Politics are likely front and center in investors’ minds as every week brings new headlines with new implications. Nanette Abuhoff Jacobson returns to the podcast to discuss a Republican vs. Democrat victory; what needs to happen for market performance to broaden out beyond large caps; and whether Fed rate cuts can revive the bond market.  

We recently recorded an episode with Nanette Eberhardt Jacobson about race, the fed, Trump versus Biden, and much of that conversation still holds true, and we’ll air that episode right after this. However, with the recent news of President Biden dropping out of the race, we’ve asked Nanette to rejoin us for an update on her perspective with this most recent change. Nanette, it’s so great to meet you again so soon.

Thank you, Julie. Glad to be here.

Well done that. You know, we talked in our podcast episode about how crazy this political season has been. None of us saw coming. I don’t think what happened just a day or two after we recorded that podcast, which was President Biden deciding to drop out of the race for the presidential election. So when we add that to the myriad of things that were coming at us, and then how do you how do you view the world today versus a day or two ago, knowing that these political winds are now shifting? What should what should our financial professionals be thinking about and what should they be looking for?

Yeah. And I appreciate the opportunity to give an update. Things are changing wildly. By the second. And so hopefully this brings some calm and reason to the discussion. So first off, we’re very early in this process. And so I think everyone needs to keep in mind that it’s very hard to develop a well-informed view of what the implications will be. Remember that, Kamala Harris has not chosen the running mate for VP yet. And there are some mechanics involved in the delegates at the Democratic convention having to nominate her. That is a requirement. But we’ll assume that they will nominate her there.

Obviously, the party is in high gear right now. And so we can assume that. But we don’t know what the VP, candidate will be. And that’s a little bit more important than in past races.

So in that way, when we look at candidates, are we really looking at candidates, or would you say more often than not really looking at platforms and therefore, I guess we shouldn’t expect significant change, although we probably should be listening for it. Is that kind of how where your expectation is at this point?

Yeah. I think when I think about the policy landscape with Kamala Harris, Harris instead of Biden, I think we, you know, should think about continuity or differentiation. And I think it’s going to be continuity. And that continuity is will be an extension of what Biden’s campaign was about. Same issues. The difference may be that she puts emphasis on issues that are important to young voters. As you know, young people have been very disillusioned by their choice. And so she’s going to want to increase turnout, particularly in the swing states. So that may mean emphasizing, issues about reproductive choice. It may be about Israel, equity and, climate. So we should look for signs of that. But I think that’s going to be on the margin. Basically, the big policy initiatives that Biden was campaigning on will continue.

Nanette. Since this is a timely update, what key polls or figures are you keeping your finger on the pulse on over the next couple of days here?

Yeah. I, you know, I think that watching the swing states and the polling in those states is really important. The six states that we always talk about, and for markets, you know, what I emphasize and you’ll hear in the remaining of the podcast, is

what’s common between Trump and Biden. And, the commonality is spending. I do think the key thing to watch is the probability of a Republican sweep if there is a sweep, i.e., not divided government by the Congress and the same party in the, Oval Office. That would mean more spending and could be inflationary. Deficits are already running 6.5% of GDP in the US, and with a sweep of either party, you’d have more spending, but there is a greater probability still of a Republican sweep. But we will say there’s a challenge to that now.

Well then that just when you thought you knew all the answers, they changed the questions. And that’s pretty much what the details are. Well, thank you for the update. And we invite our listeners down to enjoy our previously recorded, message, as Julie described earlier about the political landscape, markets, the fed, you name it, kind of our third quarter outlook, if you will. Thanks, Ben, and appreciate the update.

Thanks for the opportunity. Take care everybody.

Today we are delighted to welcome back, Nanette Abha Jacobson to the Human Centric Investing Podcast. Then that will provide actionable talking points for financial professionals to use with their clients in these very interesting times. Nanette Eberhardt Jacobsen is managing director and multi-asset strategist at Wellington Management Company and global investment strategist for Hartford Funds. With more than 25 years of experience in the capital markets, Nanette has held a variety of roles spanning the major asset classes. As the global investment strategist for Hartford Funds, she analyzes and interprets markets and investment opportunities for those mutual funds that are subsidized by Wellington Management Company LLP, and shares those views with Hartford Funds Sales Organization, the financial professional community, and major broker dealers and distributors. She also advises Wellington Managements institutional clients, including pension funds, insurance companies, endowments and foundations, and central banks, consulting on strategic asset allocation issues to develop multi-asset investment solutions.

Hi, I’m.

John. Julie [00:06:13

Julie.

We’re the hosts of the Hartford Funds Human Centric Investing podcast.

Every other week, we’re talking with inspiring thought leaders to hear their best ideas for how you can transform your relationships with your clients.

Let’s go.

Nanette. Welcome to the Human Centric Investing podcast. We are so excited to have you return with us today.

