Q2 Market Outlook: Markets, Interest Rates, Inflation, and More

Thank you everyone for joining us. I’m very pleased today to be presenting with my colleague, chief investment officer here at Mercer advisors. I’m Kara Duckworth, a partner, here at Mercer as well. And we are looking forward to talking through our second quarter market update. So many of the topics that you will have all submitted to us, as well that we’re gonna be going through. But we would like to make sure that we talk about the fact that this should not be construed as personal investment or financial planning advice for your It is educational and informational only. If you have specific questions regarding your own personal situation, please reach out to your wealth advisor here at Mercer advisors for those questions.

We also have many questions that you all submitted ahead of time and we would also like to take a lot of live questions as we are going through here. So if you do have questions, please submit them to the Q and A function, which should be at the bottom of your screen. We’ll get through as many as we possibly can. Here I know that there’s lots of topics of interest.

So Don, I’ll turn it over here to you. I know we’re gonna do kind of some updates as we go through before we head over to Q and A. Off to the races.

Great. Well, you, Kara. I appreciate everybody giving us some of your precious time. And thank you for all of those questions that you all submitted in advance. Kara and I always have a lot of fun going through those and talking about those. And so certainly appreciate all of those questions that you’ve submitted. And again, do wanna encourage you to continue to submit questions through the Q and A function.

So we live in interesting times. The past month and a half we’ve seen the world continue to change in interesting ways.

You know, naturally the war with Iran has significantly impacted markets. And so Kara, throughout our conversation today, that’s going to be an overarching theme that we keep coming back to is how perhaps the war, constraint on the flow of oil out of the Persian Gulf, how that is ultimately impacting markets and the broader economy. So let’s begin with looking at the dashboard, high level, fifty thousand foot view. What’s happening in the U. S. Economy here over the past couple of months since we spoke last at the end of June?

Well, has ticked up. We’re currently at around three point three percent year over year inflation.

That is that is hotter than the Fed’s two percent inflation target. So Federal Reserve Bank has a target of two percent. We’re currently coming in at around three point three percent. That’s ticked up here because of the price of energy.

I imagine most of our listeners, Kara, are fully aware that, gasoline prices have gone up significantly at the pump. Currently a little over four dollars a gallon. And we have some more data on this that we’ll dive into here in a few moments. But certainly I know that many of us are feeling that pain at the pump given the embargo against Iran.

And given the fact that the Strait of Hormuz is effectively shut at the moment. We’ve also seen interest rates rise. And this is the market raising interest rates, not the Federal Reserve Bank, but the free market raising interest rates. One, to I think account for the added risk now given what’s happening in the Persian Gulf, but also to account for the fact that the market is expecting higher prices for consumers going forward.

And I think that’s quite logical.

Oil impacts so much of U. S. Economic activity, whether that be transportation, plastics, food packaging, fertilizer, and things like that, that we’ll touch on here in a few moments. Despite it all, the market has actually been pretty resilient and we’re actually positive slightly for the S and P five hundred index here so far this year. So, you know, despite some of the negative data points that I’m highlighting, I do want to reassure our listeners that on the plus side, the U.S. economy continues to grow. And on the plus side, our portfolios continue to perform quite nicely despite everything that’s happening in the world.

So let’s talk a little bit here about economic growth and we’ll dive into some of these other topics here momentarily.

But as many of you have heard me say before, economic growth fundamentally comes from two places. It comes from the increase in the number of workers that are contributing their labors to our economy. And so if we look up here at this top or left hand quadrant, what I wanna draw our attention to is this here, is that the number of workers going forward is forecast to actually decline. So this is a headwind for the U.S. economy.

And it’s declining because we’ve seen a substantial decline in immigrants coming to the United States to contribute their labors to our economy. So putting aside one’s view on legal versus illegal immigration, that does not change the fact that the reality is we have fewer workers now coming here to the United States to contribute to our economy. Additionally, native born citizens, workers, is very, very low. We’re just not having children like we did in the old days.

And so for that reason, we are expecting fewer workers in the years ahead that’ll be contributing to social security and to paying taxes and paying down our debts.

The other place that economic growth comes from is the productivity of our workers. Perhaps we don’t need as many workers if we’re all using AI and we’re infinitely now more productive perhaps than we were before the rise of AI.

And so what you can see down here at the bottom is we’re showing you some of the capital spending by businesses on things like intellectual property and research and development, right? These are things that in theory, that technology is gonna make us more productive as workers. Right now, U. S. Companies for twenty twenty six are projected to spend about seven hundred billion dollars on artificial intelligence just in twenty twenty six. That is dramatic.

So pretty substantial. So that’s what we’re banking on. If we’re gonna have fewer workers, we need to get more productivity out of the workers that we do have.

Let’s pivot and talk oil. We have seen oil bounce all over the place here over the past six weeks.

Kara, at the moment I just checked a little bit ago, Brent is up over a hundred dollars a barrel. West Texas Intermediate is up about ninety three dollars ninety four dollars a barrel. Prior to the war, were somewhere in the mid to high 60s, low 70s bounced around in that range. And this is where we’re at today.

It is true. And I get this question a lot. I’ve been traveling around the country and folks say, wait a minute, Don, I thought the United States was energy independent. Well, let’s unpack that for a moment. It is true that the United States exports more oil than it imports.

