven stocks that we’ve been talking about here for a bit, and I think four of them are return are reporting earnings this week. So Jim’s asking, what are your thoughts about how much impact the magnificent seven has on the S and P five hundred and future portfolio decisions?

Well, I mean, to Jim’s question, you know, four about forty percent roughly of the S and P five hundred consists of the Mag seven. That that’s a a very significant footprint that these very large seven technology, mostly technology companies have on on the market. So that’s a concern. I mean, I’d be more concerned if if all you owned was the S and P five hundred index.

You know, that would not be good because you have a portfolio that’s gonna be really dominated by just what happens with those seven stocks. You don’t want your portfolio to be dominated by just seven companies. Right? Of course, nobody complains when it’s good, but when it’s bad, it can get really bad.

Right? And we saw that in April of last year. The max seven got totally creamed in April of of last year. And so you really wanna diversify beyond those.

And so I think when you look at the portfolios that we’re building, Kara, you know, we’re we’re huge proponents of very broad global diversification.

We don’t just own the S and P. We own small companies, small stocks, the Russell two thousand, things like that, owning non U.S. stocks in Japan and Europe and the United Kingdom and Australia and places like that, owning emerging market stocks in Brazil and Indonesia and all these other places. So the way that you really minimize, I should say immunize your portfolio to a very ugly move in those seven stocks is to broadly diversify both across both public and private markets if you qualify. Things like private equity can also help to continue to to more broadly diversify. So so I’m always alarmed when I see a portfolio or an index that is heavily dominated by just a very small handful of stocks. That’s not healthy.

But it’s a very easy problem to fix through very broad, very inexpensive diversification. Diversification. And so that’s that’s how I think about those that particular challenge. And that’s even before we add in things like bonds. Right? So naturally, as you add bonds into the portfolio, you’re gonna continue to dilute the relative impact of the mag seven.

Well, you mentioned diversification and kind of the outperformance of as we’ve seen international and emerging market stocks. So we’ve got a couple questions about how you think about your portfolio allocation. So a a fellow Don is asking, given the decline in the U.S. dollar and the recent outperformance of non U.S. developed and emerging stocks, why would you not allocate more heavily to companies outside of the U.S.?

It’s a great question. And what I would say is we only started getting this type of question in the past six months. You for the better Carrie, you and I’ve been in this business a long time. You know, there there was a better part of a decade and a half where nobody was asking that question. In fact, it was the opposite. Right?

Yep.

So why would you not do that? I I I think we also need to revisit, well, what’s the investment case for owning U.S. stocks?

And because remember, if you’re gonna buy more non U.S. stocks, it’s obvious it should come from your U.S. stock allocation.

Right? Well, U.S. companies have very attractive earnings growth. I just told told everybody on the call, it’s gonna be about fifteen percent. At least that’s the forecast over the next two years.

Well, the earnings growth forecast for non U.S. stocks next year is only two percent.

Right? So very big difference. And ultimately, stock prices will follow earnings growth. Right? Earnings is the mother’s milk of stocks. Right? Jeremy Siegel at Wharton often says that.

And so I think I think there’s a very strong case for still continuing to own U.S. stocks. And so I think you’d wanna be careful not to dilute that exposure. Right? And if you look at our portfolios, we take generally a market weight based on market capitalization. And what that means is we’re trying to buy the whole global market and then appropriately apportion how the portfolio is invested just based on the size of each country’s broad stock market. There is lots of evidence, a lot of science that just says, look, that’s the best way to do it, to get the best longer term returns.

So again, I think the U.S. case is still strong.

The currency effect that we discussed earlier is probably the biggest selling point, biggest argument for for owning non U.S. stocks. And what I would say is we do own non U.S. stocks. And like I said with one of our key takeaways, everything in moderation. So, you know, slow down. Nothing wrong with owning non U.S. stocks. Nothing wrong with owning U.S. stocks, but let’s do it in a balanced way. That’s the best approach.

Related to kind of how countries work together, Navajit is asking, how are you managing and recommending management of geopolitical risk which seem to be increasing?

Oh, that that question can give me little bit So I would agree that I think geopolitical risks continue to increase.

And and there’s lots of debate around why, and I’m not an expert in geopolitics, but it’s something that we’re paying a lot of attention to right now.

What’s the best way to diversify that risk? And it’s through broad diversification. Right? It’s owning stocks, bonds, real estate, public and private, issued by many countries in many countries, not just investing heavily in just one in one particular in one particular market.

