Markets adjust to a new trade war

Brian Levitt:

Welcome to Invesco's Greater Possibilities podcast. I'm Brian Levitt, and with me as always is Jodi Phillips. Hey, Jodi.

Jodi Phillips:

Hey, Brian. So today we're going to be covering quite a few segments once again, including reaching out to our friend Turgut Kışınbay, who's the chief US economist for Invesco Fixed Income. We're going to be asking Turgut for his thoughts on tariffs and their impact on the economy and markets.

Brian Levitt:

The news flow been fast enough for you, Jodi?

Jodi Phillips:

I could use a moment or two to process everything, to be honest.

Brian Levitt:

Just a few?

Jodi Phillips:

Just a few. I mean, we went straight from the DeepSeek news to some on again, off again, tariffs on Canada and Mexico, and then 25% tariffs on steel and aluminum, and then a hotter than expected US inflation report for January. If that wasn't enough in the background, I've been trying to remember my football trivia and markets, whether the markets have done better when the NFC or the AFC wins the championship.

Brian Levitt:

I always forget that one. What did you learn?

Jodi Phillips:

Well, the good news is it does better when the NFC teams come out on top.

Brian Levitt:

Okay. Happy with that.

Jodi Phillips:

Yeah.

Brian Levitt:

You sound a little concerned. Is there any bad news there?

Jodi Phillips:

Well, yeah, there's sort of like a Philadelphia based footnote to that. Yeah, some maybe bad things happen when Philadelphia teams win championships.

Brian Levitt:

Besides my feelings being hurt?

Jodi Phillips:

Well, yeah, no, not the optimal outcome for a Giants fan, but I'm talking about the markets. So consider this: in baseball, first of all, the Philadelphia Athletics were the top team in 1929.

Brian Levitt:

29, okay. Before the Depression.

Jodi Phillips:

Yes. And the Phillies won it all in 2008.

Brian Levitt:

Okay. Global financial crisis, we're doing great here.

Jodi Phillips:

Right, right. Switching to football, the Eagles won in 2018, and of course this year. So, yeah.

Brian Levitt:

Good to know. I think I'm going to try to not put too much credence into that. I'll stick to the usual models, rather than the Philadelphia sports teams.

Jodi Phillips:

Good idea, good idea.

Brian Levitt:

Good news is 1929 and 2008, years in which the economy was pretty over levered. I'd say that is not the case today. Interesting though. Maybe 2018 makes a little bit more sense. Back then we had concerns about tariffs, even the potential for the Fed to raise rates back then.

Jodi Phillips:

Raising rates. You don't think that's going to happen, do you?

Brian Levitt:

No, no. I can't get there. I know some people talk about it. I just can't get there and I think the bar's pretty high for the Fed.

Jodi Phillips:

I'm glad to hear that. I'm glad to hear that. And of course on the tariff conversation, as I mentioned, we'll be talking to Turgut in a moment. But before that, let's start with our first topic.

Speaker 3:

Trending Conversations.

Jodi Phillips:

Okay, Brian, so what's on everyone's mind?

Brian Levitt:

You mean besides the success of the Philadelphia teams and the market?

Jodi Phillips:

Yes, besides that. Besides that.

Brian Levitt:

So I am going to go with the trending conversation right now is the broadening of the market.

Jodi Phillips:

So it's happening, this is it?

Brian Levitt:

It's all happening.

Jodi Phillips:

Nice. So it's not just a Magnificent Seven this year, then? We're going to get performance from the Unmagnificent 493. Should we call them that? I feel like we need a different name. That's-

Brian Levitt:

Yeah, I'm sure they'd all be very happy to be called the Unmagnificent. I think it's actually 495. Aren't there 502 companies in the S&P?

Jodi Phillips:

I'd defer to you.

Brian Levitt:

Well, whatever, something like that. But yeah, it's more like the parts of the market that hadn't performed in a while have had a very nice start to the year. I'll include mid-cap stocks, value stocks, and this one might surprise you, Jodi, European stocks. So it's MEEGA, Make European Equities Great Again.

Jodi Phillips:

I'm going to have to track a whole different kind of football trivia if this is the case. So why do you think that is? Why do you think that is? What's going on here?

Brian Levitt:

I'd say a few things. I'll start with the top down. It's a higher nominal growth environment than we've been in for a long while. Meaning real GDP (gross domestic product) is good in the US, higher inflation, which some people worry about, I think is good. So that adds up to higher nominal growth, and that could benefit value-oriented stocks, smaller capitalization stocks. We always talk about, what can unlock the value, and higher nominal growth can help to do that.