Thank you so much, Julie and John. It’s a pleasure to be here.

You know, Nannette, it’s funny. Sometimes people say Republican sweep or, you know, divided Congress. What we’ve seen over the last eight years is sometimes a sweep isn’t even a sweep, because the parties can agree with themselves within themselves. So even if there is some kind of a sweep, I think what we’re hearing is the margins are still going to be pretty narrow, and it may be difficult to get mandates, if you will, through any Congress.

Yeah. And, you know, I mean, one of the things that I’m thinking a lot about is and I’m sure our financial advisors are thinking about this, too, and hearing from our clients is deficits. As long as I’ve been doing this role, the question has always come up from every audience. What about the national debt? What about US deficits? And I have always said over the 12 years that I’ve been a global strategist for Hartford Funds, is that yes, I agree it’s a problem. The U.S. is relatively well positioned, but, it’s a percolating problem. But it’s the question, what’s the catalyst for that to really move markets today? I think the scenario is a little bit different if you do get a Republican sweep. You know, the biggest expense item is, extending the tax cuts. So the CBO, which is a nonpartisan, you know, department of the government and other nonpartisan, divisions have said that the extension of the tax cuts would cost $4.6 trillion over ten years. So a big question for me is, you know, then you’re talking about deficits higher than the current 6.5% of GDP. So the question is, John, as you said, will division within the party, even in a Republican sweep, will those deficit hawks speak up or are they going to stay quiet?

Well.

And there is one theory that deficit hawks are only vocal when we have a Democratic president. So, you know, it remains to be seen. But, you know, I think and what I would. I would, I would, make our listeners aware of is ten year treasuries. I think that ten year treasuries right now, they’ve been rallying recently because of the evidence of a fed cut. Not in July, probably, but in September. And then maybe more cuts after that. So that’s why the ten year has been doing well. The question in my mind is if it looks like the door is open, the floodgates are open to more spending. Then will I would watch the ten year because then you start putting a term premium. You know that’s the lingo for ten year yields rising because they’re really more uncertainty about more treasury supply to fund this huge growing deficit. So a lot of our portfolio managers are looking at the yield curve and seeing if the yield curve could steepen, meaning, you know, the short end of the yield curve could rally, it yields could fall. And the long end of the yield curve could stay relatively high. So those are the kinds of things, the conversations that we’re having and what I’m looking at.

So then that if we park politics for a second and talk more about the broader market, you just product. Yeah. Yeah, I know you’re disappointed. So if we if you just brought up the fed and potential fed actions, what are you anticipating from the fed over the next 6 to 12 months? Do you think that they are seeing enough evidence of a slowing economy that they’re realistically going to consider cuts before the end of the year?

I do. You know the Fed and Powell has kind of warmed up the market to a pivot. And even the Fed’s rhetoric and officials rhetoric has subtly changed, from being really, vocal about getting inflation under control, prioritizing inflation, and being super focused on CPI. PCA core PCA rents, shelter. I mean, we all have learned what OCR means, you know, owner, owner or equivalent rents. You know, the real nitty gritty details of inflation and what, Powell said in his, congressional testimony and he repeated at the

Economic Club of New York, is that, you know, the inflation numbers are coming down. The big kind of the headline, the recent headline was CPI and core CPI. So, you know, that was a couple of weeks ago and core CPI came in at 3.3% and headline CPI was 3%. So all of these numbers are lower. And, you know, getting close on PCA, which is what the fed looks at to their target. And at the same time we’re seeing some weakness, come through in the labor market, in manufacturing numbers in, the services economy. And so this is the fine balance that the fed is weighing, you know, cut rates too late and you risk a hard landing and possible recession, cut rates too early, and you risk inflation bubbling up again. So I think what the what the fed is preparing the market for is at least one rate cut this year.

And in that, obviously we have seen some economic numbers that show that the economy is weakening a bit. Do you think this is just a slowdown, or do you think that there is some real risk of recession ahead?

Yeah. So the R-word as in recession has emerged in our conversations. And I personally don’t see that. And my team doesn’t see that. And the reason is that, you know, we’re coming off really pretty good growth levels in the United States. I just want to remind everyone in the third quarter of last year, we had almost 5% annualized GDP, 3.4% in the fourth quarter. You know, we had a weaker first quarter. But I’m looking at growth going from, you know, around. Let’s say we go from 2.5% to 2% or 1.5%. Yes, it’s a slowdown, but it’s not a recession. Right. And the key ultimately is whether earnings can. Continue to be solid even with the slowing economy. And I would say yes. Earnings can still be okay with a slowing economy as long as it’s not a recession. Firms can cut costs. Their firms can become more, productive with automation, with, technology. So I still think with a pretty good growth environment, with inflation coming down and with monetary policy moving to easing, it’s still a pretty good environment for equity and credit risk.