I also think it’s important to contextualize for a moment. If we actually look at stock market performance during prior geopolitical crises, I think our our our listeners would be surprised to see. I mean, if you look at something like the Cuban Missile Crisis, right, arguably, the world never came closer to World War three than during the the nineteen sixty two. Was that sixty two? I gotta check my history here. Was it in October of sixty two?

During the Cuban missile crisis. And so if we actually look at how markets performed, naturally, you know, often they went down. Right? But I think what you’ll find is as those crises ultimately, get behind us and things return to normal, markets very quickly, recover.

And so I would be careful. I would be careful trying to, make changes in your portfolio based on your perceived level of geopolitical risk. I mean, just look at, you know, the debacle with Greenland over the last month. Right?

The market was very unhappy last was it last Tuesday? I think it was last Tuesday. The market was very unhappy. We saw about a nine hundred point sell off, eight hundred and seventy point sell off in the Dow Jones.

And yet once that crisis quickly abated, right, within the very next day, the president’s in Davos, he walks it all back, and the market rapidly recovers. And so that’s why I’d be very careful for us as investors, especially taxable investors.

Right? That’s a very, very expensive decision if you’re saying to yourself, okay. I’m gonna try to de-risk my portfolio because I’m worried about some geopolitical risk. And then you incur all of that capital gain, and then that geopolitical risk quickly goes away.

I don’t know. I don’t know that that was a good a good decision. So I keep coming back, Kara, to broad diversification. Make sure that your your financial plan is up to date and really continue to build what we call a fortress balance sheet.

Make sure you have suitable liquidity. Make sure you have a financial plan in place that makes sense. Make sure that you’re constantly working towards reducing liabilities, things like that. I think that’s really the best way to really to really immunize ourselves against increasing geopolitical risk.

Yeah. I think one of the most valuable exercises that we can do with our clients related to financial planning is is stress testing their plan. It helps to be able to say, what if there is a big market correction the year that I retire? What’s going to happen? And going through all of those scenarios, I think, are very valuable for people to really understand if they truly have this fortress balance sheet. So work with your adviser on that. We do that all the time, and I think that’s really important, for our clients.

It’s a great point.

Well, as you are probably not going to be surprised, there are a multitude of questions about gold and silver and precious metals. I know we’ve talked about this on on previous broadcasts, but it’s it’s certainly in the news and very top of mind for folks. So what’s your outlook there and your recommendation, Don?

Well, my recommendation would be if we could go back in time and buy gold, certainly, we should do that.

So, you know, a couple of thoughts on that. So first off, we do not currently recommend gold. We have lots of debates, on our investment committee about gold. Gold is what we call a speculative asset. It is not an investment asset in in our view. And well, what’s the difference?

Well, an investable asset generates cash flow. Right? If you’re gonna buy a McDonald’s or you’re gonna buy stock in IBM or, you know, Johnson and Johnson. Right?

These are businesses that generate cash and send cash back to investors in the form of dividends or sometimes what we call free cash flows, perhaps share buybacks, things like that. Right? And so you can look at a share of McDonald’s, and you can actually you know, based on interest rates and bunch of other inputs that financial types tend to get really excited about, we can actually put a price on it. We can say, okay.

At this level, it’s a good price. But if it hits this point, we should probably get out of it. Right?

With speculative assets, you don’t have a pricing framework. There’s no valuation framework that makes any sense. Right? Gold does not pay dividends. It does not pay interest. It does not have a profit margin.

And so I I often challenge folks. Well, okay. It’s at fifty three hundred bucks.

Is it still a good price? And usually, my my gold proponents will say, oh, it’s absolutely it’s a great price. And I would say, okay. Well, then at what price would you sell it?

Oh, I’ll never sell it. Well, that’s not an investment. That’s like a that’s a religion. That’s an ideology.

Right? And so that’s the problem I have with things like gold or silver, all commodities. You know? I was just listening to a podcast from the chief investment officer of Goldman Sachs, their wealth management business, and she has the same view. She was like, look. This is not an investable asset.

It it’s not it should not really be part of a portfolio. And so I I think I agree with her name is Charmaine. I think I agree with her on that.

So I don’t recommend that people put it into their portfolio. It’s not a strategic long term asset, because you have no idea what it’s worth. Is fifty three hundred a great price? I don’t know. It’s rallied significantly here in the past year and certainly in January.

You could buy it now, but how do you know you’re not just buying it at a top?

It’s hard to know. It’s really hard to know. So as a fiduciary for that reason, you know, we shy away from things like crypto. Again, same challenge, no asset pricing model.