Jodi Phillips:

All right. So the higher tide lifts more boats, that saying.

Brian Levitt:

Yeah, and some of it also would be policy-related. We always say, "Don't fight the Fed." Well, we don't want to fight the ECB, the Bank of England, and everybody else. So ECB, European Central Bank, is lowering rates, that's providing support to European stocks. We've seen some stimulus out of China. I'd also remind this idea about mid-caps, when the Trump administration came in people were excited about deregulation. Well guess which companies tend to face the highest regulation? Those tend to be mid-cap stocks. And also some optimism around mergers and acquisitions. If we're going to get this wave, that should benefit mid-caps also.

Jodi Phillips:

Great. So do you think the broader market performance that we're talking about here, can that be sustained?

Brian Levitt:

Yeah, so that's the optimistic view, but our base case is optimistic. So that's the idea. And investors right now, I think they want to participate, but they feel like perhaps the market's gotten ahead of itself or somewhat overvalued. Well, that's just one part of the market, that's the S&P 500. So it's not about blowing out of those big tech names, but think about the big tech names, and what else can we have in our portfolios.

Jodi Phillips:

Okay. So for the investors who maybe have grown a little bit tired of waiting for broad market performance, I mean we have kind of heard this before. What's the one thing you would tell them that might make it different this time?

Brian Levitt:

I would say it's been a long while since we've had a good nominal growth backdrop, but also a Fed that was preparing to gradually lower rates. I mean, think about it, for more than 20 years the Fed has either been raising rates or quickly taking rates to zero to respond to a crisis. So this is different, maybe a slower, gradual easing environment can help unlock some value that exists in parts of the market.

Jodi Phillips:

Okay. So that can support a broader market, so that's the idea then. Sounds-

Brian Levitt:

That's the idea.

Jodi Phillips:

We'll take it. All right, moving on to the next topic.

Speaker 3:

Phone A Friend.

Jodi Phillips:

So each episode we're reaching out to a friend of the podcast for a deeper dive on topics that are at the top of investors' minds. Tariffs, no big surprise. We reached out to Turgut Kışınbay, chief US economist at Invesco Fixed income, for his views on tariffs and the potential impact on the economy and markets. And it was a really great wide-ranging conversation, so we're going to bring in a couple different clips on what Turgut had to say. First, we asked him if tariffs are more of an inflation concern or a growth concern. And here's what he said.

Turgut Kışınbay:

I think tariffs can be both an inflation and a growth concern. So I'm not really worried about the sustained inflation when it comes to tariffs, but it can be a one-off increase in the price level. And the central banks are supposed to see through that, but that's easy to say in theory. But in practice it may not be easy for the Fed to respond, because if the last couple of weeks is an indication, tariffs will be used as a negotiating tool. It can be on and off, that we have tariffs on and then off, and then they're sustained at different countries, different sectors. So for the Fed it'll be a bit difficult to figure which part is transitory, and they have been burned by transitory, and which part is sustained. So I think it is not a sustained inflation risk, but it is still something difficult to manage for the Fed. So, in my view, it can just delay Fed easing cycle a little bit.

Jodi Phillips:

So then we asked whether the markets have become a little bit too complacent, perhaps, thinking that tariffs might just be a negotiating tool, an on-again off-again thing. So here's his thoughts on that.

Turgut Kışınbay:

I think the market may be a little complacent on the tariffs. So far I think the market is assuming that this is just going to be a negotiating tool. So just like maybe Colombia is an example that tariffs will be used as a threat, and then a couple of days later it's not implemented. But I think going forward that may not be the case. We'll get into more economic tariffs against autos, against countries with large trade deficits, that US has large trade deficits. Eventually tariffs will come, and I think that that will have an impact on growth, inflation, and even business confidence.

Jodi Phillips:

And then finally we asked for investors thinking about the type of risk profile they might want in their portfolio, if he thinks tariffs might bring about the end of the business cycle or whether it may create a less optimal outcome for the economy. And here's what he had to say about that.

Turgut Kışınbay:

I think tariffs create a bit of a more volatile investment environment rather than necessarily like a bearish market. It's just going to be more volatile. I think US economy is quite resilient and tariffs will be again, if they're implemented aggressively, a challenging environment for consumers and maybe some companies who are importing intermediate goods. But I think US economy has proven that it's quite resilient, and I think the policymakers will be sensitive to the economy, and if they see any signs of consumer or business concerns they will basically, maybe not reverse, or go slower, or do something about it. So it's not like I think they will just go ahead blindly and just implement tariffs across the board.

