Greater Possibilities

Brian Levitt

Welcome to Invesco Greater Possibilities podcast. I'm Brian Levitt. With me is Jodi Phillips.

Jodi Phillips

Hey, Brian. So coming up in a bit, we will be having a conversation with Justin Livengood, who's the senior portfolio manager for the Mid-Cap Growth Strategies.

Brian Levitt

Yeah, Justin has been very excited about renewed activity in the initial public offering markets. He's been saying that this could be very good for or potentially very good for mid-cap growth investors.

Jodi Phillips

So companies coming to the IPO market as mid-cap businesses, I guess there's benefits to staying private for longer.

Brian Levitt

Yeah, that's what it seems like. So we'll be hearing from Justin on the IPO markets in a few minutes.  

Jodi Phillips

And, recent IPO activity has put a spotlight on stablecoins, so we’re going to talk to Justin about that topic as well.

Brian Levitt

So my goal in that conversation is to feel a little bit less like a dinosaur with that.

Jodi Phillips

So one tip if that's your goal, you might start by stopping quoting movies from 1997.  I couldn't help but notice your latest above the Noise commentary started with an Austin Powers quote. And it's one that might sound familiar to longtime listeners of this podcast. You've quoted him before. Austin only fears two things nuclear war and carnies.

Brian Levitt

Yeah. So I guess what you're telling me is I need new material and I need more modern references, I got it. Look, Jodi, I mean, from my perspective, I could never go wrong quoting Austin Powers.

Jodi Phillips

Well, in a business environment, I think you potentially could go very wrong with quoting Austin Powers, but. But not this time. It was a good quote.

Brian Levitt

Yeah, I don't think the carny community was offended by that. When I actually like carnivals. But, what I said was, you know, Austin Powers fears nuclear war and carnies. I fear the loss of the independence of the Fed.

Jodi Phillips

Yeah, we do know that that is a big fear of yours.

Brian Levitt

Yeah. It matters like the last thing we need in this economy, the last thing we need for these markets is inflation expectations becoming completely unanchored. Borrowing costs rising. And that's what I fear.

Jodi Phillips

Okay. Nuclear war, carnies and the loss of Fed independence.

Brian Levitt

Well, I mean, I try to not think about nuclear war. We are recording this on the day of Hiroshima. But I try to not think about nuclear war. I do like carnivals. So, yeah, the loss of Fed independence is what I fear.

Jodi Phillips

Okay. Understood. And very nice transition to our first segment.

Narrator

Trending conversations.

Jodi Phillips

All right Brian, what's trending? What's on everyone's mind.

Brian Levitt

So I think maybe we need to go back to this stagflation thing. Although I would categorize any comments about stagflation as hyperbole.

Jodi Phillips

Yeah, you've said it at least a million times to stop exaggerating about this.

Brian Levitt

I like what you did there. So, Yeah. Good one.

Jodi Phillips

All right, well, say more about this. Why do you characterize this as hyperbole?

Brian Levitt

Well, it's certainly not “stag”, right? I mean, you say stagflation. It's certainly not stag.

Jodi Phillips

It's not even with the weak jobs report and the significantly lower revisions to the prior months?

Brian Levitt

No. I mean, does it feel like stag to you?

Jodi Phillips

Maybe not. It does feel a little like things are slowing.

Brian Levitt

Yeah, I think things are slowing. No, I mean, we've been expecting this, right? The leading indicators of the economy where we're sort of pointing lower. We've been expecting a slowdown.

Jodi Phillips

Okay. So that's that's the stag part. What about the “flation”? What's inflation looking like?

Brian Levitt

I mean, the reality is goods prices are going to rise. Right. They're already starting to that's what happens with tariffs. But more importantly inflation expectations three years out, five years out. We look at that in the bond market comparing a nominal yield to a TIPS yield. Those have been very contained. And they actually declined following the that jobs report that you referenced. So you know look it's not “flation”. It's maybe a little bit of a goods price shock here. But the bond market is telling us it's not inflation.

Jodi Phillips

All right. So pull this all together for me then.

Brian Levitt

I’ll pull it all together for you. Look, this is what's trending. We've always said tariffs are going to result in less optimal outcomes slower growth higher goods prices. It's not ideal but it's also not stagflation. Right. Stagflation is a major policy mistake causing inflation expectations to become unanchored for years. Right. This is not stagflation. I believe the economy is going to muddle through.

Jodi Phillips

All right then, on onto the next segment.

Narrator

I disagree.

Jodi Phillips

So in this segment we find something that Brian has read recently in the news and disagrees with. So what is it this time, Brian?

Brian Levitt

Yeah, we've done some of these. As “I agree.” I'm going to strongly disagree. Taking us back to the intro on this. So I'm going to go with Bill Pulte on X, formerly known as Twitter. He said “I believe Jerome Powell is conducting economic warfare against America.”

Jodi Phillips

Okay. Yeah. This does sound like something you would disagree with for sure.

Brian Levitt

Can we change the title of this to I strongly disagree? I strenuously object?

Jodi Phillips

You strenuously object? Sounds like A Few Good Men reference.

Brian Levitt

Totally unfair. Yes. A Demi Moore, A Few Good Men reference. Yes. It was.

Jodi Phillips

We literally just talked about this. That movie is from 1992. So you're. Yeah.

Brian Levitt

Well, Rome wasn't built in a day. I'll get there. I am going to modernize my references, but. But look, Bill Pulte is the director of the Federal Housing Finance Agency. He's also a grandson of William Pulte. That's the founder of the Pultegroup. So though the Pultegroup is one of the nation's largest homebuilders.

Jodi Phillips

Okay, well, sometimes where you stand depends on where you sit, as they say.

Brian Levitt

Yeah, absolutely. I mean, look, I understand the head of the Housing Finance Agency wanting lower mortgage rates, who doesn't want lower mortgage rates? But the Fed doesn't control long rates. That's such a misperception. When I hear these things about economic warfare, the Fed sets short rates based on a dual mandate of price stability and full employment. If the Fed is pressured by the executive branch to lower rates, if that's the reason why they're lowering rates, Jodi, then what do you think happens to long rates?

Jodi Phillips

They go higher?

Brian Levitt

Yeah. So yeah, if the Fed loses credibility then long rates go higher. So to me that would be economic warfare. If the Fed lowers rates for the wrong reason, short rates and long rates go up because of it, that would be economic warfare not keeping short rates slightly elevated to make sure we don't have inflation.

Jodi Phillips

Okay, well then I guess the silver lining in this situation is if the Fed may have to cut rates for economic reasons, not political pressure.

Brian Levitt

Yeah, exactly. I mean, maybe that's the silver lining, right? You said it. That's the silver lining. So. All right. Sorry Jodi. If I got a little fired up there. But you know, this is a big topic for me.

Jodi Phillips

Well, that that's the whole point of I disagree, I think. But in our next segment, we'll give you a second to regain your composure. We're going to call in Justin Livengood with.

Narrator

Phone a friend.

Jodi Phillips

So we caught up with Justin for a conversation on the IPO market and how he thinks it could be beneficial to the mid-cap growth market. So first we asked him his thoughts on the reopening of capital markets. And here's what he had to say.

Justin Livengood

With the new administration and with sort of more stable Fed policy outlook for 2025, there was a lot of hope coming into this year by the investment banks and by the investment community that there were going to be a lot of IPOs, a lot of secondaries. The private equity firms definitely were hoping for that, because it's been a long time since they've really been able to start to monetize investments.

So we had a decent first quarter, particularly March, in terms of activity. But nothing quite as exciting as hoped for because we were still sort of feeling out some of the administration policies and where the economy was going to go. Then of course, April hits that the tariff disclosures occur. And that completely froze the market for the month of April.

And expectations at that point changed dramatically, such that there was much less optimism about the rest of the year for the capital markets. Could not have been more misleading. Starting in May, things came back a little bit. You know, you walk before you run, and a handful of deals came out the gate on the IPO market that were reasonably successful and that gave encouragement to the investment banks and some of the sponsors that had some deals teed up to go a little more in June.

And in June, suddenly we saw a flurry of deals that were very successful and that just got the ball rolling down the hill super fast. July has been a huge month of activity, such that May, June and July collectively as three months are up year-over-year significantly in terms of IPO issuance. Even August here as we sit one week in August, is still churning out a bunch of deals.

I've had five meetings in the last week and a half with either companies that are in the midst of an IPO roadshow or that are doing what's called a “test the waters” meeting. They're, you know, private, but getting ready to go public. Five in a week and a half. I can't remember that pace in the last ten years, frankly.

So things are absolutely, back there happening. And a lot of the deals are meaningful in size. So it's a mix of small caps. But even mid-caps, it's across industry.

So we're seeing a lot of financial service things. We're seeing some things in tech even frankly, some things in health care, which surprises me given how health care has not been a good sector in the market generally. So it's diverse in industry. It's diverse geographically. Asia and Europe are actually as busy as the US.

And there's a lot more to come, both globally, but also, you know, across industry from those PE backed sources.

So that's why I think there's a runway here. I don't think this is just a temporary little pop.

Jodi Phillips

Next, we asked Justin for some background on stablecoins, which is a topic that's gotten a lot of attention as of late. And here's what he told us.

Justin Livengood

Stablecoins are, in my opinion, one of the first good use cases of cryptocurrencies. It's an item. It's a coin that is not - it has a value that doesn't fluctuate. It's a $1 per coin, fixed ratio instrument that enables primarily cross-border payments, which is to say you can do a transaction with the stablecoin with someone not in your country.

And the value can be transferred instantaneously across the blockchain. So it's secure. You know, the recipient of that transaction is getting that value instantly, securely. And then they can take that coin and transfer it into their home currency or keep it in the form of a stable coin, which is very appealing for a lot of different industries’ transactions, both service but even goods-related, things.

And so there's actually been a lot of use of stablecoins for 7 or 8 years for cross-border transactions. You know, there are trillions of dollars of transactions cumulatively have been done using stablecoins. To conduct cross-border activity.

It's just now rising to the level, I think a lot of people are more aware of it. And seeing them, the use cases begin to expand. The other thing that just happened, which brought a lot of attention to this, was that Congress passed a bill called the Genius Act, which is offering for the first time regulation and sort of a set of guideposts on how these are all going to be policed and how they operate both in the US and globally.

And that's helping give some confidence to people, to use these stablecoins more, now that the rules have been laid out.

Jodi Phillips

And then finally we asked Justin what else besides the IPO market has been exciting to him lately, what sectors he's looking at in particular. And here's what he had to say.

Justin Livengood

My two favorite sectors all year have been industrials and financials. That remains true today. Nothing has changed.

So to take that one step lower, you know, the couple areas in industrials I'm most excited about are aerospace and defense. The aftermarket aerospace commercial aerospace market remains super, super tight. Super in demand as we're all flying a lot. And there's just not enough new supply of planes from Boeing and Airbus to keep up with that demand. So that whole supply chain is just really robust. We're finding lots of good opportunities.