But we are talking about different grades of oil. We use different types of oil for different products, for different things, whether that be gasoline or diesel, plastics, surgical plastics, things like that. So while it is true that we export more than we import, not all oil is created equal. So that would be my first point.

My second point here is that oil is a global market, right? We trade oil globally. We sell oil globally. So naturally, if the price of oil globally has risen, that’s gonna impact all of us here negatively at home. Now, it might seem obvious that well, if we have higher prices for oil, why are we not seeing more production come online? Why do we not see more rigs drilling for oil and coming online and producing?

Well, there’s a lot that goes into making a decision as a business to expand your rig account, to drill another hole in the ground. And in fact, we’ve actually seen the rig count come down slightly since the start of the war against Iran. So I would just caution our listeners that sometimes the simple linear answer that seems so obvious rarely is that the right answer, Right? There’s a lot more that goes into making a decision around whether or not to bring new rigs on online.

And part of that is because many oil companies do not expect oil prices to stay at these elevated levels after the war ends. These are very long term investments. And so if oil was gonna stay high for five years, ten years or more, then perhaps they would increase production and their rig count. But we don’t see that at the moment in the data.

Retail gasoline, this is where I think it hits all of us right in the pocket.

We’ve seen it spike quite dramatically here naturally as a result of the war. What we’re showing you here on the right with these blue dots and these raspberry colored dots is the futures market. What the financial markets are predicting the price of gasoline will look like over the next, say, six months. And you can see that the blue dots here, this is what the market was expecting on March twelfth.

Why March twelfth? That was during the heyday of the war. The war was still relatively new. There was a lot of communication coming out of the administration that, we’re going be done in a couple of days, or it’s going to last two weeks or four weeks or something like that.

However, that has not happened. And here we are six weeks, seven weeks in, and we still don’t really have a resolution to the conflict. Just last night, Iran fired on several tankers trying to get through the Strait of Hormuz.

And at the moment, see futures, gasoline futures have actually risen since from where they were in mid in mid March. So TBD on this. I don’t think the market really knows what’s gonna happen with gasoline prices or oil prices. This is really the market’s best guess based on information that frankly is changing sometimes Kara by the minute, by the hour, certainly by the day.

One other thing that I would highlight here, this war comes at a very painful time for farmers in the northern hemisphere. This is our planting season. This is when we are buying fertilizer and diesel and lots of things like that.

Urea is an input in fertilizer. It’s one of the most important inputs in fertilizer. And what we’ve seen here is that the price of urea has actually more than doubled since the beginning of the war. So eventually we’re going to see this show up in food prices.

I don’t think that this is a conflict where the economic shock waves go away overnight. I think we’re going to be feeling this one economically for quite a long time to come. These prices naturally are going to have to be reflected in the food that we all consume at restaurants or the grocery stores and so on and so forth. And this is one of those input prices that we think is negatively gonna impact the price of food in the months ahead.

So let’s pivot and talk debt and deficits.

And the reason why we often revisit this is because interest rates influence the price of everything on the planet. From stocks and bonds and real estate, mortgage interest rates, what you pay on your credit cards, interest rates are critical. And the U. S.

Government is the world’s largest borrower, right? So understanding our deficits, what’s happening in terms of how much capital the federal government has to borrow, but also keep refinancing. Because let’s be clear, the federal government does not pay off its debt. It just keeps refinancing that debt when it comes due.

What we can see here on the left, this is everything that we, meaning our elected officials that we send to Washington, that they spend our money on. Everything from social security and Medicare and defense and other types of spending, whether that be infrastructure grants for the states and all of those things. But I wanna highlight the net interest expense. So we spend a trillion dollars a year now on just the interest on the nearly forty trillion dollars in debt that we have outstanding.

That forty trillion represents the sum total of all prior year deficits. The deficit is the shortfall in any one year.

And we can see over here on the right, this is where our government gets revenue. It collects revenue in the form of payroll taxes. That’s FICA. If you look at your paycheck stub, but also income taxes, right? We just finished up income tax season, Kara. Some of us paid, some of us get money back.

But that’s that annual excruciating exercise that we have to go through.

But we can see here custom duties, right? So these are some of the tariffs that they’ve been in the headlines.

But also we have corporate taxes on here, about four hundred billion. But you see this perforated box here, that’s the deficit. Almost two trillion dollars is the additional borrowing that our government has to take on in order for us to pay our bills. All right?

Now, why is this such a concern? And why and this also speaks to why the president has been pushing the Federal Reserve to cut interest rates. It’s because of that heavy interest expense that we just showed you on the prior slide here.

Coming into the year, interest rates were reflected by this blue line here. This was the yield curve, which just shows interest rates at different maturities. The maturities are down here along the bottom. And you can see that where we’re at today, this darker blue line, that interest rates have all pretty much shifted up.

Interestingly though, the Federal Reserve did not increase interest rates, right? The Federal Reserve hasn’t done anything with respect to interest rates this year. But the free market pushed those interest rates higher. And that means it’s higher for all of us to buy a car or buy a home or something like that, all right?

We’re also expecting that upward pressure will probably continue over the next twelve months. Regardless, I would argue of what the Federal Reserve does. The Federal Reserve influences interest rates on what we call the short end of the curve. They arguably have very little influence over interest rates further out on the curve. Meaning these longer term type loans. Think of a thirty year mortgage loan that many of us I’m sure have had throughout our lives. Federal Reserve doesn’t have too much influence over that at least not directly, perhaps a little bit indirectly.