So net, when we were to the point in the cycle where we tend to group all forms of fixed income together under one umbrella and just call it fixed incomes should do well. Right. But are there are there areas in fixed income that you favor more than others at this point? Like where do you think, opportunity lies within the broad umbrella of the fixed income market?

Sure. You know, I like credit broadly, and I think there are opportunities in, every sector. Right now we’re favoring high yield, because the all in yields are still pretty attractive at 8%. So, you know, when was the last time you could say you could get an all in yield and in the bond market of 8%? And it’s very interesting because the, high yield market in the U.S. has become a better quality market. Defaults are very low. They’re under the long term average of 4%. The market has actually benefited from less supply because, there’s a term called rising stars. What that means is that firms get their debt under control, and they actually get upgraded by the rating agencies from high yield to investment grade. So a lot of paper has actually left that market. And so it’s a smaller market. So the demand technicals in credit and the supply technicals and credit are really very good. And so even though we’re not expecting spread tightening, we do think that the Carey and the all in yield is still attractive. And we leave it to the experts to decide whether it’s emerging markets or bank loans or investment grade. But our team specifically, we do like high and and and even more granular than that. We’d like European high yield.

Great. Thank you.

Nanette. Will you share a few thoughts on domestic stocks versus international stocks? Obviously, international has underperformed for so long that many

U.S. investors have just chosen to stick with U.S. stocks. But do you think it’s a mistake to be avoiding international stocks? It was. We look forward.

Yeah. I, you know, I, I really sympathize with the view that stick with what has worked and. The U.S. market is very unusual because tech is 30% of the mark of the market. So and tech earnings have been extraordinary. You know, I mean, with the enthusiasm, you know, even call it euphoria of artificial intelligence that has just catapulted this group of stocks, into, you know, just incredible, incredible earnings. And, you know, we’re looking at a technology cycle that could be transformative and last for many years.

That said, it doesn’t mean that that will be a straight line. And so what our tech, analysts are saying is that there is going to be more differentiation. We’ve seen that already. We used to talk about the Magnificent Seven. Then it went to the Fabulous Four. And, you know, and there’s a lot more differentiation among those mega-cap stocks. So I think it’s worth pausing, looking at client portfolios and saying, how much exposure do I have to the US market and therefore tech and therefore just a few stocks. And as a financial advisor. You know, I wouldn’t want to be telling my clients, okay, you know, here’s here’s a portfolio of four. I’m putting all of your capital into four stocks, because that means you’re just exposed to one of those, or two of those going down by a lot. And I do think that there’s a big question as to whether all the CapEx spending, that’s going into artificial intelligence and GPUs, and chips, you know, these very, high capacity, chips, whether that will be supported by revenues. So, you know, I think our, our what I’m talking to clients about is broadening of the rally. And we started to see that already, broadening into small caps, broadening into value oriented. And in terms of international. I think, you know, my in rank order, my favorite markets are U.S., then you’re then Japan, then Europe, then emerging markets. That’s how I would rank them. And I still think there are opportunities in Japan.

we’ve taken some profits there. But I you know, when I think of the UK market, there’s an interesting one too. So anyway, yes, I do think you shouldn’t ignore, international stocks. I think there are opportunities. I still think there are opportunities in the U.S., and you can diversify within the U.S. as well as well as well as regionally.

Now that you mentioned a moment ago, the concentration risks and the you know that all the tech companies and the narrowing of the tech companies, but you also said the market started to broaden out. Do you think that but what will it take to continue that broadening? Like sometimes you say, you know, is it tech weakness where people start looking at other sectors, which would seem to me to also risk bringing the entire market down? But what’s it take in order for broader participation than just the these narrow tech stocks driving these indices?

Yeah, I’ll make three points. The first one is that earnings expectations. If you look at consensus EPS forecasts for 2025, you’ll see. And in the webinar that I did some days ago, there’s a nice chart that shows that the consensus earnings estimates for tech in 2025 are coming down, and the consensus estimates for the rest of the market are actually going up, in 2025. So expectations we don’t know whether those will materialize. But expectations are that that gap in EPS expectations is going to narrow with tech coming down and the rest of the market going up. That’s number one. Number two, certainly lower interest rates could sustain this rotation, that we’ve already begun to see. And, you know, we’ve seen I just want to point out the sectors that have outperformed over the past week or so. It’s been health care, utilities, real estate, industrials, financials, small cap and value. So those were all the underperforming sectors last year or year to date until a week or so

ago. And I think certainly utilities real estate or interest rates sensitive. So they’re getting a lift from the idea that the fed is going to start easing cutting rates. And then I do think, you know, there’s a political element there too, that if you do get a, you know, lower rates and less regulation, tariffs, etc., all these sectors, you could see a lift. You know, even the we were talking, this morning, the portfolio managers and I about the M&A environment. You know, we’ve had last year was a very scarce year for M&A activity, partly because of the scrutiny on antitrust. So could a Trump presidency, lower some of the restrictions on that? Who knows? I mean, JD Vance has also been very vocal about antitrust, but, you know.