There's also opportunities in defense right now, given the way that sort of, the new administration here in the US has required NATO and Europe to step in and foot more the bill for providing their own defense and security that's generating a lot of incremental orders and demand, for products that are often sourced out of the United States by, you know, defense companies here.

So there's some interesting things going on in defense as well as aerospace. The other big theme in industrials that's still very compelling, and probably incrementally more so even than the aerospace defense is this whole AI infrastructure play. You know, we've now heard over the last couple of weeks the big hyperscalers talk about increased CapEx budgets yet again.

And we're now talking many, many billions of dollars of extra spending on data centers and power sources. And that means all that money, all that CapEx is eventually going to be spent on, or for companies that are in our universe and the, you know, the small and mid-cap universe that are providing engineers and equipment to build out the grid to, you know, provide cooling equipment to data centers. You know, providing, all sorts of components, to, to the real estate and, again, data center industry. It's a fascinating land grab. And a lot of those companies live in the industrial sector.

The other thing we really like to see, of course, is companies that have visibility. And what's happening with this build out of AI infrastructure is companies are getting orders now for 2027, 2028. These are take or pay orders from, you know, the Microsofts and the Amazons of the world where that is as good a visibility as you could probably ask for.

And at very high prices. You know, margins are terrific. So when that game continues, at the rate it's now approaching, you can have a lot of confidence about the next couple of years, you know, revenue and earnings growth from some of these companies. So industrials in general a really exciting area and a place we’re overweight.

The other sector I said was financials.

And it goes back to this discussion about the capital markets being open. You know, the banks are doing really well, particularly the larger banks that have big capital markets, businesses and even some of the smaller boutique banks that focus on M&A and advisory work. There is a lot going on and a lot of pent up demand things where, you know, they've been on retainer for a long time waiting to actually start getting deal fees.

The deal fees are coming and their backlogs are huge. Again, we like businesses that have visibility. So the investment banks, the M&A boutiques have, big, big backlogs. They're talking about, you know, projects and sizes of deals that they haven't seen in a long time.

So you're starting to break through, with both IPOs and underwriting but also with M&A. Part of that M&A story is because we have a new, philosophy in Washington around allowing transactions to happen.

So, there's some great stuff going on in financials as well. And we're excited about the near term outlook in that group.

Jodi Phillips

So thank you, Justin, for joining us. And now we're going to conclude by putting Brian on.

Narrator

The hot seat.

Jodi Phillips

All right Brian I've got a list of questions for you as quickly as you can okay.

Brian Levitt

I’ve calmed down.

Jodi Phillips

Don't lose your composure this time. We don't have time.

Brian Levitt

I’ve calmed down, I'm ready to go.

Jodi Phillips

The clock is ticking. So first off, what is your take on recent revisions to the Bureau of Labor Statistics numbers?

Brian Levitt

Oh, you're trying to fire me up again? I see what you're doing there. So. Okay, my take on is I don't believe it was being driven by politics. The bigger issue is that we're getting these big revisions in the data. So it's hard to get a good grasp of what's going on in the jobs market. It's hard for the Fed to set policy.

So it may be worth debating methodology, because we're at a time when businesses seem less interested in participating. Or maybe for the time being, we'll just focus on payroll data coming from the private sector. I mean, ADP puts out a report, there's other reports. So, I'm not going to get too concerned over this. We will be able to monitor it.

Jodi Phillips

Okay. Yeah. I did see on your LinkedIn your chart showing those ADP numbers and the BLS numbers and the pretty tight correlation.

Brian Levitt

Pretty tight correlation. Thank you, ChatGPT for running those numbers for me.

Jodi Phillips

All right. Next question. Why are long term US interest rates going down? I mean what happened to those fears of US fiscal sustainability that were such a hot topic?

Brian Levitt

Yeah. I never thought it was about fiscal sustainability, that that is more hyperbole. The US Treasuries are going to trade based on the nominal growth potential of the economy. People get it wrong thinking the US Treasury bond trades like a credit. That is not the case, right? It's not about fiscal sustainability. So long rates are going down because US growth is slowing, right.Plain and simple.

Jodi Phillips

Okay. Next, if you only had one indicator that you could watch for this cycle, what would it be?

Brian Levitt

Inflation breakevens. Now this is every cycle. It's something new. 2008 we watched interbank lending rates. 2020 we watched social mobility. Right. It's something different in every cycle. This one to me it's all about breakevens given what's going on with terrorists if they stay contained inflation breakevens and we define them earlier, then the Fed is likely to ease. And I would expect this cycle to continue.

Jodi Phillips

Okay. Last question. What is the biggest risk to your market outlook.

Brian Levitt

Easy. And that's that goes right back to that inflation breakeven story. So the biggest risk is that we're wrong about tariffs and the implication for prices. My expectation I think most economists’ expectations is it's a price shock right. It's not broad-based inflation. But if it leads. And why is that. Because other goods don't get the same price lift. Services don't get the same price lift. It's really more of a tax on us. We spend less on other things if we're wrong. And it leads to broad-based inflation. And the Fed either has to sit here at higher rates or even have to raise rates, then I fear that would be the end of the cycle. That's not our call, Jodi, as you know. That is a risk to the cycle. As you know, there's always some type of risk to the cycle. And that would be this one.

Jodi Phillips

That's it. You're off the hot seat.

Brian Levitt

Oh, yeah. It's good to be off the hot seat. I got a little bit heated there again.

Jodi Phillips

All right, Brian, so before we go, remind our listeners where they can follow you for more commentary.

Brian Levitt

Yeah. Thanks, Jodi. Visit invesco.com/BrianLevitt to read my latest commentaries. And of course you can follow me on LinkedIn and on X at Brian Levitt. That's two T's.

Jodi Phillips

Well thanks for joining. See you next time.

Brian Levitt

Thanks, Jodi.

 

Important information

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 August 6, 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. 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 the weak US jobs report and lower revisions sourced from the US Bureau of Labor Statistics as of June 30, 2025. Based on US nonfarm payrolls.

References to leading economic indicators pointing lower sourced from the Conference Board as of June 30, 2025. Based on the US Leading Economic Indicators Index, which aggregates 10 key economic indicators.

References to rising goods prices sourced from the US Bureau of Labor Statistics as of June 30, 2025. Based on the US Consumer Price Index, which measures the change in consumer prices.

References to bond market inflation expectations sourced from Bloomberg as of August 6, 2025. Based on the 10-year US Treasury rate.

Correlation between payroll numbers from ADP and the BLS sourced from the Bureau of Labor Statistics and Automatic Data Processing as of July 31, 2025. Based on the correlation of the 6-month rolling average of the BLS Nonfarm Payrolls and ADP National Employment Report.

References to long rates going down sourced from Bloomberg as of August 5, 2025. Based on the 10-year US Treasury rate, which peaked this year at 4.79% on January 14^th and fell to 4.21% the first week of August.

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.

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

Stablecoins are cryptocurrencies whose value is tied to another currency, commodity, or financial instrument, such as the US dollar or gold.

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

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

Correlation is the degree to which two data points have historically moved in relation to each other.

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, or TIPS, are US Treasury securities that are indexed to inflation.

The Greater Possibilities Podcast is brought to you by Invesco Distributors, Inc.

Brian Levitt:

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

Jodi Phillips:

Hey, Brian. So we have an awful lot of stuff to cover today, definitely a long list of topics to get through, including later on in the show, we're going to be talking to David Nadel, who's a portfolio manager of the Invesco International Small Company Strategy.

Brian Levitt:

Yeah, international managers are in vogue again. I see them walking with a little bit of a straighter posture in the hallways of our offices, and I think that makes sense given the policy uncertainty that we have here in the United States.

Jodi Phillips:

Well, sure. I mean, given the performance of international markets since the beginning of this year, getting David on was definitely a top priority for today.

Brian Levitt:

Absolutely. And it's not only international markets, you've seen the US markets, in many instances, recover as well from what had been a challenging period. And it just reminds that even during difficult times, keeping an optimistic way of thinking can certainly be helpful to investors, don't get caught too much in the negative news flow, although I do wonder periods like this, Jodi, do you think I have a pessimism aversion?

Jodi Phillips:

Pessimism aversion? Oh, there's an interesting question. I don't know, I don't know.

Brian Levitt:

I mean, you know me well.

Jodi Phillips:

Yeah.

Brian Levitt:

Am I adverse to being pessimistic about markets?

Jodi Phillips:

About markets? All right, where is this concern coming from?

Brian Levitt:

Well, it just seems like when you do what I do for a living, you hear a lot of pessimistic views. So it's not as if there aren't times where I think markets could be overvalued or the economy may be challenged, but it's really these more existential crises that I hear from people, these things that they fear. I just have an aversion to being overly pessimistic about these things.

Jodi Phillips:

Okay, so all the talk about the end of US exceptionalism, the US can't fund its fiscal deficit, those kinds of issues?

Brian Levitt:

Yeah, but I mean, that's just this week.

Jodi Phillips:

Yeah, true.

Brian Levitt:

I've been doing this for a long time. I remember when the baby boomers were all going to turn 65 and crash the housing and stock market. Well, they're all 65 now. I remember when we were going to run out of oil. It doesn't seem to be a problem. You and I lived through 2022 together, that was going to be the beginning of a new era of stagflation. Did that happen? I remember when after COVID, every office building in the country was going to be empty. Jodi, anecdotally, my commute is awful again, the lines at lunch are intolerable. So office space, no, not every office building in this country is going to be empty. Certainly not the one I'm coming to every day.

Jodi Phillips:

All right, all right, so a little bit of pessimism seeping through on your commute and your lunch line, but when it comes to the big topics, that's where you draw the line.

Brian Levitt:

Oh, yeah, yeah, I'm not averse to pessimism in my day-to-day life, I'm all in on pessimism on my day-to-day life. So yeah, yeah, you're right, the better future, I am averse to be pessimistic about a better future.

Jodi Phillips:

Well, understandable. I mean, I think history has mostly proven you right on that front.

Brian Levitt:

Yeah, it's not fair though. The pessimists just get to sound so smart.

Jodi Phillips:

You say that, but I don't think that's true. I just think if the pessimists are wrong, no one cares and brings it up because it means something good happened and we're all distracted by the good thing that happened. I don't think the pessimists necessarily get to sound smart. It's just, they're either right or if they're wrong, we're celebrating something good.

Brian Levitt:

Yeah, okay, that's fair. I just wanted to make sure I'm not just too Pollyanna about a lot of these things that people worry about. I just can't get there. I prefer to be on the side of human ingenuity, innovation, advancement. Again, I think the historical context proves me right.

Jodi Phillips:

Okay. So with that, let's move on to our first topic.

Automated Voice:

Trending conversations.

Jodi Phillips:

So Brian, besides pessimism, what's on everyone's mind?