In terms of interest rate cuts coming into the year, the market was expecting there to be at least two potentially as many as three interest rate cuts coming into the year. We have a new Federal Reserve Chairman who’s been nominated for the position, that’s Kevin War. She just testified yesterday to the Senate, Senate Banking Committee. But the war in Iran against Iran has actually changed all of that. The market during most of the month of March had effectively said we do not expect any interest rates.

Since then it’s come in a little bit and the market is now expecting one interest rate perhaps later this year. One interest rate cut later this year. So TBD, we will see what happens here. But at the moment, given I think rising pressure on prices, the reality is I’m not entirely sure that the Federal Reserve is going to be open to cutting interest rates, even if the new Fed chairman, the nominee is in favor of those rate cuts. It’s unclear to me that the other members of the voting federal open market committee will be on board with cutting interest rates. So only time will tell.

In terms of our debt, the U. S. Government needs to refinance a significant amount of debt just this year, close to ten trillion dollars That is a very significant amount of our economy. If you just looked at that in terms of the percentage of GDP, we basically need to refinance almost a third of the U.

S. Economy, an equivalent amount of debt equivalent to one third of the U. S. Economy.

So that is very, very significant.

All of us are citizens. We all vote. We all have our own beliefs on what these public policies should be.

But it’s something that we should all be very, very conscious, very aware of. Is that our debt is very substantial.

The congressional Along those lines, there’s a question about the amount of debt from Garland.

And it simply just says how much U. S. Government debt is too much debt?

That is the forty trillion dollars or maybe the one hundred trillion dollars question.

Economists, academics, we debate this ad nauseam. And the truth is, nobody And we’re not gonna know until it’s arguably a little too late. And we will know when the bond market tells us that it is too much. Some of our listeners have heard me say this before, but the bond market is the ultimate power in the universe. And the bond market ultimately decides whether or not it will be willing to refinance this much debt and at what interest rate.

And there will come a time and I don’t know when. And I don’t know. I think our listeners know I am not an alarmist person. I hope I do not come off as an alarmist person.

But there will come a time when the bond market calls their debt and says no, no more. We are done. Right? Interest rates need to go higher for U.

S. Government debt. And that’ll be that moment of truth where we’re gonna have to make some really hard decisions as a society. So I wish I had a better answer.

But at the moment we just don’t know. All right. What I would say is if we look at Japan as a proxy, you know Japan had debt to GDP ratio, I think at one point as high as two sixty, two seventy percent of its GDP. The United States at the moment is about at about one hundred to maybe one hundred and ten percent of GDP.

That is forecast to grow substantially, as I showed you, in the years ahead. So whether or not the United States can sustain the same level of debt as a percentage of GDP as Japan, I don’t know.

But we don’t want to find out. Let’s leave it at that. We don’t want to find out.

But a very good question.

And these are the sort of things we have to be thinking about from a public policy perspective. So if we look at the long term impact of the one big beautiful bill that was passed last year, look, we as Americans all love getting tax refunds. Nobody likes paying taxes, right? They’re very unpopular.

We’re gonna get a little bit of a sugar rush from those tax cuts over the next couple of years. But longer term, the impact of that bill is quite detrimental. It is going to drag on the U. S. Economy by as much as three point five percent points of GDP growth. That is very significant. Additionally, by mid century that bill alone just by itself will add about thirty three trillion dollars more, more to our existing debt.

We have about forty trillion in debt at the moment. If indeed this comes to pass, Kara, we’re talking at debt loads of somewhere in the mid 70s, seventy to seventy five trillion dollars And this assumes that we basically didn’t make any additional changes between now and mid century, which we know is not realistic. Congress is always spending more or less. Sometimes they’d like to tell you that they’re cutting spending. I don’t think I’ve ever seen that in my fifty some years.

And they also like to cut taxes. It’s how they win votes. But here’s where we’re at. And this is the very real impact of these types of public policies.

Again, whether you support this or not putting that aside, our goal here is just to show you the economic impact. And ultimately this could have a very detrimental impact to financial markets if this continues to get out of control.

So Kara, let’s switch here and let’s talk a little bit about financial markets and just see how things are going. You know, despite all of that negative data, right? Let’s pivot and let’s actually look at something that’s positive. Well, what’s positive is year to date, we’re seeing pretty positive returns across the board despite the war in the Middle East, despite tariffs, despite all of that turmoil. Here we are.

U. S. Stocks are positive somewhere in that three percent to five percent range depending on the day. Right.

I see the markets up again handsomely this morning. So that’s great to see. But non U. S.

Investments have really they’ve really stolen the show year to date. They did last year, they’re doing it again this year. Emerging markets up fourteen percent, fifteen percent year to date. Developed markets, you know, think of Europe, think of Japan, Canada, Australia, but also now Korea, South Korea up very, very, very handsomely on a year to date basis.

So strong returns across the different equity markets. Mercer portfolios continued to perform very well in large part because we do have an allocation to these non U. S. Assets.

We are a firm that espouses global diversification. And that has paid off quite handsomely over the past several years. And we expect that to be the case going forward.

Kara, I also wanted to mention many of our clients know that we espouse multi factor approaches to investing. It’s a key part of really the financial science, academic financial science. And what we’ve seen here this year, last year, but again this year is multi factor approaches to investing within the U.S., within non U.S. markets have continued to outperform the broad market, the benchmarks and not by a little, but by a lot. So we’ve seen very powerful outperformance across the different factors.