Nobody can really tell you, well, is it worth eighty? Is it worth a hundred and twenty? And at what price would you buy it? At what price would you sell it?

You can’t get good answers to those very important questions.

And for those reasons, we’ve made a decision to avoid investing in speculative assets.

Well, this question from Rich, there is definitely a financial planning component to it, but I’m gonna kind of take his question. He his question is I have a large position in one stock with a very low basis.

What strategies do you recommend to diversify while minimizing the capital gains? Obviously, from a financial planning perspective, we have a lot of tools to do that. So, your comments on that are welcome, but I also thought maybe talking about concentration risk in a portfolio would be important to hear your perspective.

Yeah. I mean I mean, concentration risk, there’s actually a very famous book that was written not too long ago on this that it’s actually the biggest threat to wealthy families. Right? And and and the book actually does a case study on the Vanderbilt family. And it explores why does why did the Vanderbilt family effectively lose all of their wealth over the past, you know, hundred years?

And it wasn’t from the things you would expect. It was from this issue. It was from concentration risk. And so that’s that’s the biggest threat to our long term financial security, especially for wealthier families that are hoping to pass wealth to the next generation, is this concentration risk. So concentration risk is probably one of the biggest risks that will blow a hole a mile wide in your financial plan and your financial So how what are what are some of the best ways to manage that? Well, there’s a lot of investment tools. I I’ll leave the financial planning and tax tools to the tax team.

But, you know, something called a long short strategy. Right? Your advisors understand what this is. You should discuss it with your adviser.

But a long short strategy is a is is a strategy where you can leverage the stock, go both long and short, sell the stock, and actually through strategically harvesting capital losses in the short side of the portfolio, you can actually very tax efficiently unwind a concentrated position and build a more diversified portfolio. Now there’s pros and cons to all of these strategies. Right? So you should definitely explore these carefully with your adviser.

But a long short strategy is a strategy that’s become very, very popular here over the past couple of years, and and we use it quite extensively here at Mercer Advisors. That’s just one. There’s also something called an exchange fund, which is a partnership fund. It’s you know, where you can actually contribute low basis stock in exchange, you now own interest in a more diversified, investment fund.

So there’s those are just two very popular investment solutions. You’ll often hear people talk about collars and option strategies.

I’m I’m I’m less a fan of those. It’s not that they aren’t effective, but not like, something like an options collar, Kara, is really a tool for timing when you want to liquidate and pay your taxes. Right? And so it’s it’s I I think that has a different set of outcomes relative to, say, a long short strategy or investing in an exchange fund.

So I think the really, the message for our listeners is there are lots of strategies in the toolbox to help investors diversify concentrated positions. The best time to do that is now. It’s always now. So I would encourage folks to do that.

But there are a number of tools in the toolbox, and I really encourage you to discuss those with your adviser. Figure out what are the pros and cons of each, which ones make the most sense for you given your situation, your preferences, you know, what you’re trying and what you’re trying to accomplish.

Well, this last question, Don, I have a feeling you’re gonna wanna know the answer to this too. So Nanette is asking, how do I get a crystal ball for market volatility?

Yeah. They might sell them on Amazon. I don’t know.

Yeah. No, Nanette. If you can find one that works, that’s the caveat. It has to work. Sign me up. I’ll take two. So I wish I had one.

Yeah.

And I I would say that’s that’s always a question that we get from our clients, and and I always channel my inner Don Calcagney and say, you’re a long term investor. We need to work through your financial plan, diversify your portfolio. That’s the answer.

One one thing I would say to that though is I would also be very careful. Wall Street has made a business out of trying to convince investors that they have a crystal ball. They have some fancy model or they have really smart people who are well connected and all the other sort of fairy tales that we hear.

So I would be careful. Anyone who tells you they have a crystal ball or is trying to lead you to believe that they somehow are clairvoyant, that they have insight into the future, I would hold on to your wallet, hold on to your portfolio, turn around, and run.

Well, Don, thank you so much for your insights.

Many questions that we didn’t get to. So please rest assured because we did not get to your question. We have them, and we will be sharing them with your health adviser to follow-up with you. Additionally, if you would like to hear this webinar again, we do record them, and they will be posted on our website at Mercer Advisors dot com on our insights tab. Usually takes about three business days for us to do that, but we would welcome you listening to the recording as well. So thank you for joining us. Thank you, Dawn.

Thank you, everybody. Thank you, Kara.

Take care.