Brian Levitt:

I think what's been on everybody's mind, I mean, we've shifted from a tariff conversation. The market generally believes that we've seen the worst of the tariffs and things will get incrementally better here. The focus is now really on the fiscal deficit topic and what the implications are for US growth and for US treasury rates.

Jodi Phillips:

Sure. Well, I mean, that's a topic that's clearly in focus given the one One Big Beautiful Bill that's making its way through Congress at the moment, the Congressional budget office has estimated that it'll add 2.4 trillion or so to the deficit over the next decade.

Brian Levitt:

Yeah, that feels like a pretty big number. I wanted to put it into context. So 2.4 trillion is enough to give every person in the world 52 Big Macs.

Jodi Phillips:

That's your context?

Brian Levitt:

That's my context.

Jodi Phillips:

Okay, I guess that's one way to measure it. I don't know. Do fast food places have dollar menus anymore, Brian? Did that come up in your research? I miss dollar menus.

Brian Levitt:

I think if there was dollar menus, we could give them a lot more than 52 Big Macs.

Jodi Phillips:

I mean, 2.4 trillion went a lot further back in my day, but all right, all right, so be it.

Brian Levitt:

I don't know. I mean, so we'd be giving them a couple of hundred Big Macs? I don't know if that's-

Jodi Phillips:

Fries, fries, a shake...

Brian Levitt:

Fries, yeah.

Jodi Phillips:

... something. We could do Happy Meals.

Brian Levitt:

I don't know if we would feel great about doing that, but...

Jodi Phillips:

Rates, all right, let's get back to rates. How has the US treasury market been responding to this?

Brian Levitt:

Well, that's what's so interesting about it is, so the 10-year Treasury rate was at 4.27, that's on election day, November 5th, 2024, and ended last week at 4.47. So that's a whopping 20 basis point move that seems to have everybody so concerned.

Jodi Phillips:

Okay, so up a bit, but that doesn't seem like it's enough to worry about. I don't know. What do you think?

Brian Levitt:

Yeah, it depends on the day. I mean, I think it's fair to say the term premium has increased. What does that mean? I mean, investors demanding a little bit more to go out on the US treasury yield curve, but it's not like it blew out to this level where everybody should be thinking the US can't fund this 2.4 trillion in additional deficits over the next decade. It went out to a level that's consistent with the historical average. I could actually argue that investors over the last number of years weren't demanding enough to go out on the US Treasury yield curve.

Jodi Phillips:

All right. So bring it home, what's the bottom line then with this trending conversation? What do you want people to take away?

Brian Levitt:

Yeah, I mean, I think rates are higher now, rates will be higher than they were in the prior cycle, but I would say thankfully, what it means is the world is expecting a better growth than inflation environment in the US or a higher growth than inflation. So maybe you get a little bit more of volatility in rates. But this idea that the US rate market is behaving like an emerging market country that could default, there's just... we need to stop that. There's nothing in the data, there's nothing in the bond auctions that would suggest that to be a case.

Jodi Phillips:

Okay. Then let's move on to our next topic.

Automated Voice:

I agree.

Jodi Phillips:

So this is where we find something in the news that Brian has read recently and agrees with. So what do you got?

Brian Levitt:

Yeah, I'm going to go with Steve Rattner in the New York Times. He was talking about the future of employment, why we shouldn't necessarily be looking to bring manufacturing back to the US. So Rattner's comments were we led the Industrial Revolution, we can be leaders again in new sectors, substantial advantages in technology in general, and artificial intelligence, well positioned to remain the world's most dynamic economy. This is the key part, Jodi, the challenge is to ensure that Americans are educated, trained, positioned to take advantage of the jobs of the future, not necessarily trying to bring the manufacturing jobs back.

Jodi Phillips:

All right, all right. Well, I mean, that definitely sounds like it tunes into some of the optimism you were talking about earlier, substantial advantages and dynamic economies, so.

Brian Levitt:

Yeah. And Rattner talks about the benefits of outsourcing over the past decades. He does admit it was going too fast, not preparing enough of the workforce for it, but for all the talk of bringing manufacturing jobs back to the US, I was wondering if you wanted to take a guess of how many manufacturing jobs are actually open in the US today.

Jodi Phillips:

Oh, all right, well, I have no idea, so I'll just guess a nice round number, I don't know, 100,000.

Brian Levitt:

Yeah, so it's actually closer to 381,000. Average over the last two years has been about a half a million.

Jodi Phillips:

Wow, okay. So we do have some jobs to fill, even before the impact of tariffs.

Brian Levitt:

But I think at the end, the most important thing is for all this talk about it is tariff negotiations do seem to be moving in a favorable direction. So I think ultimately we will move beyond the worst of this and again, start to thinking about those advantages that the US does have. Not that there aren't great businesses international as well, but again, just back to this pessimism aversion, this is not the end of US exceptionalism.

Jodi Phillips:

Great. Then let's go into our next topic.

Automated Voice:

Phone a friend.

Jodi Phillips:

So this is where we caught up with David Nadel for a conversation on investing outside of the US. So we asked him several questions. First, we discussed with David the positive start that international stocks have had this year. So what does David attribute that to, and does he think it's sustainable? Here's what he had to say.

David Nadel:

Yeah. So I think we attribute it to a kind of reversal of the trends that have been going on for much of the last 15 years that have propped up US equities. So you had much better growth from the US than the rest of world, or at least better than the eurozone, you had a much stronger dollar, and if you wind back the clock 20 years, the EU economy was roughly the same size as the US. The US is now 50% larger. I mean, the US has probably benefited from the global trade disproportionately, although we're now in a tariff war.

You look at the DXY, the DXY is now broken through support levels on the downside. It's in the high 90s. I mean, they could certainly test low 90s, maybe move back into the 80s because the tariff war is delegitimizing to the US dollar. And I think that the administration wants a weaker dollar to try to stimulate exports. But exports are, of course, going to face their own challenges because of reciprocal tariffs.

Jodi Phillips:

Next, we talked about valuations and how international stocks stack up against US stocks. Here's David's thoughts.

David Nadel:

So in terms of valuation, I mean, as you would expect given that international has underperformed the US for most of the last 15 years, there's a massive valuation gap between international equities and US equities, with the US being much, much more expensive. So I think the Russell 2500 is at about a 50% premium to the international SMID benchmark on a forward PE basis, roughly 40 or 50%, I mean, quite substantial, and that's on elevated earnings. So we're talking about a big multiple premium on elevated earnings, whereas international earnings are not at peak levels.

Jodi Phillips:

Then we moved on to the subject of interest rate cuts, and David shared his opinions on global central banks' capacity to cut rates.

David Nadel:

We think that the international SMIDs are in a much more likely position to benefit from rate cuts than US SMIDs are because the tariffs are obviously inflationary, it puts the US Fed in a box. I mean, we're seeing the sort of jousting match and jawboning, but in theory, if you have a independent central bank, inflation is part of their mandate. By comparison, you look at the BOE, you look at the ECB, you look at the BOJ, they're not facing those same inflationary threats and dynamics. They have more capacity to cut rates.

Jodi Phillips:

Next, we talked about how US investors have or have not historically embraced the international SMID asset class and his team's research into the performance of this asset class compared to larger stocks. Here's what he had to say.

David Nadel:

So the data indicates, it's actually kind of shocking, there's very little allocation among US investors to international SMID. It's less than 1% actually of equity allocation compared to about 13% for US SMID and maybe, I don't know, 7 or 8% for international large. So it's a very small allocation.

SMID is viewed as higher risk than large, but the data doesn't really bear that out. We looked at rolling performance periods, international SMID versus international large, we found that international SMID beats international large whether international companies in general are beating the US or the US is beating international, but the risk-adjusted return figures are much better than people think. The Sortino ratios they're actually about 15% better for international SMID than they are for international large.

So the whole perception that people have about the risks of international SMID relative to large, I think these are misplaced.

Jodi Phillips:

Finally, the conversation drifted toward tariffs

David Nadel:

There's so much in this tariff discussion, there's so much discussion about where the products are sourced from or geographic locations and all this. What's much more important, that is how mission-critical are these products to the buyers? If it's a mission-critical service or a product, a company that's got pricing power, a company that's got a capacity to suffer, people are... and it's a B2B business, tariffs just don't really impact stuff like that.

Jodi Phillips:

And that was phone a friend. Thank you David for joining us. Now, we're going to conclude by putting Brian on.

Automated Voice:

The hot seat.

Jodi Phillips:

So Brian, I got questions for you, answer them as quick as you can. First, when would you become more concerned about the state of the US economy? What would that take for you to maybe get a little pessimism in that thought process?

Brian Levitt:

I always watch corporate bond spreads. That's my canary in the coal mine. If corporate borrowing costs relative to a risk-free rate, were going up significantly, I would be concerned. Instead, the high-yield bond market, so the lowest-rated US corporate borrowers is actually positive this year. Last I checked, outperforming equities. So to me, that is not signaling an economy that is rolling over into a recession.

Jodi Phillips:

Okay. And now it's time for the mandatory Federal Reserve question, will the Fed cut rates this year?

Brian Levitt:

If you look at the world interest rate probabilities, so what are the implied rates telling us? The market is saying maybe twice. I heard a great comment recently that that twice is just kind of an average of what all investors are thinking. And the reality is the Fed may cut zero times or six times more realistically than twice. And what does that mean? That means either the economy remains resilient, and they don't have to cut rates, or the economy rolls over, and they respond quickly and have to take rates down, what, six times. And the reason that you would say six is that would be the normalization of the yield curve, the three-month getting down into the mid-three levels or so. As of this point, I'll take zero, zero rate cuts rather than six.

Jodi Phillips:

Okay. All right. And then final question, do you think President Trump's Big Beautiful Bill is going to become a large lovely law?

Brian Levitt:

Yes, I do. There may be some changes along the way, but yes. And I like large lovely law. You should probably put a trademark on that and send it over to 1600 Pennsylvania Avenue.

Jodi Phillips:

Yeah, yeah, I'm sure. All right, all right, that's it, you're off the hot seat.

Brian Levitt:

Good, thank you.

Jodi Phillips:

So before we go, Brian, where can our listeners follow you for more?

Brian Levitt:

Yeah, thanks for asking. Visit invesco.com/brianlevitt to read my latest commentaries. And of course, you can follow me on LinkedIn and on X @BrianLevitt.

Jodi Phillips:

Great. Thanks for joining. See you next time.

Important information

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 June 11, 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. 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.

Statements about the performance of international markets this year sourced from Bloomberg as of June 16, 2025. Based on the year-to-date performance of the MSCI All Country World ex USA Index, which returned 16.9%.

Statements on the recovery of US markets this year sourced from Bloomberg as of June 16, 2025. Based on the performance of the S&P 500 Index since the market bottom on April 8, 2025.

Data on US Treasury rates sourced from Bloomberg as of June 9, 2025.