Things like value and momentum and quality.

Things that I know our advisors all the time are discussing with our clients and explaining what are these things and how do they work and why should we do it? We continue to see very strong multifactor performance across most equity asset classes.

On that topic, Donna, can you go back to the multifactor?

Hopefully John asked a question about is multifactor asset allocation still a desirable plan? Hopefully, I think we’ve addressed that question. But we’ve got another question from Jean who’s asking moving forward in twenty twenty six, what will be the strongest market in regional sector sectors? And are there any that you think should be avoided?

You know, first off, it’s hard to really predict what exactly is going to be the strongest performer over any period of time. Right? And I have a slide here towards the end of our deck that I want to touch on looking at defense stocks, which you would think well, now must be the perfect time to own defense stocks.

But they’re not. And so what I would say is I do think that value stocks, cheaper companies relative to their earnings, relative to their cash flows is probably where I would be tilting portfolios right now. I like non U. S.

Assets because of the currency effect. I’ll touch on that here in a few moments. But the currency effect has to do with an anticipated decline perhaps in the value of the U.S. dollar. We saw that last year.

And we saw that a little bit earlier this year. It’s been paused given the war in Iran.

But I think non U.S. assets, I think value assets will continue to do well. I think highly profitable companies will continue to do well. And so those are probably the two most robust quote factors. Again, that’s the lens that I look at.

I don’t care if you generate cash or profits as an energy company or a consumer company or a technology company, a dollar is a dollar is a dollar. So that’s all we were focused on as investors is show me the profits, show me the cash flows. What do those what does that growth look like going forward? So that’s where I would tilt the portfolio.

And perhaps that’s a setup here, Kara, for this next slide. When we look at valuations, U. S. Stocks are pretty frothy.

They’re very high relative to their own history. So you can see up here that as of April tenth at least, the S and P was trading at about twenty times forward earnings, meaning the earnings that we expect to earn over the next year or two, okay? Relative to its history, it’s been around seventeen times. So it’s trading at premium relative to its own history.

And so non U. S. Stocks trade somewhere between thirteen to fifteen times earnings. And so that’s very attractive from an investor perspective. You always wanna buy companies for less, not more relative to their earnings.

And one of the reasons, Kara, why we think U. S. Companies are trading at a premium is really because profit margins are at an all time high. They’ve been amazingly strong, they’ve been high.

And so you could argue that, hey, these companies legitimately should trade at a premium right now, given how well they are doing. So profit margins remain strong, but so does earnings growth. I mean, we are seeing really strong earnings growth for U. S.

Companies as well as non U. S. Companies. I mean, we often think of Europe, for example, as a place where they’re just not growing.

That’s actually not true. European stocks this year are positive in large part because of positive earnings growth for European companies. And so we’re seeing positive earnings growth really globally for companies. That could be a combination of their technology investments, perhaps some AI, things like that, that are ultimately helping these clients deliver better results for shareholders.

But my message to investors would be focus on value and focus on the quality of earnings. The quality of earnings is important because we want earnings that are sustainable, that they can keep replicating year after year, quarter after quarter, and not something that’s like a one time flash in the pan. We’re looking for things that are persistent, things that are resilient going forward.

I mentioned the U. S. Dollar already. If we go back to early of twenty twenty five, so about a year and a quarter ago, we’ve seen the U. S. Dollar come down about ten percent since then.

And that decline in the dollar actually helps us with respect to our non U. S. Investments. So I’m often asked, Don, how do I hedge against a potential decline in the value of the U.

S. Dollar? Own non U. S. Assets.

Right? That should be in your portfolio. That is one way to help hedge against a decline in the value of the U. S.

Dollar. Related to this, I’m often asked, is it not true that the U. S. Dollar has lost its reserve currency status that the rest of the world no longer wants to own U.

S. Dollars?

I think that is objectively untrue. I know that’s a common argument in like the dark corners of the internet. But the truth is globally fifty seven percent of foreign currency reserves are held in U. S.

Dollars. So the U. S. Dollar continues to be the world’s most preferred, most highly favored reserve currency.

It’s come down a little bit over the past twenty five years. It was around sixty eight percent at the start of the century. It’s come down a little bit, but it’s partly because the euro and some of these other currencies issued by companies that are traditionally allies of the United States, their currencies have become relatively more popular as a reserve currency.

So Karen, we’ll finish it up here with the next few slides here, then we’ll open it up for questions. But I’ve been traveling the country, and one of the questions I often get is, gee, given the war in the Persian Gulf, and given the fact that the United States is really working hard to ramp up production isn’t now a great time to own defense stocks. And I just wanted to go back to the start of the war and compare defense stocks relative to the broader S and P five hundred index.

Well, no, the answer to that is no. What we’ve actually observed is that defense stocks have actually underperformed the broad market by as much as ten percent. Just doing the arithmetic on this, almost eleven percent, right? About ten point five percent.

So my message here to listeners, my message to investors is be very careful when someone is pitching you an investment thesis that seems so obvious, right? We’re spending billions of dollars a day in the war against Iran that does not necessarily translate automatically into positive returns for defense stocks. And I know that’s counterintuitive, but I would argue that the obvious simple answer when it comes to investing is often the wrong answer. So be very careful of that, all right?

