Lori Calvasina

Blake Gwinn

Amy Wu Silverman

Blake Gwinn

Yeah, so as you mentioned, I mean, it has long been our call that the Fed would cut in December. They'd cut in January, but by the time we got to that March meeting, the balance of risks would have shifted enough that it would have been easy for the for the Fed to pause. And what I mean by that is we're getting farther and farther away from some of those downside concerns, the hard landing concerns we had, largely driven by the labor market in early summer. Labor markets have clearly kind of stabilized. People are starting to look ahead to what the Trump administration means. Those upside inflation risks are starting to bubble up a little bit. So by that March meeting, you know, we thought with the Fed presumably by that point, having cut 1.25 basis points, and that balance of the risk shifting back to the upside on inflation, it would be pretty easy for them to pause. As we've seen in the past couple years, the Q1 data has been coming in very strong, and if we saw a repeat of that, and, we're heading into that May meeting with that very strong Q1 data, our view is that it would just be very hard to start cutting again, and that skip would basically become a long hold that lasted for the rest of the year. I'm a lot less convicted on the fact that they're going to cut in January. I mean, clearly there's a bias here to slow down. We had one dissent from President Hammock. We get one more inflation, one more labor market print, NFP print, before that January meeting, certainly some possibility that we see that same kind of strength in that print, and we go into that January meeting with another stubbornly high inflation print in the pocket. So that's certainly a risk. I'm still pretty close to a tossup on January. I haven't really changed our call for right now. The base case is still a cut in January. But, it's only going to take a stiff breeze to knock that thing over. As far as what that means for the rest of the rest of the horizon, I think we basically just take everything we were forecasting for the rest of the year, starting in March, and we just pull forward to January, because I think the same holds true, which, which is that if they don't cut in January, with this potential strength in Q1 data, it could be very hard for them to start cutting again in March. So what initially starts as a skip of January, may very well just become a hold.

Lori Calvasina

Blake Gwin

Yeah, sure. So, I mean, I'm gonna kind of work myself out to 10 years start at the beginning. You know, Fed funds rate, as I was just mentioning, we see this 4.0 to 4.25, type of terminal level. Obviously, there's a little bit more risk that that's 4.25, kind of 4.50, range, if they do end up skipping in January. So I think, markets have largely come to terms with that higher terminal rate. If you look at very front end pricing, it's pretty much in line with that kind of higher for longer type of environment. And the reason I mentioned the front end yields is because it really has implications for what's happening at the back end. I really don't think we're kind of breaking out of these post-election ranges, at least kind of in the near term as we go into that Fed hold. Now, I say that on a day when we are trading slightly above those ranges, but I do think, as we head into year end, there's inevitably going to be some pullback on this very positive data narrative we've had over the last few months. So I do think we kind of pull back into that four to 4.50 type of range for 10s, and that that at least persists until the shift in the market thinking around what the next stage looks like, when there actually starts to be some acceptance, the next phase of the economic and Fed narrative may be another expansion, you know, a renewed hiking cycle. Once that starts to be priced in, that's where we really see yields kind of breaking out of those ranges. But I will say, you know, our 10 year yield forecast is probably not as exciting. I do think as we get a more hawkish Fed, we price more in at the front end, and front end yields are really rising. That is going to keep things a bit subdued at the long end, because those longer run growth and inflation expectations are going to be somewhat dampened by the fact that we are having a more hawkish Fed. So we really see this as kind of a bear steepening the yield curve moving higher, but it's really more driven by the front end

Lori Calvasina: So Amy, let's turn it over to you now, the VIX spiked pretty sharply on the date of the last FOMC meeting, not getting quite as high as we did back in August, but a definite breakout from what we've gotten used to. Is that move a sign of things to come in the year ahead, from your perspective?

Amy Wu Silverman

Lori Calvasina

Amy Wu Silverman

Yeah, you know, I love that analogy, because I find it's like one of the few that doesn't make investors eyes glaze over. What I mean when I say paddling duck is, it's a market that may look calm on the surface, really smooth, you know, that's your index level volatility, but underneath there's really severe rotations. You know, two really simple examples of that is when RFK became the cabinet pick, you saw severe drawdown in healthcare. But similarly, when we got our treasury pick Besant, you got a rally in Financials, particularly on the regional side. The issue is, when you net those out in S&P returns, that tends to cancel itself out. And so on an index level, that volatility kind of belies how much rotation there was underneath. So you know, the fancy term we use in derivatives is the dispersion of the market. We think that's going to be very high next year, and when that's very high, it really has implications of how you think about index volatility, because it does look artificially damp, even though those duck feet are paddling under the water.