Statistics on US manufacturing jobs sourced from the US Bureau of Labor Statistics as of May 31, 2025.

Statements on the performance of the high yield bond market compared to equities sourced from Bloomberg as of June 12, 2025. Based on the year-to-date performance of the Bloomberg US Corporate High Yield Index and the S&P 500 Index as of June 19, 2025. The S&P 500 was up 2.33%, and the high yield index was up 3.31%.

Statements on the performance of tech stocks sourced from Bloomberg as of June 12, 2025. Based on the performance of the S&P 500 GICS Information Technology Sector Index from the bottom on April 8, 2025. This index comprises those companies included in the S&P 500 that are classified as members of the GICS® information technology sector.

Statements about implied rates sourced from Bloomberg as of June 12, 2025. Based on Fed Funds implied rates. The Fed Funds rate is the rate at which banks lend balances to each other overnight.

Fed Funds implied rates are the difference between the spot rate and the futures rate.

Comments about the historical economic growth of the US compared to the eurozone sourced from the World Bank as of May 31, 2025. Over the past 20 years, Euro Area nominal gross domestic product growth has increased from $6 trillion to $15 trillion. US nominal gross domestic product has climbed from $8 trillion to nearly $30 trillion.

Comments about the strength of the US dollar sourced from Bloomberg as of May 31, 2025. Based on the US Dollar Index.

Comments on the valuation gap between US and international stocks sourced from Bloomberg as of May 31, 2025. Based on the price to earnings ratio, or P/E,  of the MSCI All Country World Small Cap Net Total Return USD Index and the Russell 2500 Index.

Comments about US investors’ allocations to international small and mid caps compared to large caps sourced from the Investment Company Institute as of May 31, 2025, based on mutual fund and ETF assets.

Over 10-year rolling periods from July 1, 2007, to March 31, 2025, international SMID had average annualized returns of 5.59%, compared to 4.43% for international large. This time period includes periods of US outperformance and international outperformance. Based on the MSCI All Country World ex USA SMID Index versus the MSCI All Country World ex USA Large Index.  

Over 10-year rolling periods from July 1, 2007, to March 31, 2025, the average Sortino ratio for international SMID was 0.55 versus 0.46 for international large caps — a 16% difference. Based on the MSCI All Country World ex USA SMID Index versus the MSCI All Country World ex USA Large Index. The Sortino ratio is a measure of risk-adjusted return that focuses on downside risk.

There are 8.2 billion people in the world, and $2.4 trillion divided by 8.2 billion is roughly $300 per person. The average price of a Big Mac is $5.79, per Food & Wine. So that is enough to buy everyone 52 Big Macs.

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

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.

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.

The profitability of businesses in the financial services sector depends on the availability and cost of money and may fluctuate significantly in response to changes in government regulation, interest rates and general economic conditions. These businesses often operate with substantial financial leverage.

Many products and services offered in technology-related industries are subject to rapid obsolescence, which may lower the value of the issuers.

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.

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.

High yield bonds, or junk bonds, involve a greater risk of default or price changes due to changes in the issuer’s credit quality. The values of junk bonds fluctuate more than those of high quality bonds and can decline significantly over short time periods.

The MSCI All Country World ex USA Index is an unmanaged index considered representative of large- and mid-cap stocks across developed and emerging markets, excluding the US.

The S&P 500® Index is an unmanaged index considered representative of the US stock market.

The Bloomberg US Corporate High Yield Index measures the US dollar-denominated, high yield, fixed-rate corporate bond market.

The US Dollar Index (or DXY), measures the value of the US dollar versus a trade-weighted basket of currencies.

The MSCI All Country World Small Cap Net Total Return USD Index captures small cap representation across developed and emerging markets.

The MSCI All Country World ex USA SMID Index captures mid- and small-cap representation across developed and emerging markets, minus the US.

The MSCI All Country World ex USA Large Index captures large-cap representation across developed and emerging markets, minus the US.

The Russell 2500™ Index measures the performance of the small to mid- cap segment of the US equity universe.

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

The yield curve plots interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates to project future interest rate changes and economic activity.

Correlation is the degree to which two investments have historically moved in relation to each other.

The price-to-earnings ratio (or P/E) measures a stock’s valuation by dividing its share price by its earnings per share.

Forward P/E ratio is a variant of a company’s price-to-earnings ratio and is calculated by dividing the company’s current share price by its expected earnings, usually for the next 12 months or the next full fiscal year.

The term premium is the compensation investors require for bearing the risk that interest rates may change over the life of a bond.

A basis point is one-hundredth of a percentage point.

Spread is the difference between yields on differing debt instruments, calculated by deducting the yield of one instrument from another.

EU stands for European Union.

BOJ stands for the Bank of Japan.

BOE stands for the Bank of England.

ECB stands for the European Central Bank.

B2B stands for business-to-business.

SMID is short for small- and mid-cap stocks.

The Greater Possibilities Podcast is brought to you by Invesco Distributors, Inc.

Brian Levitt:

Welcome to Invesco's Greater Possibilities podcast. I'm Brian Levitt. With me as always, my co-host, Jodi Phillips.

Jodi Phillips:

Hey, Brian. So did you have a hard time preparing for this episode today? I'm curious.

Brian Levitt:

Just a little bit. Yeah, I'd say.

Jodi Phillips:

Yeah. Yeah. Our timing was really impeccable for the last episode. I believe we recorded it about 12 hours, give or take, before Trump announced his 90-day pause in most reciprocal tariffs.

Brian Levitt:

Yeah, I think that's Murphy's Law. I was on an airplane when it happened, so I had to wait to land to find out whether we could actually use the podcast or not. But that was a fun day. I was very concerned about where markets were going when the plane took off, and by the time we landed, the S&P 500 was up about nine and a half percent. So, not bad.

Jodi Phillips:

Nice. Sounds like the kind of day you don't want to miss.

Brian Levitt:

Yeah, we definitely don't want to miss those kind of days. And I was thinking about that the whole day. I mean, the challenge that investors always have is great days like those almost always happen around the worst days. So you think you're timing these things well and then bang, you're missing 9.5% update.

Jodi Phillips:

So then you're implying that maybe we shouldn't try to time the markets.

Brian Levitt:

Yeah, you've heard that?

Jodi Phillips:

Once or twice. Once or twice. Okay. That sounds like it was an interesting plane trip for you. Would you have rather had that fun market surprise or a podcast that wasn't stale?

Brian Levitt:

That's probably both. Can I ask for both?

Jodi Phillips:

Yeah. You can ask, but good luck. Good luck.

Brian Levitt:

Yeah. So you think about it, it's like we're joking, but it's even hard to plan for podcasts right now. Like how could businesses even plan to build factories, right? These are the jokes that are going on amongst my friends.

Jodi Phillips:

Is that what counts as humor in macroeconomics circles?

Brian Levitt:

Yeah, that's the dark macro humor.

Jodi Phillips:

I need to start hanging out with you and your friends. That sounds like great conversation.

Brian Levitt:

You're always welcome, Jodi. But I think that's the rub for this market right now. It seems like these markets are looking to bounce on any good news. Challenge is that policy uncertainty persists. So it's hard to know one day from the other. One day, you're kind of considering the prospect of for a long US-China trade war, and the next day Treasury Secretary Bessent starts talking of de-escalation. So it's like you're getting whipsawed a bit on this.

Jodi Phillips:

Well, of course, compounding the issue is that we've seen the president directing comments to Federal Reserve Chairman Jerome Powell. So there's been more uncertainty or speculation around that as well.

Brian Levitt:

Yeah, that wasn't helpful. The exact quote was, "There could be a slowing of the economy unless Mr. Too Late, a major loser, lowers interest rates now." And then the now is in all caps. And so you saw the market on April 21, and that was another tough day. That was a rare combination of US stocks down, US treasury bonds down, US dollar down. So if you want to risk the Fed's independence, you could affect all major asset classes.

To me, the biggest concern about that, and I think maybe we're walking back it a bit, if the Trump were to fire Powell, the market, which is now focused on whether this is recessionary, you could see it move from recession concerns to stagflation fears. Now this is not stagflation, but to stagflation fears, and I think that would be a significantly worse outcome for stocks.

Jodi Phillips:

Sure. Well, as we record this, and I guess we should always say as we record this, it doesn't sound as if the president intends to fire Powell. So perhaps instead we might see some blame thrown his way for the looming slowdown in economic growth.

Brian Levitt:

Oh yeah, that's fine, right? Presidents can always blame the Fed chair. I'm not worried about that at all. Let's just not mess with Fed independence. And let's not have to rerecord the intro to this in a few hours.

Jodi Phillips:

Don't get on a plane, Brian. Don't go anywhere. Don't go anywhere. All right, so we entered this year with the notion of American exceptionalism, but the US dollar index, which of course measures the strength of the dollar against other currencies, that's declined from its peak to a recent trough by 10%. So is American exceptionalism being called into question? And if so, what does that mean for investors? So these are the questions that help tee up our first segment of the podcast.

Automated:

Phone a friend.

Jodi Phillips:

Each episode, we reach out to a friend of the podcast for a deeper dive on the topics that are top of mind for investors. So this time around, we called Ben Jones, who's a director of macro research in our UK office, for his views from across the pond. First we asked Ben whether the current situation in the US brings back any memories for him of Brexit. Here's what he said US investors could learn from that period.

Benjamin Jones:

Yeah, look, bad memories of Brexit, I must admit. And I think the Brexit analogy is a good one. So in 2016 when the UK voted to leave the European Union, it now seems as if the US is moving to isolate itself somewhat from the rest of the world. And look, I never thought I would say something like that. Some of that policy move obviously theoretically could be reversed, and we're seeing some semblances of the policy being toned down a little bit at the moment. But I think like Brexit, this is not something that is going to be fully reversed. This is something that we do have to live with.

And now I think in terms of the lessons that we can learn, the market lessons that I'm focused on at the moment really is that this is not something that is going to be an immediate panic and an immediate break. It's not something that we have to immediately make a knee-jerk reaction to. But what I do think we are going to see is that US assets command a greater risk premium. And I mean that in terms of treasuries, the dollar and US equities.

And much like in 2016, what I do think we're going to see is a steady drain of capital flows out of the US just like we've seen out of the UK over the last decades or so. So that means that US assets essentially will probably underperform for a protracted period of time. But look, it's not the end of the world. The world still revolves. We still go around and we still buy stuff and London is still a fabulous place to live and you can still buy things and still get things. So it's not the end of the world, but it does appear to be that this is going to be a protracted period of slower growth than would've otherwise been the case. So not nice lessons, apologies.

Jodi Phillips:

Next, we ask Ben whether there's a sense in the UK that the era of us exceptionalism is over. Here are his thoughts.