Will have to see, but that could give a lift again to smaller companies, where large cap companies are looking for acquisitions. And it might be a little bit, you know, different regulatory environment, less a little bit less scrutiny, maybe.

Well, Nanette, you provided so much excellent insight today and we’ve covered such a host of topics. So thank you so much for our financial professionals listening. If they pick up the phone or meet with their clients next, how would you summarize this? What would be some of the key talking points that you would guide them to use with clients? Obviously, there’s a lot on everyone’s mind given the complex landscape that we’re in right now, would you be willing to share some of those talking points that you’re using with financial professionals right now?

Yeah, I like to talk in groups of three bullets, so I’ll stick to that script. And the first thing is, as we started the conversation is to acknowledge, validate the concerns that people and clients have about the current state of the world and politics and geopolitics. It is, concerning. And, and certainly, you know, gives you pause. Right. In terms of your outlook, however, as investors, we need to compartmentalize and really put that aside and think about the fundamentals, which are growth, inflation, monetary policy and fiscal policy. And those elements of the economy and the markets are not easy to predict, but easier to predict than the state of global, geo, you know, than of geopolitics or

U.S. politics. So, you do want to put more weight on those four things growth, inflation, monetary policy, fiscal policy. And then, of course, valuations. I happen to think that even though U.S equities are expensive, that valuations are not going to drive the next 12 months. I think that the environment for risk to perform, for equities to perform is pretty good. I wouldn’t be extremely overweight equities, but in our portfolios we have a slight overweight to global equities. and that’s because growth is slowing. But we’re not looking at recession. Inflation is coming down. And the fed is really at the cusp of easing. So that’s the second point. And the third point is to have your antenna up for inflation. I do think deficits are something to be concerned about. And this government is going to have to issue a lot of treasuries to fund those, huge national debt and, and fiscal deficits. So we should be alert to that. And look at the ten year Treasury to see whether, you know, I think the first response, in spending will be great growth, but there may be a secondary response, which is inflationary. And then you’ve got to think about your portfolio. Do you have inflation sensitive assets. Do you have energy commodities. Do you have commodities in general? And maybe even gold plays a role if we’re looking at a more stagflation era environment. So who knows. Lots of questions out there, lots of uncertainty. In the end, though, you know what I’m going to say? Diversify your portfolio because no one is smart enough to predict which path we’re going down. So make sure that you’ve got some assets to cover a variety of economic outcomes.

Well, perfect. Well, thank you for that synopsis. Truly appreciated. And for those of you that tuned in to our last episode with Nanette in 2023, we surprised her with a donation to the Brooklyn Center in honor of Mental Health Awareness Month. It was a very exciting day for us here at Hartford Funds, and Nanette is on the board of directors at the

Brooklyn Center, where they work to transform the mental health system through the development and delivery of innovative programs and services that are accessible to the community. Since this is the Human Centric Investing podcast, we would love for an update on your work with this important organization. Nanette, if you’re willing to give us one today.

Oh, yes. Thank you so much, Julie and John. And thank you again. I think I’ve told you that was, one of the best days of my career. Honestly, because it was such an incredible surprise and so generous of you. So I thank you again, for doing that. And, you know, my work continues, and I think the, the exciting development is, you know, that the Brooklyn Center is very focused on kids, and we just had a ribbon cutting for the opening of the Therapeutic Garden, which is a small outdoor space where therapists and groups can take, their clients outside, and, you know, play basketball, sit in little pods outside with flowers, walk around and, it just gives a another way of having, you know, conversations that surface, problems that kids have and challenges that they face. Both for teens and younger kids. So I’m, like, really, really excited about this. Because sometimes the face to face is too, you know, it can be very intense. And I think our therapists and social workers have found that, you know, having an outdoor space will be really beneficial. So that’s the latest.

It’s exciting, Nanette, and thanks to you and and all the work going on at the Brooklyn Center. It’s it’s really, really important these days, for sure.

Yeah, yeah. And of course, we would accept any more donations that you consider.

We’ll work on it.

I may as well give a plug.

Absolutely.

Well, thank you again, Annette, for being here with us today on the Human Centric Investing podcast. We can’t tell you how much we appreciate your insights.

Thank you so much. I really enjoyed it. And, thank you to all the essays and clients that, have taken the time to listen.

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Investing involves risk, including the possible loss of principal. Fixed income security risks include credit, liquidity, call duration, and interest rate risk. As interest rates rise, bond prices generally fall. The views expressed here are those of the podcast guest.