What I will say is that markets all of this geopolitical uncertainty have continued to do well for investors over time. And I know it may seem scary at the moment, could have been the Ukraine war.

It could have been, you know, the war that we have now against Iran. But the reality remains is that over time, markets invest through these conflicts and ultimately go on to achieve greater highs.

And in fact, when we actually look at all of the geopolitical crises since the late 70s, what we observe is that the average decline is about five percent. That’s frankly nothing. If you’ve been investing for any length of time, a five percent decline in equity prices is absolutely nothing. That is normal, right? And markets on average have fully recovered those declines in about twelve trading days. So Kara, I’m just going back to like early March, I had investors asking me, shouldn’t I sell everything and just wait this one out? The challenge with that is many of you are sitting on very significant untaxed capital gains.

That could be a very expensive decision.

And ultimately by the time things settle down and you try to get back in, chances are the market has already recovered. Right? So what happens is you typically when we do that, we end up selling low and then rebuying at a higher level. And then to make matters worse, now we need to pay the IRS.

So not a good approach. So patience is typically the best and most prudent course of action. So Kara, I’ll just finish with this. Let’s open it up for some questions.

But a few takeaways. Number one, the U. S. Economy continues to deliver positive economic growth despite everything.

The U. S. Economy continues to grow. Number two, the best course of action as the war drags on is to remain fully diversified.

Don’t try to time this, right? These things are changing by the minute, by the hour, by the day, don’t try to time it.

And try to resist anything that’s obvious, I can’t tell you how often I’m pitched different investment, products, strategies, things like that. Resist investing in things that seem so plainly obvious. And then finally, try to tune out the noise. Remember, the media’s job is to sell advertising.

Not to give you objective information. It’s not to educate. It’s to sell advertising. And so the more eyeballs that they can capture, the more advertising revenue they can generate.

So my advice is typically to turn off the boob tube and just go do something that’s a bit more enjoyable. So Carol, let’s stop there and maybe we can open it up for some questions.

Absolutely. And we’ve got plenty of questions coming in. Just as a reminder, the Q and A box on the bottom of your screen is where you can submit any questions that you have that will take live. Let’s dive in, Don. We’ve got quite a few.

In fact, we’ve got three people, Manuel, John, and Raymond, that are all asking about private equity and private credit. So, there’s been a lot of negative press about private equity, I guess private credit in particular. So what are your thoughts on should private equity remain part of client portfolios?

So I’ll take the second part of that question first. The short answer to that is yes.

Remember, we firmly believe in broad global diversification, Kara. And that applies to both public and private markets. Eighty five percent of the world’s investable opportunities are not publicly traded. They’re private.

And so if you genuinely want to diversify your balance sheet and try to immunize your wealth to the degree possible against big or steep or sudden declines in public markets, it’s absolutely imperative that we own private assets. All right. Now, with respect to the headlines, with respect to private credit specifically, what’s happening there? Private credit as an asset class grew exponentially in the wake of the global financial crisis.

And that’s because there’s a bunch of new regulations that basically made it impossible for banks to lend money to businesses, to small private businesses. Private credit funds filled the void. What has really happened here over the past, at least in my opinion, over the past decade, is we’ve seen the wrong investors moving into the wrong types of funds. These funds are illiquid.

You’ll often hear people say, no, they’re semi liquid. I can get out every ninety days.

Be very careful there. You gotta read the fine print. The fund manager is only obligated to redeem five percent of their shares per quarter. And if you and a bunch of other investors all went out at the same time, you’re gonna get prorated, right?

That you might get cut back. You might want one hundred percent of your capital, but instead they only give you perhaps half or maybe a third of it, right? Depends on the situation. So I think that’s what’s really happened here is we have a lot of hot money or retail money that’s moved into funds that historically have been just for high net worth and ultra high net worth individuals and institutions.

And we really need to make sure that we as investors genuinely understand, hey, wait a minute. Sure, I like the return profile of these things.

But what’s the trade off? What are the expenses? What are my liquidity provisions? So, I really encourage our investors to make sure we always understand those those things. I think related to that, Kara, what what I think was really sort of the the impetus for a lot of investors suddenly trying to get out is there’s a lot of software loans, loans to software companies in a lot of private credit funds. The ones we’ve invested in tend to have lower levels of software funds. So that’s been good for us.

But there are other funds out there that have invested in a lot of software companies, have lent money to software companies that potentially could be severely disrupted by the rise of AI. We just don’t know yet. And I think that’s what a lot of investors were trying to get out of in front of and try to redeem investments.

Great, Dawn. That’s helpful insight. Now I want to pivot to kind of market outlook.

So Gary’s asking, is this the, and I’m going to do the air quotes here, new normal where markets go up one day and down the next, and it’s all kind of based on what the news headline is, what’s on social media, all of those things. How do you think about that?

First off, don’t know that that’s a new normal. To me that is normal. That’s been the normal since I got into the business in the mid 90s, right? In the mid 90s, was the dot coms. Everybody was going to get rich on an IPO and it was always the headlines, right?

So I don’t know that that necessarily is new. Politics, social media is arguably new here in the last ten to fifteen years.

I don’t know that that necessarily is new. What I would say is look, in the short term the market is a voting machine. And it’s driven by the media, it’s driven by all of the talking heads from Washington to Wall Street. In the long term, the market is a scale, it’s a weighing machine. And that’s where profits, earnings, prudent management of companies, those are the things that ultimately matter in the long run.