Blake Gwinn

Amy Wu Silverman

Lori Calvasina

Blake Gwinn

So, Lori, it's really interesting, I think there's almost a bit of a circular logic problem. If we have higher rates, if the Fed's hiking and rates are moving higher, because the economy is going absolutely gangbusters, you know, me and my simplistic rates world would think, okay, that's probably good for equities, because the economic side outweighs what's happening on the rates. The rates are just responding to the strong economy. But it sounds just like there may be a bigger impulse from those higher rates that even if those rates are moving higher because economic growth expectations are going up, that it still might actually be negative for equities. And as a rates guy, I always have a hard time wrapping my head around that. So I'm just wondering, you know, how do you kind of see those two factors, and if rates are going up because the economy is doing well, how do you kind of think about that in terms of equity valuations?

Lori Calvasina

Amy Wu Silverman

Lori Calvasina

Blake Gwinn

So, Lori, his year, you know, there was a lot of focus on labor market softening, but I think a lot of that weakness and kind of the rise in the unemployment rate that we saw came from a slowdown on hiring and also new entrants coming into the labor market. But layoffs have actually been very, very low. So I guess my question to you is, how are companies thinking about headcount into next year?

Lori Calvasina

Blake Gwinn

No, that's great, and I appreciate your non-economist, I'm really asking for the bottoms up, like what you're seeing. How do you think companies are looking at pricing pressure?

Lori Calvasina

I haven't noticed as much of a pricing discussion coming up in the earnings calls themselves. But what I will tell you is that since the since the election, we have kept a close eye on what companies have been saying about political dynamics down in Washington, and that can be anything from the Department of government efficiency to tax policy to tariffs to deregulation. We've been keeping an eye on all these topics. And the tariff discussion has been front and center. We've seen it across a number of industries, a number of sectors, and companies have made it clear when they've been talking about the potential for tariffs down the road. To be fair, they've mostly been talking about the possibility of China tariffs, as opposed to broad based tariffs. But in the tariff discussion generally, they have been very quick to emphasize that they would pass any higher prices that they were forced to pay onto their end consumer, whether that's, you know, an individual consumer or a corporate consumer.

Blake Gwinn

Oh interesting.

Lori Calvasina

Amy Wu Silverman

Okay? It's fatter tails.

Lori Calvasina

Okay, I would have guessed potholes, but I liked fatter tails. All right, Blake…

Blake Gwinn

Wait, she gets two words.

Amy Wu Silverman

There’s a dash.

Blake Gwinn

Oh, dashes are ok.

Blake Gwinn

Whipsaw. Given the Trump administration, and given that we have these very big risks that can crop up at any time, with the Fed kind of on hold, I do think we're just going to be really kind of whipped back and forth on the economic narrative and kind of on expectations around administration policies.

Lori Calvasina

Yeah, and I'll wrap up with mine, you know, my word is going to be tactical. And, you know, it's outlook season, right? And one of the things that you know just keeps coming up in my client conversations has been we have very limited visibility on the year ahead. I think the key is to be adaptable. I think that being wedded to one view over the next 12 months and not being willing to change it, because that's what you said back in November or December, I don't think that's realistic in the year ahead. And I agree with you, Amy, you know, the fatter tails. I think we've got, you know, big upside risks. I think we've got some downside risks. And I think in general, we just all need to keep the idea of being tactical and adaptable in mind in the year ahead.

Blake Gwinn

Can I just say we didn't even plan that… but look how well that worked out because Amy and I seem to kind of give the conditions, and then Lori gave the response to those conditions. Those conditions, the fat tails and whipsaw. You have to be tactical. So that really worked out nicely.

Lori Calvasina

That's perfect. All right. Well, thank you both for doing this. This was a great conversation. I'm glad we were able to pull this together before the end of the year. And to all of our listeners, we are so grateful that you joined us today, and we wish you all a very happy New Year.

Lori Calvasina

That’s all for this episode, thank you for tuning in today. If you enjoyed this episode, please subscribe and share with others.