But given what we are seeing over the last couple of weeks, that is a more, it is a change. It's a new government. It is a new government that is basically changing the rules of the game compared to the previous decades. So it's a more uncertain environment and there's going to be some volatility. There are going to be winners and losers, but I wouldn't expect an across the board decline in risk assets or a recession in the economy.

Jodi Phillips:

All right, thank you Turgut for joining us. So our next topic is...

Speaker 3:

The Inbox

Jodi Phillips:

So here's where I go to the mail bag, so to speak, and select a question that listeners have had for Brian. You can always reach out to Brian on X or LinkedIn, @BrianLevitt. So, are you ready?

Brian Levitt:

Yeah, I'm ready.

Jodi Phillips:

All right, here's the question. What can we watch to determine if inflation is again becoming a problem?

Brian Levitt:

Price of eggs?

Jodi Phillips:

Yeah, I just bought some yesterday, so that's top of mind for me. But I thought we strip out food and energy prices when making the determination on inflation.

Brian Levitt:

Yeah, I think we should. Actually, the price of eggs is a perfect example of that. I'm always asked by people, "Why do they strip out food and energy? Does the Federal Reserve, do they not drive? Do they not eat?" They do, I think. They just don't want to be setting policy based on things that are idiosyncratic to the broad inflation picture. So for example, egg prices have risen significantly because of a breakout of avian influenza, bird flu.

Jodi Phillips:

Bird flu. All right. So that obviously has led to a significant reduction in the egg-laying hen population. But you're saying that's not a reason to raise interest rates?

Brian Levitt:

No, no, no. Culling the chicken population or the hen population should not be a reason to raise interest rates. Again, that's precisely why they strip out food and energy. It's about broad-based pricing pressure, not these idiosyncratic things.

Jodi Phillips:

Okay, okay. Then the real answer then, what should investors watch?

Brian Levitt:

So I'm watching the ten-year US inflation break even, which we may want to define.

Jodi Phillips:

Sure. All right. The difference in yield between a ten-year Treasury note and a ten-year Treasury Inflation-Protected Security. So essentially that's what the market is expecting from inflation, yes?

Brian Levitt:

Yeah. And the reason we use the long term is because it's going to kind of ignore some of those near-term shocks, like a spike in the price of eggs, or a spike in the price of auto insurance, or some of the things that have been happening. And so what the Federal Reserve wants is price stability, they want to make sure that long-term inflation expectations aren't becoming unmoored. So right now, long-term inflation expectations are sitting at around 2.5%. That seems okay. And if you break out of that, then the Federal Reserve may need to respond to it. That's something to watch. But as of now, it's sitting within what we would all perceive to be a comfort zone.

Jodi Phillips:

All right. So let's conclude with our last segment where we put Brian on...

Speaker 3:

The Hot Seat.

Jodi Phillips:

I'll ask Brian some quick questions and he must answer in as concise a fashion as he can. So, let's go.

Are you surprised that market volatility has remained low?

Brian Levitt:

No, not necessarily. I mean, we talk about policy uncertainty, and market volatility tends to be driven by policy uncertainty. I think the markets right now, at least on the monetary side, feel comfortable with the Fed being on hold. So not a significant amount of uncertainty there.

So trade uncertainty remains but the market has been comforted, at least for now, by the president having used the potential tariffs on Canada and Mexico as a starting point, a negotiating tactic, rather than something we were going to follow through with. So yeah, to the extent you get some additional uncertainty around those things, yeah, you could see some market volatility, but I'm not shocked that we haven't seen significant amount now.

Jodi Phillips:

Great. All right. I think you answered this question a little bit earlier on, but we'll ask again. Why the great start to the year for European stocks?

Brian Levitt:

Yeah, it's never about good or bad, investors need to remember that sometimes you just get these conditions where things are getting a little bit better. And the bar was set low. Say sentiment is improving as the European Central Bank lowers rates to support growth. And I would add to that, we'll see where these negotiations between Russia and the US over Ukraine go, but it seems to be a little bit of a wake-up call that the Europeans want to increase defense spending, that they may want to issue debt collectively. And so those are things that investors have wanted to see and could help to support growth.

Jodi Phillips:

Okay. All right. So, next question, we all know how much you like your market milestones.

Brian Levitt:

I do.

Jodi Phillips:

We talked last episode about Bitcoin at a hundred thousand, for example. So now, this time, what's your take on gold nearing $3,000 per troy ounce?

Brian Levitt:

Well, my take is, I've missed the whole thing. But that's okay, because the stock market has done fine as well. You know what's really interesting about gold, it's happened as real yields have risen. So I was always taught that if you can get a positive real yield in Treasuries, why gold? So this is a little bit different. I would say it's being driven by a few things, central bank demand, so particularly from China as they diversify away some from the US dollar. Also, the uncertainty we just talked about with regards to trade. So yeah, gold continues to get a bid.