Benjamin Jones:

Look, now I generally look at this obviously from a perspective of being outside of the US as a foreign investor. But the way I like to think about this is, look, I started in this industry about 20 years ago and the thing that I was taught 20 years ago was diversification. Diversification, diversification, diversification. But over the last 20 years or so, generally speaking, US assets have outperformed and the US dollar has strengthened over that period, so diversification would've hurt you somewhat.

I think going forward though, because we're expecting to see lower growth in the US and a lot of those US assets still do trade on higher multiples than other parts of the world, what we should be thinking about is very much diversifying our portfolio more across geographical lines. So generally speaking, favoring rest of world equities over US equities, for example, seems sensible to me. The other thing to start to think about is positioning yourself for a slightly weaker dollar, or at least thinking about how currency implications play out in your portfolio in a different manner than they have done over the last 20 years or so.

Jodi Phillips:

Finally, we asked him his views on positioning portfolios for a world in which US exceptionalism may be behind us, and here's what he had to say.

Benjamin Jones

So ultimately, what it really boils down to is broaden out the portfolio, think about getting more assets in there to get those diversification benefits. Very much do that across regional lines as well. So perhaps look at places like Europe, China, dare I even say the UK as well. And also think about style along a different line as well. So growth has done very well over recent years, and obviously that's largely been led by the US tech names, but I think perhaps thinking about value to a greater degree in portfolios now makes a bit of sense. So ultimately, look, it all boils down to just look outside of the US for other opportunities. There are lots of opportunities outside of the US today and run a more diversified portfolio.

Jodi Phillips:

Thank you Ben, for sharing your perspectives. Next step is a segment we call...

Automated:

I agree.

Jodi Phillips:

So for the second podcast in a row, I've asked Brian to highlight a recent comment in the news that he agrees with.

Brian Levitt:

Are we getting tired of me disagreeing with everyone? Is that why we're moving to I agree?

Jodi Phillips:

No, I don't want you to sound like a curmudgeon too much. Yeah. So who do you agree with recently?

Brian Levitt:

I'm going to go with Senator Rand Paul this time, the great state of Kentucky. So Rand Paul said, "I have a trade deficit with my grocery store."

Jodi Phillips:

That's good.

Brian Levitt:

Yeah. When asked about his views of whether trade deficits are bad.

Jodi Phillips:

Okay, very good. So perhaps inspired by Nobel Laureate, Robert Solow who said, "I have a chronic deficit with my barber who doesn't buy a darned thing from me."

Brian Levitt:

So are we allowed to say darned on the Greater Possibilities podcast?

Jodi Phillips:

We did, twice. Yeah.

Brian Levitt:

We just did. Exactly. Exactly.

Jodi Phillips:

All right, so say more about the Rand Paul quote. Why do you agree with that? And feel free to say darned as much as you want.

Brian Levitt:

Right, right, right. So trade is not a darn zero-sum game where there must be a loser or there must be a darn loser. So I think that's the big thing. This idea that trade has to have a winner and loser. It's the opposite. Trade occurs because it's mutually beneficial, right? Like Rand Paul goes to the grocery store with dollars because he wants groceries. It works out for both.

Jodi Phillips:

That's really basic, yes.

Brian Levitt:

And just think about it from the perspective, I know a lot of the focus of this is going to be on China, but since China joined the World Trade Organization in 2001, the world's gross domestic product has nearly doubled to over $93 trillion in real terms. And much of that growth is attributed to China. And so you think about that massive growth and the significant amount of people who have been pulled out of poverty. Over that period, the US started accounting for about a fourth of the global economy then and, Jodi, guess what the US accounts for now as a percent of or a fraction of the global economy?

Jodi Phillips:

I don't know. I don't know. I couldn't even guess, what's the-

Brian Levitt:

Exactly the same.

Jodi Phillips:

Oh, well, there you go.

Brian Levitt:

So basically the pie has grown and the US share's grown proportionally. So it is not as zero-sum game. Trade is beneficial, and I very much agree with Senator Rand Paul.

Jodi Phillips:

Very good. Okay, so our next segment is...

Automated:

The Inbox.

Jodi Phillips:

... where we highlight a question that Brian has recently received from clients. Are you ready?

Brian Levitt:

Yeah, I'm ready. Let's do it.

Jodi Phillips:

All right. So, is the US dollar in danger of losing its reserve currency status?

Brian Levitt:

I've been getting this question my entire career.

Jodi Phillips:

What's been your answer?

Brian Levitt:

Well, I mean my whole career, the answer was don't even lose a second of sleep over it. There's no alternative to the US dollar. The US is the world's biggest economy, the world's biggest trading partner, the world's biggest military, controls the trade lanes, all of those things. And one way I've heard it put is to just ask yourself, what's the world's language? When you go around the world, what does everyone speak? English.

Jodi Phillips:

Yeah.

Brian Levitt:

It's the same concept. That's why dollars are transacted so readily. That's why everybody speaks English, because it's the world's largest economy and we all do business together.

Jodi Phillips:

Yeah, Brian, you're right. They do speak English everywhere, which we're very lucky on that as we're traveling. It sure makes our lives anyway a lot easier.

Brian Levitt:

It does. Although I always feel a little bit wrong about it. So the reason that investors are asking now, and we heard Ben allude to this a bit, is there's concerns that with the tariffs and with the uncertainty around the rules in the US, that'll result in foreign investors diversifying their currency exposure. So right, we heard Ben say that.

Jodi Phillips:

Yep.

Brian Levitt:

Yeah, but look, I tell my daughters, Jodi, don't go from A to Z, right? Just because something happens, don't extrapolate that all the way out to the end of the alphabet. So yeah, like Ben was saying, you may see some currency diversification, but to be a reserve currency, the nation needs a lot of things going for it. It has to be attached to liberalized capital markets, free currency, convertibility, rule of law. So I always tell people to consider a few facts.

One, right now the US dollar accounts for about 95% of trade invoicing in the Western Hemisphere, about 75% in Asia. Those are pretty big numbers. Nearly two-thirds of foreign debt is denominated in US dollars. The US equity market has by far the largest capitalization in the world. So in order to lose the reserve currency, these things would need to change drastically.

Jodi Phillips:

Okay. All right. So I'll resist the temptation to go from A straight to Z. It doesn't sound like the US dollar is going to lose its status anytime soon.

Jodi Phillips:

All right, so we're going to conclude with our last segment where we put Brian on...

Automated:

The hot seat.

Jodi Phillips:

So we're going to run through a list of questions, answer as quick as you can. Question one, will the Fed be able to lower interest rates?

Brian Levitt:

Yeah, I think so. And then the good news about that is long-term inflation expectations remain very contained. So yes, there will be a price increase, there will be a shock in prices in the near term on imported goods because of the tariffs, but the Fed's going to look through that as a one-off price shock on imported goods rather than broad-based inflation.

Jodi Phillips:

Okay. Question two, has the US government hit a fiscal wall where we'll no longer be able to borrow money at the same levels?

Brian Levitt:

Yeah, so this one's like the US dollar reserve question. I've been getting it a lot. No, no. I mean, the US treasury rates backed up in mid-April and it did concern some people. I actually think US treasury rates are pretty reasonably valued. So how do you price treasuries, inflation expectations plus real growth, plus some premium over short rates that gets you into the low to mid-four percent area. So I would hardly call that a bond market that is signaling that the US has hit a fiscal wall. If anything, I would consider the ten-year treasury rate to be pretty fairly valued.

Jodi Phillips:

Okay. Last question, and maybe the most important one. I don't know, but what is your most important message to investors today?

Brian Levitt:

Ooh, good one. So, can I go with think beyond the next minute?

Jodi Phillips:

Think beyond the next minute?

Brian Levitt:

Yeah, think beyond the next minute.

Jodi Phillips:

Sure. Yeah.

Brian Levitt:

Look, I mean, you started this talking about long-term investing, right? You said you had heard that a time or two. I was considering the stagflation period from 1973 to 1980. So stagflation is not a base case right now, but that's the worry. The worry is that that '73, '74, '75 period is analogous to this one because growth was weak, prices went up and the Fed lost credibility. And so could you get there with a bad policy mix, I suppose.

Now, what was that terrible case scenario? Over the eight years, the S&P 500 made no money. So that is a bad, bad outcome for investors. Now, if you have a longer horizon, if you had stayed invested from the beginning of '73 to the end of '92, so you actually held on for another decade plus, you actually made 11% per year over the full period. So per the rule of '72, you're doubling every six and a half years. And that's not withstanding the eight-year period where you returned nothing. So again, not forecasting stagflation, but we still need to think beyond the challenges du jour. Don't focus on what we want right now, focus on what we want most over time.

Jodi Phillips:

Okay, great context. So you're now off the hot seat. Before we go, Brian, where can our listeners follow you for more? So as things change when you're midair and you're out there tweeting, where? Where do we see this?

Brian Levitt:

Well, dependent on the Wi-Fi on my-

Jodi Phillips:

Fair enough.

Brian Levitt:

... carrier of choice. Thanks, Jodi. Visit Invesco.com/brianlevitt to read my latest commentaries. And of course you can follow me on LinkedIn where I'm consistently posting Above the Noise, and on X at Brian Levitt.

Jodi Phillips:

All right, thanks for joining. See you next time.

Brian Levitt:

Thanks, Jodi.

Important information

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 April 25, 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. 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.

Diversification does not guarantee a profit or eliminate the risk of loss.

The S&P 500 Index returned 9.5% on April 9, 2025, according to Bloomberg.

The S&P 500 Index is an unmanaged index considered representative of the US stock market.

The quote from President Trump about Jerome Powell sourced from The Daily Mail, as of April 21, 2025.

According to Bloomberg, on April 21, 2025, the one-day performance of the S&P 500 Index was negative 2.39%, the Bloomberg US Treasury Index was negative 0.39%, and the Bloomberg US Dollar Index was negative 0.70%.

The Bloomberg US Treasury Index measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury.

The US Dollar Index measures the value of the US dollar relative to the majority of its most significant trading partners.

According to Bloomberg, the US Dollar Index fell from by 10.62% from a peak on January 10, 2025, to a recent trough on April 22, 2025.

According to Bloomberg, for the 20 years ending April 25, 2025, the S&P 500 Index had a 10.22% annualized return, versus the MSCI All-Country World ex-USA Index with a 5.38% annualized return. During that same period, the US Dollar Index posted a cumulative advance of 17.13%.

The MSCI All Country World ex USA Index is an unmanaged index considered representative of large- and mid-cap stocks across developed and emerging markets, excluding the US.

Comments about the multiples of US assets compared to the rest of the world sourced from Bloomberg as of April 25, 2025. Based on the price to earnings ratio of the S&P 500 Index, at 23.6x, and the MSCI Europe Index, at 14.5x.

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

The price-to-earnings, or P/E, ratio measures a stock’s valuation by dividing its share price by its earnings per share.

Comments about growth performance over the past few years based on the 5-year return of the Russell 1000 Growth (with a 17.5% annualized return) versus the Russell 1000 Value Index ( with a 12.9% annualized return). Sourced from Bloomberg as of April 25, 2025.