So I think the reality is that I don’t know that this is a new normal. Think to be fair to John’s question is that I do think it’s been exacerbated here over the past six weeks given the war and given the administration’s clearly interest in being in the spotlight and constantly trying to tweet out a message on what’s happening.

And that has moved markets and I think many investors should just try to ignore that and certainly don’t make investment decisions based on tweets or the headlines.

Great.

Talking about, we talked about various wars, and Jeff is asking, could the war with Iran have a permanent negative effect on the U. S. Stock market?

I love that question.

And I think the short answer to that is potentially, yes. I would broaden it a little bit and say that I do think that there’s a possibility that the Iran war has a, maybe not permanent is a strong word, but I would say a lasting impact on the U. S. Economy and the global economy for a pretty long period of time.

Permanent, I wouldn’t use that word, but I would say that the reality now for investors and for the global economy is that there now needs to be a geopolitical risk premium perhaps that we apply to the price of energy coming out of the Persian Gulf. And not just energy, helium, not just for like birthday balloons, but helium. We use helium for producing semiconductor chips, which we’re trying to bring here to the United States, right, from places like Taiwan.

So the fact that things like helium and urea, which is an input in fertilizer like we discussed, all of these things now, it is clear, can be shut off in virtually a moment’s notice. So while the U. S. May have militarily dominated Iran, the reality remains that Iran’s bar for success in this conflict was very low. All they had to do was threaten ships in the Persian Gulf enough to convince them not to try to get out through the Strait of Hormuz, right? So it was a very different bar for success for Iran relative to the United States and Israel. At least that’s what I’ve heard and that makes a lot of intuitive sense.

The market needs to price that in now. And I think that that is going to weigh on prices going forward. Even though the market today is pretty much close to new highs, that is a new calculus that I think we as investors are gonna have to take into consideration going forward.

So talking about how we sort of structure portfolios, I’m gonna combine a couple of questions here from Carol and from Howard. So Carol’s question is, is the traditional sixty percent equity, forty percent bonds still a good yardstick for a retired investor? And then Howard is adding to this. Are there good alternatives besides stocks and bonds that we should consider for a portfolio?

I love this question.

So to Carol and Howard’s question, I do think the sixtyforty is a good barometer. It’s a good benchmark and here’s why.

Most investors, most mere mortals are not going to invest one hundred percent of their wealth in the S and P five hundred index, is one hundred percent stocks for those who aren’t familiar.

A more realistic portfolio is something perhaps closer to a sixty percent stock, forty percent bond portfolio. And so I think that’s a good starting point to just look at that and say, okay, how does that mix? How has it performed historically?

And how is it performing today, you know, year to date?

So I think that’s a good starting point. What I would do is click a little deeper. What goes into the sixty, what goes into the forty is immensely important. So if the sixty is just U.

S. Large companies, that’s not very good. You want to own thousands of stocks in that sixty and not just U. S.

Stocks, but also non U. S. And emerging market stocks. Same thing with your bonds, you don’t want to just own bonds issued by the U.S. Treasury, you want to own corporate bonds and things like that and other sovereign bonds ideally in the forty.

To the last part of the question, the answer is absolutely yes. This gets back to our conversation a moment ago on private markets. Owning private equity, private real estate, private infrastructure, private credit. Yes, indeed. There are other things, other investments, what I would call investable assets that should be in that sixtyforty mix. Now related to this is I often get the question, shouldn’t I have a small piece of gold or cryptocurrency as part of my diversified asset allocation?

And I think many of our listeners know my view on that, that those are speculative assets because they don’t generate any cash. They don’t generate any cash flows. They just simply rise and fall depending on demand for those particular assets. We prefer assets that generate cash flows. So stocks, bonds, real estate, private companies, things like that. So I don’t think you need gold or commodities or anything like that in a portfolio, but I do think you have to pay careful attention to what goes into the sixty, what goes into the forty. And I would definitely include private assets as part of that mix.

Well, this is this is gonna be a hot ticket item. Uh-oh. Russell, several others in in the q and a are asking, what are your thoughts on the SpaceX IPO?

Gee, I’ve never heard that question before.

Yeah, can’t imagine it hasn’t come up.

So what I will do is I’ll telegraph this a little bit.

We are actually putting together a talking points that’ll be on our website at some point on SpaceX. So Bob Berlinson who heads up venture capital for the investments team, he put together a phenomenal investment, what we call investment committee memo. Lots of good detail. So we’re gonna be forthcoming with a piece on that.

Here’s what I would say, because I wanna answer the question.

It’s gonna be very expensive, right? And I think that’s objectively true no matter whether you agree with the thesis behind the combination because SpaceX isn’t just SpaceX. It’s a whole bunch of other companies that have been rolled under it, right? So it’s X, it’s XAI.

There’s a bunch of other things under that. So what we’re doing is we’re peeling it apart and saying, wait a minute, like what’s the strategic rationale for this combination of companies under this wrapper that we now call SpaceX? What it what do the earnings look like? What does the revenue growth look like?

What do the profit margins look like? One thing that I think is very clear is that it is going to be priced at somewhere north of one hundred times revenue, not earnings, but revenue. And so and by the way, that might scare you, but believe it or not, there are times many times when certain types of companies, especially private companies are valued in that sort of nosebleed level. So it’s not unheard of that SpaceX would have this crazy high valuation.