Jodi Phillips:

All right, and that brings us to the end of another episode. So Brian, before we go, remind our listeners where they can follow you.

Brian Levitt:

Yeah. Thanks, Jodi. Visit invesco.com/brianlevitt to read my latest commentaries. I'm being told that I'm being paid by the click now, so help a friend out. I kid, of course. Of course you could follow me on LinkedIn and on X @BrianLevitt.

Jodi Phillips:

Thanks for joining. We'll see you next time.

Brian Levitt:

Thank you.

You've been listening to Invesco's Greater Possibilities podcast. The opinions expressed are those of the speakers, are based on current market conditions as of February 18, 2025, and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

This does not constitute a recommendation of any investment strategy or product for a particular investor. These comments should not be construed as recommendations, but as an illustration of broader themes.

Investors should consult a financial professional before making any investment decisions. Should this content contain any forward-looking statements, understand that they are not guarantees of future results. They involve risks, uncertainties and assumptions. There can be no assurance that actual results will not differ materially from expectations.

All investing involves risk, including the risk of loss.

Past performance does not guarantee future results.

Investments cannot be made directly in an index.

References to market performance at the start of the year sourced from Bloomberg as of February 18, 2025. Based on the returns of MSCI Europe Index, which gained 10.17%; the Russell Midcap Index, which gained 5.21%; and the Russell 1000 Value Index, which gained 5.75%.

The MSCI Europe Index captures large- and mid-cap representation across a universe of developed market countries in Europe.

The Russell 1000® Value Index is an unmanaged index considered representative of large-cap value stocks. The Russell Midcap® Index is an unmanaged index considered representative of mid-cap stocks. Both are trademarks/service marks of the Frank Russell Co.®

Statements about long-term inflation expectations sourced from Bloomberg as of February 18, 2025. Based on the 10-year US inflation breakeven.

Breakeven inflation is the difference in yield between a nominal Treasury security and a Treasury Inflation-Protected Security of the same maturity. Treasury Inflation-Protected Securities are US Treasury securities that are indexed to inflation.

The price of gold sourced from Bloomberg as of February 18, 2025.

In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.

Stocks of small- and mid-sized companies tend to be more vulnerable to adverse developments, may be more volatile, and may be illiquid or restricted as to resale.

A value style of investing is subject to the risk that the valuations never improve or that the returns will trail other styles of investing or the overall stock markets.

The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

Fluctuations in the price of gold and precious metals may affect the profitability of companies in the gold and precious metals sector. Changes in the political or economic conditions of countries where companies in the gold and precious metals sector are located may have a direct effect on the price of gold and precious metals.

Bitcoins are considered a highly speculative investment due to their lack of guaranteed value and limited track record. Because of their digital nature, they pose risks from hackers, malware, fraud, and operational glitches. Bitcoins aren't legal tender and are operated by a decentralized authority, unlike government-issued currencies. Bitcoin exchanges and bitcoin accounts aren't backed or insured by any type of federal or government program or bank.

Bitcoin is a digital currency (also called cryptocurrency) that is not backed by any country's central bank or government. Bitcoins can be traded for goods or services with vendors who accept bitcoins as payment.

Investments in companies located or operating in Greater China are subject to the following risks: nationalization, expropriation, or confiscation of property, difficulty in obtaining and/or enforcing judgments, alteration or discontinuation of economic reforms, military conflicts, and China’s dependency on the economies of other Asian countries, many of which are developing countries.

Fixed income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.

Monetary easing refers to the lowering of interest rates and deposit ratios by central banks.

GDP stands for gross domestic product, which is a broad indicator of a region’s economic activity, measuring the monetary value of all the finished goods and services produced in that region over a specified period of time.

Idiosyncratic developments refer to unique events that do not affect an entire market or portfolio.

Inflation is the rate at which the general price level for goods and services is increasing.

The Magnificent Seven stocks refer to Amazon, Apple, Alphabet, Meta, Microsoft, Nvidia, and Tesla.

Stocks of medium-sized companies tend to be more vulnerable to adverse developments, may be more volatile, and may be illiquid or restricted as to resale.

Real yields are the returns that a bond investor earns from interest payments after accounting for inflation.

A risk asset is generally described as any financial security or instrument that carries risk and is likely to fluctuate in price.

Stagflation is an economic condition marked by a combination of slow economic growth and rising prices.

A troy ounce is a unit of measurement used to weigh precious metals 

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