The Russell 1000® Value Index is an unmanaged index considered representative of large-cap value stocks. The Russell 1000® Growth Index is an unmanaged index considered representative of large-cap value stocks. These indexes are a trademark/service mark of the Frank Russell Co.

Comments on China’s gross domestic product and the US’s percentage of the global economy sourced from the  World Bank as of December 31, 2024.

Gross domestic product, or GDP, 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.

Comments about the US dollar and trade invoicing sourced from the US Census Bureau and the Bureau of Economic Analysis as of April 3, 2025.

Comments about the amount of foreign debt denominated in US dollars sourced from the US Federal Reserve Board as of April 2025.

According to Bloomberg, the 10-year US inflation breakeven was 2.27% and the 10-year US real yield was 1.46% as of April 25, 2025.

Breakeven inflation is the difference in yield between a nominal Treasury security and a Treasury Inflation-Protected Security of the same maturity.

According to Bloomberg, the cumulative price return of the S&P 500 Index from 1973-1979 was negative 8.56%, and the annualized total return of the S&P 500 Index from 1973 to 1992 was 11.3%. 

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

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.

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.

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.

Growth stocks tend to be more sensitive to changes in their earnings and can be more volatile.

Many products and services offered in technology-related industries are subject to rapid obsolescence, which may lower the value of the issuers.

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.

Brexit refers to the exit of the UK from the European Union.

Correlation is the degree to which two investments have historically moved in relation to each other.

Alpha refers to the excess returns of a fund relative to the return of a benchmark index.

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

A  reserve currency is a quantity of currency maintained by central banks and other major financial institutions for investments, transactions, and international debt obligations, or to influence their domestic exchange rate.

A risk premium is the amount of return an asset generates above cash to compensate for the higher risk.

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

A trade deficit is an economic measure of international trade in which a country's imports exceed its exports. Therefore, a trade deficit represents an outflow of domestic currency to foreign markets.

American exceptionalism refers to the expectation that the US economy and stock market will outperform global peers.

The Rule of 72 is a formula that calculates how long it would take for an investment to double in value, based on its rate of return.

The Greater Possibilities Podcast is brought to you by Invesco Distributors, Inc.

Jodi Phillips:

Welcome to the Greater Possibilities podcast. This episode was recorded right before President Trump announced a 90-day pause on reciprocal tariffs to most countries, which sent stocks surging on April 9th. We'll be tracking this story with updates as it develops, but in the meantime, here's our take on the tariff situation as of April 8th. Enjoy the show.

Brian Levitt:

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

Jodi Phillips:

Hey, Brian. So definitely not too difficult to come up with topics for discussion in today's show or I guess I should say-

Brian Levitt:

Oo, are we going to talk-

Jodi Phillips:

... topic. One topic. Yes.

Brian Levitt:

Oh, I thought we were going to talk about Houston versus Florida. No?

Jodi Phillips:

Nope. Nope. Even better. Tariffs.

Brian Levitt:

Tariffs, okay.

Jodi Phillips:

Welcome to the Tariff podcast.

Brian Levitt:

Tarrific.

Jodi Phillips:

No. Oh, that was terrible, Brian.

Brian Levitt:

Tarrible?

Jodi Phillips:

That was terrible.

Brian Levitt:

That was terrible?

Jodi Phillips:

Terrible, yes.

Brian Levitt:

Well, the market certainly thinks it's terrible.

Jodi Phillips:

They certainly do. Markets were hoping for clarity on Liberation Day, and what we got was escalation instead.

Brian Levitt:

Escalation or-

Jodi Phillips:

Escalation.

Brian Levitt:

... obliteration.

Jodi Phillips:

Some speculation-

Brian Levitt:

Or is it speculation.

Jodi Phillips:

... that this may be the starting point for negotiations. And don't forget retaliation, there's some retaliatory tariffs as well.

Brian Levitt:

This is like an Adam Sandler song, Cajun Man.

Jodi Phillips:

Well, so the upshot of all that anyway is that the average tariff rate has now reached levels higher than those during the Great Depression.

Brian Levitt:

Yes. Little Smoot-Hawley history for us there. And yet, unfortunately, the uncertainty persists. So if you are hoping Liberation Day would give you clarity and lower tariff rates than expected, you basically got the opposite on that.

Jodi Phillips:

So how did you respond to all of this?

Brian Levitt:

Denial.

Jodi Phillips:

Denial. That's healthy. Okay. Denial about which part?

Brian Levitt:

Well, I mean, I initially hoped going into it that we wouldn't get an escalation, then I was just kind of confused. The announced tariff rates on the countries were perplexing. It was hard for me to even understand what went into the calculations. What is a non-tariff barrier? How do you quantify currency manipulation? Why was there a 50% tariff on goods from Lesotho, an African country?

Jodi Phillips:

There's a question.

Brian Levitt:

Small, very small African country. And so, denial. I just felt there had to be something I was missing.

Jodi Phillips:

Yeah, yeah. The Lesotho one sent me to Google for sure to learn more about what we're actually importing. Yeah, textiles. It looks like we get our jeans from there in large part. So yeah, you learn something new every day. So, all right, so you started at denial, which of course is the first stage of grief. And then did it turn to anger? Where did you go next?

Brian Levitt:

Yeah, a little bit of anger. I mean, certainly anger when we saw the market's response to it. It felt unnecessary. It felt like a little bit of a shot on the own goal. Just even consider that Lesotho example. How is that tariff rate even calculated? It's like the trade deficit divided by the nation's imports from the US and then half, right?

Jodi Phillips:

And then divided by two, yes, for the discounted reciprocal tariffs.

Brian Levitt:

Right. So I mean, their trade deficit versus ours, that's what their economies is largely based on, right? We're buying a lot from them, they're not buying all that much from us. So it seems like a pretty good deal.

Jodi Phillips:

All right. All right. Well, okay, so what next? What is the next stage of grief? Bargaining? Am I remembering that right? Do we go to bargaining?

Brian Levitt:

Yeah, so I think a lot of people have been sitting in this area of bargaining with regards to the tariffs. I think what I'm hearing most from people bringing up the Art of the Deal with Donald Trump, that these are just the opening salvo in negotiations. And if you think about it from the perspective, expectations now have gotten really bad in these markets. And maybe if the tariff rates just get a bit better or move directionally in a better way, then that'll be more beneficial to markets. So that's first part of bargaining. I don't know. Have you heard any of the bargaining?

Jodi Phillips:

Any of the bargaining? I don't know. I mean, there's people saying perhaps the Senate could vote to overturn it. I think that would take two thirds though, if I remember correctly. So that would be a pretty high bar.

Brian Levitt:

Right. I think you'd need 60 to overturn it, then Trump could veto it and then you would need two thirds to overcome the veto. So, good luck getting those numbers. And then also I hear, a lot of people, the Fed's going to come to the rescue by lowering interest rates. That's all part of the bargaining. It's the opening salvo, the Senate maybe could overturn it, the Fed's going to save us. So I think a lot of people are sitting in that bargaining space right now.

Jodi Phillips:

Sure.

Brian Levitt:

I mean maybe bouncing between anger and bargaining.

Jodi Phillips:

So that last one you mentioned the Fed, I mean, that one seems like it could be the most likely. I mean, do you think they will?

Brian Levitt:

Yeah, they probably will. They're going to see slower growth. Clearly prices are going to rise in the short term. I mean, there's a cost to tariffs, and that cost is either the businesses take on the cost and their profits get hit or consumer prices go up or both. So you've got to assume that prices are going up in the near term, I heard every 1% tariff is a 0.1% increase in the core personal consumption expenditure. So we could see where that's going. But it's also about longer term inflation expectations, which have actually come down a bit if you look at the 10-year break even. So if they see growth slowing and they think longer term inflation expectations are anchored, they could lower rates, they will likely lower rates. Although I'm not sure it's a magic elixir this time.

Jodi Phillips:

Okay. All right. Well it sounds a little bit like you might be heading to the next stage, depression.

Brian Levitt:

Yeah. I mean maybe I was there for a little bit. I think I'm getting closer to acceptance at this point. I don't have the type of personality to sit in depression for very long.

Jodi Phillips:

Well, good. Okay. So what does acceptance look like then?

Brian Levitt:

It seems like you're heading to a worse economic outcome. So a recession is potentially there, potentially likely. And where does that come from? I mean, look, confidence is falling, sentiment is falling. Future investment is driven by that. So also a spike in consumer prices in the near term. And really this acceptance that for now the future for the markets and the economy is really being based on the whims of the White House. So that's what acceptance is to me. I'm focused on what we know, which is likely heading towards slower growth and a near term shock in prices. But of course, the whims of the White House can change that in any given moment.

Jodi Phillips:

Okay. Well, if I remember this stages of grief model correctly, they don't have to be a linear process. So you're getting to acceptance, but that doesn't necessarily mean you're finished processing all of this.

Brian Levitt:

Oh, so you're hoping I move back to depression? I'm telling you, I'm not going back to depression. Depression's very quick for me.

Jodi Phillips:

I do not wish that for you, Brian. I was thinking maybe you could just go straight back to bargaining and we could figure something out.

Brian Levitt:

Yeah, or denial. Denial being the river that I'll jump into. No. Yeah, I could quickly shift to bargaining if new policies emerge. Look, the reality is we had a good setup for markets that led to a correction in markets amid policy uncertainty, that's now led to a crisis of confidence. So when you go from a correction to a crisis, you need a policy response. And usually that comes from the Fed, I'm not sure that's enough this time. The bargaining element of this is if it's the stages of negotiation, that's how I think you toggle back from this acceptance of a weaker economic outcome and whiffs of stagflation towards back into that bargaining area that I think you want me to get back into.

Jodi Phillips:

Okay. All right. Well, while Brian continues to process everything that's going on and what might come next, we're going to reach out to someone else for further context. It's time for.

Speaker 3:

Phone a Friend.

Jodi Phillips:

So each episode we reach out to a friend of the podcast for a deeper dive on the topics that are at the top of investors' minds. No surprise, the topic is tariffs and the equity markets. So we reached out to Justin Livengood, who's a senior portfolio manager for Invesco's Growth Strategies. First, we asked Justin whether he believes there will be a prolonged downturn for US equities. He mentioned two things he'll be watching.

Justin Livengood:

I think that the odds of a prolonged downturn have certainly gone up. I think the next month is going to be really interesting, this is going to be one of the most fascinating earning seasons of my career, and that's going to help give us some important information about what companies and management teams at least initially think their businesses are going to be able to do with these tariffs, at least potentially in place.

And what I'm really looking for in this earning season is to see whether companies and expectations come down enough, management teams cut guidance sufficiently to give equity investors more confidence that the consensus estimates are realistic both for this year and then perhaps even into '26. What we as investors need to see is some reasonable path I think to growth in '26. '25 numbers are too high, let's work them down hopefully here over the next month with earnings and then see if there's a path to some form of improvement next year. That's going to be critically important. Earnings drive stocks I always like to say. And so we've got to get more confidence around that earnings outlook to avoid a prolonged downturn.