It’s not unprecedented, but you really have to believe the story that this company is gonna deliver on the promise of those future profits for investors. You’re really buying into the narrative and that’s what you have to ask yourself. Are you willing to, you know, I would say buy the hype, but hype is not fair because this is a company that’s generating real cash. You have to ask yourself, do you really believe in the future of these different companies that Elon has kind of pulled together under the SpaceX wrapper?

So there’s more forthcoming on that. One last thing I would say on this Kara is whatever you do, if you do happen to get access to a piece of it while it’s private, or if you choose to buy it once it’s public, they’re supposed to go public I think in June, keep in mind, keep it small. Don’t get crazy. I’ve seen so many investors over the years get so excited about a company that they over allocate to it.

Anything north than like one percent of your investable liquid assets I would think would be way too much, way too much. So keep it small. If the company delivers and goes to the moon, then great, you’re gonna do well. But if it flops, it’s not gonna blow up your whole balance sheet.

Great perspective.

I wanna transition a little bit. We talked about the Fed for just a little bit. You mentioned Kevin Warsh, the nominee for the Fed Chairman. So Kevin is asking, can you comment on Kevin Warsh’s Fed policy views as compared and contrasted to Jerome Powell, the current Chairman?

Yeah, I mean, it’s interesting. I mean, Kevin Warsh was on the FOMC, the Federal Open Market Committee back during the global financial crisis.

And back then he had a brand. And I think for the greater part of his career, he’s had a brand as being an inflation hawk. Somebody who favored higher interest rates to really put a damper on inflation.

So I have to admit, at least for me personally, this was a real shock, knowing that President Trump had been pushing for lower interest rates. And Jerome Powell has been resistant to simply placating the present. I think Jerome Powell, at least in my view, has done a very good job as Fed chairman in terms of his monetary policy and his views. And so I think Jerome is more focused on being data dependent, meaning existing data that comes in historical data that informs what the Fed should be reacting to.

Kevin Worsch coming out recently saying he favored lower interest rates is really an eyebrow raiser just because his brand was not as a dove, right? Somebody that typically would push for lower interest rates.

His argument is that, well, AI is going to have a deflationary impact on the U.S. economy in the years ahead. He might be right. I actually think he probably is right. But we don’t know that for sure.

And the Fed historically has not set monetary policy based on forecasts, based on things that might happen. So it sounds like Kevin Wash is open to making policy based on things that might happen. We don’t know that they’re going to happen. They might.

Whereas Jerome Powell is probably more resistant to that. Jerome Powell is probably more focused having a bird in hand versus two in the bush, right? He’s probably focused on no, let’s wait and see if AI has a deflationary impact and then we can always cut interest rates then.

So I think that’s the key difference between the two, at least at the moment based on everything I’ve read and everything that Kevin Walsh has communicated publicly.

Well, you touched on inflation, and we just have a very simple question from Tim. Just says, we about to see inflation get a lot worse?

What I would say is, I don’t know if that I would use the word a lot.

That that could be a subjective term. What I would say is I do think it’s true that it goes higher.

Right? And even within our own team, let’s be fair, we have a lot of debate around this. Right? My view is that it’s gonna take time for oil prices to stabilize even if Iran and the United States and Israel were to ink a peace agreement in ten minutes. It’s going to take a number of months, maybe even a couple of years for energy markets to stabilize.

Iran, for example, destroyed a natural gas processing facility in Qatar. Qatar has communicated it will take three to five years to rebuild that, to repair that and bring that production back online. Qatar is responsible for twenty percent of the world’s natural gas. Things like that are gonna take time to fix.

What that means is that we’re gonna have higher input prices for a lot of goods and services globally, at least in my opinion, for a period of time. When I look at the high price of urea and I look at food and food production, I mean, you go to your supermarket Kara, most of us don’t live where our food is grown. It’s shipped in from somewhere. Everything in the supermarket is wrapped in some form of plastic, right?

You go to a hospital, they make extensive use of surgical grade plastics. So I actually think we are gonna see higher prices. I don’t know how high, and that’s gonna be hard to forecast, but I do think it’s fair. In fact, I was just on a call with Goldman Sachs earlier in the week and I’m sorry, JPMorgan, and they had forecast that inflation will probably get up to around four percent by the end of this year.

We’re currently at three point three. Could see inflation rise to as much as four percent. We’ll see. I do think that personally, directionally, prices are going higher.

Whether they stay there, whether they ultimately drift back down, time will tell.

So we talked about AI a little bit earlier and this is actually AI related to, our investment process here at Mercer advisor. So Robert is asking has Mercer begun to incorporate AI modeling into their investment decision making process?

So I’ll unpack it a little bit. Do we use AI? Yes, we absolutely do. Right? Mercer uses it. We use it in our business.

We use AI really for aggregating data, for looking for information, patterns, things like that. Many of our investment managers use AI for the same purposes, looking for patterns, looking for investment opportunities in big data, in large, deep markets.

In terms of the decision making, that’s where I would draw the line.

I have not seen a situation yet. And I’m a huge advocate and I would say student of AI. I have not seen a situation yet where I would trust AI to exercise judgment.

AI is really, really good at quickly analyzing, aggregating, pulling together data, things like that.

But whether or not you should do something, I think I have not seen anyone relying on AI to just take over one hundred percent and decide whether or not we should invest in X, Y or Z. All right?