The other thing I think that's important to mention here is Fed policy. How much help will the Fed provide later this year in terms of cuts? Unclear. But that's going to be, I think, an important piece as well to determining when the equity markets dig in and the magnitude that they recover.

Jodi Phillips:

Next, we asked whether he's concerned that today's situation could reach the severity of the 2008 global financial crisis. Here's what he had to say.

Justin Livengood:

I am more so than I was a couple of weeks ago, but I still would put the odds of an '08 or certainly even something worse than that below 50%. Some positives, if we're looking at silver linings here. Companies and even consumers are still relatively under levered. So credit risk is starting to percolate, but it's not yet out of bounds in part because, again, we're coming into this with a little bit healthier balance sheet set up than we've had in the past.

Another factor is at least the Fed at the moment is biased to lower rates. The Fed is trending down, it's a debate of how much and when. But in some other environments, we've had a Fed that was tightening or was reluctant to do anything and made the crisis a little deeper than it perhaps needed to be. I don't sense that's as big of a risk this time. So I think those are a couple of positives. And the last thing maybe I'd say is this is somewhat self-inflicted. I mean, the trade war that Washington has chosen to implement here can be rolled back. If I've learned anything in the last few weeks, it's that tomorrow could be completely different than today in terms of headlines and news flow.

And there is a scenario, I suppose, where in a month or two the administration has dialed back a bunch of tariffs or done things that mutes the impact of this. The equity markets are pricing in a lot of, I think, appropriate worst case scenarios, maybe that doesn't play out. So those are a few things that I hope keep us out of that '08 type environment.

Jodi Phillips:

Finally, we asked him what he's hearing from the companies he covers in regards to tariffs and the Department of Government Efficiency, or DOGE. Here's his thoughts.

Justin Livengood:

Tariffs, it's still a little early and that's again why I'm so interested in the next month when we go through earnings season. But DOGE, absolutely. So one of the sectors I cover somewhat closely is healthcare. The things that have happened at the FDA and Health and Human Services in the last month have had really significant negative impacts on the way those agencies operate. Drug companies and medical device companies have to get approval for their products by the FDA. And as part of that process, you don't just show up after you've done all this clinical trial work with a packet of data and say, hey, what do you think of this? You're going to approve it? You work with people in the agency for years, as you design a trial, you execute on that clinical trial and so forth.

Well, when all the people you've been talking to do those trials disappear, leave, the companies are... So I've talked to many CEOs in the last few weeks of pharmaceutical companies, medical device companies who are pulling their hair out because they've invested all these R&D dollars to develop products with the help of and the guidance of FDA staffers who they expected would be there all the way to the finish line. And now they don't know who to call, they don't know who's going to be the reviewer and they don't even know when the review might happen.

So there's a lot of concern about how, for instance, new drug and new medical device approvals are going to happen. I think it's going to be much slower and it's going to be much more precarious. I think it's going to cause a lot of healthcare companies to slow the pace of R&D spend. So DOGE is definitely going to have an impact on intermediate term healthcare spending. And that's a very real issue, separate and apart from tariffs.

Jodi Phillips:

Thank you, Justin. And now our next topic, it's kind of a new one we call it, I Agree. We're switching it up a little bit today. Rather than find comments that Brian disagrees with, I asked him to find someone that he agrees with. So what did you come up with, Brian?

Brian Levitt:

I'm going to go with Jeremy Siegel, professor at the University of Pennsylvania, he said tariffs are the worst policy mistake in 95 years. I hope I didn't alienate any of our listeners, but I do tend to agree with that.

Jodi Phillips:

Okay. 95 years clearly referencing the Great Depression, that's 1930. So I'm assuming he means the Smoot-Hawley Tariff Act.

Brian Levitt:

Yeah, I mean there was a whole host of policy mistakes in the early 1930s.

Jodi Phillips:

Sure. Yes.

Brian Levitt:

Fed raising interest rates, Andrew Mellon working to purge the rottenness from the system.

Jodi Phillips:

Liquidate everything. Liquidate it all.

Brian Levitt:

Liquidate it all. Exactly. Exactly.

Jodi Phillips:

Okay, so this particular quote is one that you agree with, but we're not talking about another depression here though, right? Let's please make that clear.

Brian Levitt:

Yes. Yes. I mean, we're not going to be lining up at banks, but it's a policy mix that slows growth and increases prices. So that's the bad combination. Look, I don't want to get too overly negative here. Again, this can change on a dime. I think the worst case scenario that you're looking at is a period of slower growth and higher prices that just isn't great for the equity markets. Now if you think of the 1970s, you basically went nowhere for a while. It's not that you lost an excessive amount of money. Long term investors went nowhere for a while. So that's what I would consider the worst case outcome. And again, Siegel said the worst we've made in 95 years. He doesn't say it's worse than what we've made in 95 years. He's just saying it's the worst we made in 95 years. And I tend to agree at this point.

Jodi Phillips:

Okay. And with that we'll move on to our next segment called?

Speaker 3:

The Inbox.

Jodi Phillips:

Where Brian answers questions he's getting from clients. So are you ready, Brian for questions?

Brian Levitt:

Yeah, I'm ready. I'm ready.

Jodi Phillips:

How do you position for this type of environment?

Brian Levitt:

Yeah, I think investors probably got sick of us all harping on diversification during that period when only seven stocks were outperforming. That was the old, just own the money markets, T-bills and chill and own seven stocks in the US and of course all the asset managers, all the investment professionals telling them to do more. So yeah, this is proving it.

Jodi Phillips:

All right. So okay, if it's not just the Magnificent Seven and money markets, then what else? What are you looking at?

Brian Levitt:

Well, look, intermediate, high-quality bonds make some sense here. I think they've certainly helped to at least cushion some of the downturn. If the Fed's going to cut rates, investors have reinvestment risks, so you probably don't want to be as short as you are. If those rates are going to come down, you're going to reinvest down along with it. And intermediate-term bonds, quality bonds should provide ballast during the more volatile equity market periods.

Jodi Phillips:

Okay. What about the equity side?

Brian Levitt:

Yeah, the equity side. So if you are concerned about an economic downturn, then you've got to realize that the S&P 500 Index is not positioned, it's not trading for a recession. Valuations are still above average. If you’re in an economic downturn or dare we say a recession, those valuations fall to average or even below average. So you'd want to look at other parts of the market where you can still participate if things improve, but also have less exposure to the higher valuation names. So I'm focusing on higher quality value stocks, not deep value, not value stocks that create big cyclical impulses, but higher quality value stocks, as well as non-US equities. Places like Europe and places like China where they're working to stimulate growth. It's not to say that they're not caught in the crosshairs of all of this, but their starting valuations are better and the policy makers are working to stimulate growth.

Jodi Phillips:

And now we're going to conclude with our last segment where we put Brian on.

Speaker 3:

The Hot Seat.

Jodi Phillips:

So I'm again, only going to focus on one topic this time around. What do you watch to determine if the market has bottomed?

Brian Levitt:

I watch a lot. I mean there's a bunch of them. I always want to see how bearish have investors become. So I look at things like the American Association of Individual Investors surveys. Has volatility spiked? Of course that has happened. Is the famed put-to-call ratio above one? Are credit spreads moving out? Those all look pretty good. But has the economic policy uncertainty index peaked? I think that's the critical one here.

Jodi Phillips:

Okay, that's a lot to process. So what is the verdict? Do we have a verdict yet?

Brian Levitt:

A lot of it has happened and I think investors are getting comforted by the fact that the markets do appear tactically oversold here. That was a pretty fast move down. I just keep coming back to that economic policy uncertainty concept.

Jodi Phillips:

Meaning that it's unclear that we've reached peak uncertainty?

Brian Levitt:

Yeah. Does it feel like peak uncertainty?

Jodi Phillips:

I mean, I don't know. It feels like pretty high uncertainty.

Brian Levitt:

Yeah.

Jodi Phillips:

I don't know.

Brian Levitt:

So that's maybe. Maybe, right? If we start to see these negotiations work out better, if the US and China, if the US and Europe don't pursue a tit for tat reciprocal trade war, then, yeah, we may be getting closer. But until that moment, it's probably going to difficult for the markets to bottom. It doesn't mean that they need to come down substantially. We may just be in a rough stretch trying to find the bottom here.

Jodi Phillips:

Okay. That's it. You're now off the hot seat. So before we go, Brian, where can our listeners follow you as you track every aspect of what's going on and your stage of grief or acceptance or bargaining as you process all of it-

Brian Levitt:

Every aspect..

Jodi Phillips:

Where can we find it?

Brian Levitt:

Yeah, join us each moment to see what my mood ring is telling us Invesco.com/BrianLevitt to read my latest commentaries. And of course you can follow me on LinkedIn and on X at Brian Levitt.

Jodi Phillips:

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

Brian Levitt:

Thank you.

Important information

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 April 8, 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. 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.

Diversification does not guarantee a profit or eliminate the risk of loss.

References to the average tariff rate sources from the Tax Foundation, Peterson Institute for International Economics, and the Budget Lab at Yale as of April 7, 2025.

References to the impact on tariffs on the Personal Consumption Expenditures Index sourced from  Goldman Sachs Global Investment Research as of April 6, 2025.

The Personal Consumption Expenditures Index measures price changes in consumer goods and services.

The Jeremy Siegel quote on tariffs was reported by CNBC as of April 4, 2025.

References to equity market performance in the 1970s is based on the S&P 500 Price Index, which returned an annualized rate of 1.6% from December 31, 1969, to December 31, 1979.

Sourced from Bloomberg as of April 7, 2025.

Statements about intermediate high quality bonds helping to cushion against equity losses based on data from Bloomberg as of April 7, 2025. The Bloomberg US Treasury Intermediate Index outperformed the S&P 500 Index by 16.47% on a total return basis year-to-date through April 7, 2025.

The Bloomberg US Treasury Intermediate Index measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury. To be included in the index, securities must have at least one and up to, but not including, 10 years to maturity.

The S&P 500® Index is an unmanaged index considered representative of the US stock market.

Statements about the valuation of the S&P 500 Index based on data from Bloomberg as of April 7, 2025.The S&P 500 Index trailing price-to-earnings ratio ended April 7, 2025, at 21.65, compared to its 35-year historical average of 20.24. The S&P 500 Index began 2025 with a 21.65 price-to-earnings ratio compared to 14.05 for the MSCI All Country World ex-US Index.

The price-to-earnings ratio measures a stock’s valuation by dividing its share price by its earnings per share.

The MSCI All Country World ex US Index captures representation across developed and emerging markets, minus the US.