And believe it or not, I mean, itself is not new. We’ve had AI driven investment funds in the business, not at Mercer, but in industry since about twenty fifteen or twenty sixteen. And believe it or not, the returns on those strategies have been abysmal. It’s not very good.

All right, but I think it’s a powerful tool. I would be careful seeding to AI any decision rights. I don’t know that we’re there yet. Imagine at some point in the future we’re gonna see AI models that can make lots of decisions and do it well.

But I think at the current moment, we certainly as an organization are not trusting AI to make investment decisions. But it is part of the process.

Well, building on that a little, we’ve got a question about how to take out our biases in making investment. And you and I talked about this. I think we’ve talked about the Artemis two launch and it was very inspirational.

I remember watching the launch and I was in junior high when the challenger went and I remember watching it on TV in the classroom and the explosion and it was terrible. And I’m watching Artemis and I realized I was holding my breath for like the first two minutes and they launched and it was great. And I waxed and I thought, oh, now they’re gonna be great. And not even thinking through, they’re not even through the hard part yet. But because in my memory, it was the launch that was the problem that I wasn’t holding my breath for the rest of it.

I think we all have those sort of unconscious biases. And how do you combat that when you think about portfolio construction or your own investments?

Great question. And I had a similar experience, Carrie. I know we talked about that earlier in the week. And you know, because I was in middle school and I was there.

Know, we watched it Absolutely. I think every school kid in America watched the Challenger unfortunately explode. And, but it was a moment of pride watching the Artemis, you know, successfully along returning to and just following their journey. Like it gives you a lot of pride as an American and I think it should.

Such an enormous accomplishment. But with respect to biases, I mean, begin first and foremost with this is why we have a very large and very robust investment committee at Mercer.

It’s not just up to me, right? We have sixty five members of our investment committee across eight underlying subcommittees that focus on very specific areas.

And so bringing lots of voices into the room, right? These are highly trained financial professionals. Many of them have CFP certifications or CFA charter holders, MBAs and finance from some amazing schools.

And there’s centuries of experience across the investment committee. Actually, probably a few millennia now that I think about it. Not calling out any of us in terms of our age, but there’s certainly a lot of, there’s a depth and breadth of experience there. And so I think it first begins with having a lot of voices in the room.

That’s number one. Number two, we are a very data driven organization. We’re very quantitative in how we think about markets, how we think about portfolios, how we think about portfolio design, how we think about evaluating investment managers, right? So being very data driven, focusing on the science, the state of the financial science and incorporating that into our processes.

You know, maybe I’ll end on this is, is every year one of the things we do is we hold a summit called the Building Better Portfolios Summit, where we invite seven or eight global leading asset managers to come spend two days with our members of our investment committee. And one of the things we do there Kara is we actually give them in advance about six weeks in advance of the summit, a copy of all of our strategies, all of the holdings and the weights and everything else. And we ask them to grade our work. Come on in, spend two days with us, tell me everything that we’re ******** up that you would do differently.

Now, as you can imagine, these are big global firms, Goldman, JP Morgan, Dimensional, Vanguard, great, great organizations. A lot of times they like to talk to their book. They’re gonna say, well, you should just put it all in our product.

To meter that, we typically have two business school professors from leading business schools in the room, least one, occasionally two, to call them out and say, no, that’s not true. There’s no financial science to back up what you’re perhaps espousing. But it’s a very creative exercise, right? It’s an exercise in humility.

We’re letting really smart people grade our work. And we learn from that. So I think that’s how you manage biases. Humility, bring lots of voices into the room.

Don’t be afraid to have others grade your work, but always have a high standard of evidence. Come back to the data, right? Make decisions based on real world data.

Yep, that’s great. Well, to end on a positive note, Paul is asking, what are you most optimistic about in the next twelve to eighteen months?

Wow.

I mean, I think, you know, the U. S. Economy continues to be the world’s most dynamic, most innovative place to do business. We have our problems. I’m not saying we don’t. We absolutely do.

But I am always, I was just on a meeting late last night with a venture capitalist from California and just, I mean the optimism, the innovation, the focus on solving real world problems. I mean it’s infectious.

And so like if you’ve ever been to the Bay Area, if you’ve ever been to some of these areas, parts of New York, New York City, where there’s just, there’s like this entrepreneurial spark for solving real world problems.

I find that very, very exciting. I’m very excited about young people. I have a son who graduates college here in a few weeks and just him, his friends, his classmates, they are whip smart. Smarter than I think any of us were when we were in college.

And they’re smart, they’re socially conscious, they’re aware, they have good moral compasses. And I really think that generation is gonna change the world for the better. I have huge optimism when I think of, you know, I think it’s called, I think they now call it Gen Alpha. That young generation coming up out of college.

So I’m excited about those things. They give me hope. They give me hope.

Always a good thing to have. So, thank you for the time, Don, and thank you everyone for attending. As always, we’ve recorded these webinars and it will be posted on our website at merceradvisors dot com under our insights tab. It usually takes about two to three business days for us to be able to process those and get those posted. Additionally, we had so many great questions that we didn’t have the opportunity to get to. We have recorded them.

We do provide them to your wealth advisor for follow-up if we didn’t make it to those. So, we will make sure that we get those out to your advisors to answer if we didn’t have time to get them today. Thank you so much, Don. Thank you everyone for attending.

Thank you everyone.

Take care.