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

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 profitability of businesses in the financial services sector depends on the availability and cost of money and may fluctuate significantly in response to changes in government regulation, interest rates and general economic conditions. These businesses often operate with substantial financial leverage.

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.

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.

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.

Credit risk is the risk of default on a debt that may arise from a borrower or issuer of bonds failing to make required payments.

Credit spread is the difference in yield between bonds of similar maturity but with different credit quality.

The Economic Policy Uncertainty Index is compiled from three underlying components that quantify newspaper coverage of policy-related economic uncertainty, reflect the number of federal tax code provisions set to expire in future years, and use disagreement among economic forecasters as a proxy for uncertainty.

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

The United States Tariff Act of 1930, commonly called the Smoot-Hawley Tariff Act, raised US import duties on foreign agricultural products and manufactured goods.

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

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

Tightening monetary policy includes actions by a central bank to curb inflation.

A trade deficit is an economic measure of international trade in which a country's imports exceed its exports. Therefore, a trade deficit represents an outflow of domestic currency to foreign markets.

The Greater Possibilities Podcast is brought to you by Invesco Distributors, Inc.

Brian Levitt:

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

Jodi Phillips:

Hey, Brian.

Brian Levitt:

Hey, Jodi.

Jodi Phillips:

We've got a lot to cover in our show today, including a call to our friend Alessio de Longis for his thoughts on the economy and markets during this period of market volatility.

Brian Levitt:

Yeah. Market volatility. I think it's funny, people wonder when it's coming during the good times and get very concerned when it actually is happening. Keep going back to that thought, and I'll ask you if you know what the first rule of policymaking is?

Jodi Phillips:

Don't talk about it? No. No. Sorry. That's Fight Club. I don't know. What's the first rule of policymaking?

Brian Levitt:

I think that's the first and second rule of Fight Club. Don't talk about Fight Club. No. The first rule of policymaking is do no harm.

Jodi Phillips:

Okay. The Hippocratic Oath, easy.

Brian Levitt:

Yeah. It's the Hippocratic Oath.

Jodi Phillips:

Yeah. But does that mean, are you suggesting that policies are starting to do harm? Are you making a political statement?

Brian Levitt:

Well, I'm not paid to make political statements, so I'm just observing, but yes. Again, not a political statement, but it's the uncertainty around it.

Jodi Phillips:

Yeah. Fair enough. You're observing, and so are the stock and bond markets.

Brian Levitt:

Yes. Yes. What investors have seen, I think the S&P went officially into a correction, so it had its 10% down. I don't want to be too downbeat. Like we said, this type of policy uncertainty could be a little disruptive. But sentiment's declining, so we need to be mindful of it.

Jodi Phillips:

Yeah. Well, nobody likes uncertainty and that seems to be the theme nowadays.

Brian Levitt:

Right. When you speak to investors, you're asked for the merits of tariffs or government cuts, and so people want you to give is there a positive slant on that? That's for the voters to decide. Right, Jodi? That's not for you and me.

Jodi Phillips:

Certainly. Absolutely.

Brian Levitt:

Set tariff rates or cut government. Okay. But ultimately, consumers and businesses need clarity.

Jodi Phillips:

Yeah. For sure. Bottom line, it's hard to put plans in place when you don't know the rules.

Brian Levitt:

Yes.

Jodi Phillips:

That of course, Brian brings us to the fifth rule of Fight Club. Do you know what that one is?

Brian Levitt:

Actually, I haven't seen that movie... I love that movie, but I have not seen that movie in a very long... You been binge-watching it lately? No. Tell me, what's the fifth rule of Fight Club?

Jodi Phillips:

Well, it seems appropriate. One fight at a time.

Brian Levitt:

Okay. That's a good one. Yeah. It does seem like the administration is fighting a lot of fights at a time. I think we will start to get more clarity. But right now, yeah, maybe the fifth rule of Fight Club applies here.

Jodi Phillips:

One fight at... Stay focused. That is a good segue to our first segment, Brian.

Speaker 3:

Trending conversations.

Jodi Phillips:

Brian, what's on everyone's mind?

Brian Levitt:

I think it has to be the drawdown, right? '23, '24, pretty benign years in markets. Not entirely, but yeah, it's got to be the drawdown.

Jodi Phillips:

The drawdown or the correction. Remind me again the difference?

Brian Levitt:

Yeah. Semantics. Maybe ChatGPT-

Jodi Phillips:

We're talking about words. Brian, what's the right word for this?

Brian Levitt:

Maybe ChatGPT can answer this. Yeah. Drawdowns are that five to 10% variety. Corrections greater than 10%. I think anything over 20% is bear market, and are markets starting to price in a recession. Yeah. Let's call this a 10% to 20% correction.

Jodi Phillips:

Okay. Okay. That's correction territory. But you did mention drawdowns, and drawdowns are pretty common, right? Corrections less so, but drawdowns are quite common. I've seen your chart showing that there's been a drawdown in the S&P 500 just about every year.

Brian Levitt:

Yeah. That's right. Even in 2024, which I reference, I think most people remember that as the low volatility year. That was the soft landing year. Right?

Jodi Phillips:

Right.

Brian Levitt:

We even had an 8% drawdown in the S&P 500 when the Bank of Japan raised interest rates for the first time in forever. One interest rate hike, you got that yen carry trade on one. Yeah. Those things happen most years now. Correction territory is a little bit less common.

Jodi Phillips:

Sure. Sure. You say it all the time, drawdowns are almost always the result of policy uncertainty.

Brian Levitt:

You listen to me.

Jodi Phillips:

It's part of the job.

Brian Levitt:

Yeah. You're forced to listen to me. Yeah. Yeah. I've said that probably as much as I've said anything in my career is that... Because people always ask, "Well, when are the bad times coming?" Well, they don't come out of nowhere. It's a result of policy uncertainty.

Jodi Phillips:

All right. Let's look back for just a second to 2018, right? Does this today remind you of back then, the last time a trade war had hit the markets?

Brian Levitt:

Yeah. It does. It does.

Jodi Phillips:

All right. How did that end? Let me guess, policy clarity.

Brian Levitt:

Yeah.

Jodi Phillips:

That's how that one ended, right?

Brian Levitt:

Yeah. Fire. As my kids would say, "Fire."

Jodi Phillips:

Fire.

Brian Levitt:

Fire.

Jodi Phillips:

Fire. Breaking out your Gen Alpha slang today.

Brian Levitt:

I did.

Jodi Phillips:

Good for you.

Brian Levitt:

Yeah. Was it low-key cheugy or... How many more do I know?

Jodi Phillips:

I have no idea whether it was or not. I don't know what that means. You're starting to sound a little delulu though, so let's move on. Let's move on.

Brian Levitt:

But delulu? But, yes. Yeah. The 2018 drawdown, if investors remember it, I think a lot of people don't even really remember it because we ended up finishing much higher in '19 and '20 and beyond that. But yes, the market went down 20% peak to trough in the fourth quarter on the S&P 500. I think it was September 20th, 2018 through Christmas. The market actually found the bottom when the US and China agreed to a 90-day truce on the trade conflict. Then even more, or as importantly, the Federal Reserve started providing dovish signals, so we probably find some bottom as we start to navigate towards more policy clarity here.

Jodi Phillips:

Okay. Sort of a template. When is that going to happen for us now?

Brian Levitt:

I can't pinpoint the exact date, but I do believe it will happen. If you look for the typical signs of market bottoms, these blow-off capitulation bottoms, you're probably not there yet, but we do believe it'll happen.

Jodi Phillips:

Okay. At that point, the Fed will be able to lower rates?

Brian Levitt:

Yeah. That's what the bond market is saying. You had a slight inversion in the middle of March, or I guess right... Early March where the Fed funds rate was higher than the 10 year. Yeah. That's the bond market is saying things are probably a little tight.

Jodi Phillips:

Okay. Okay. All right. Would you say, Brian, that's cringe? Would you go so far as to say that?

Brian Levitt:

Yeah. The inverted yield curve is cringe. Yeah. We should do an entire podcast in Gen Alpha slang. No, let's move on.

Jodi Phillips:

That's delulu for sure. Yeah. We're going to move on.

Brian Levitt:

It would be lit if we could get some greater policy clarity.

Jodi Phillips:

Okay. Moving on. Next topic. It has nothing to do with Gen Alpha slang. This is...

Speaker 3:

Phone a friend.

Jodi Phillips:

In each episode we reach out to a friend of the podcast for a deeper dive on the topics that are at the top of investors' minds. No surprise, our topic now is the state of the economy and markets, and so we called Alessio de Longis, head of investments at Invesco Solutions for his views. I asked him a couple of questions. First, we asked him what are the top three things that are driving markets right now? Here's what he had to say.

Alessio de Longis:

Well, in my mind, markets year-to-date have been driven by three things. One is tariffs. Tariffs implemented by the United States on its major trading partners. It's not just the level of tariffs and who they are being addressed to, but it's also the volatility, the uncertainty around this trade policy. The way in which these tariffs are being announced, the diplomacy is happening is highly unpredictable, and therefore, markets... Markets don't like these type of developments because tariffs are ultimately a tax either on consumers or a tax on corporates if they have decide not to pass along cost and shrink their profit margins. The volatility around tariffs creates more uncertainty around future economic developments.

The second driver has been, in my mind, the DeepSeek scare from earlier in the year. Why is it important driver? Because it's the first instance in which markets are confronted with the possibility that the Magnificent Seven and US mega-cap tech have a monopolistic condition on AI R&D development. Instead, now there is the possibility that the barriers to entry are not that high, that increased competition may actually dent the future earnings projections and justifying... It becomes more difficult to justify perpetual growth in multiples expansion for these mega-cap tech stocks.

Finally, the third piece is the massive news of fiscal impulse driven by defense spending in the EU. As a result, as a byproduct of geopolitical tensions between Russia and Ukraine, the EU is now planning a generational size of fiscal stimulus related to infrastructure spending and defense.

Jodi Phillips:

Then we asked Alessio whether or not he's concerned about a US recession, and here are his thoughts.

Alessio de Longis:

The current market’s loss I don't think is driven by recession fears per se. When we look at the behavior of key indicators that really drive that jump to default risk that is typical of recessions, namely credit spreads, credit spreads have been widening moderately 50 basis points on high yield, 20 basis points, 30 basis points on investment grade and emerging markets that these are not dynamics that signal a recession. Similarly, the unemployment rate, while softening is not... The labor market is not showing cracks that are consistent with recession fears. To answer your question, where are we in this environment? It's more an environment where we are derating forward expectations. We are taking a pause on the idea that especially US equities can continue to surprise to the upside in terms of forward earnings, namely specifically in the growth and tax sector.

Jodi Phillips:

Finally, we talked about Europe and what's driving the outperformance of European stocks over US stocks. Here are his thoughts.

Alessio de Longis:

European equities have outperformed US equities by a large margin year-to-date. If you look at even the spread between US growth stocks and European equities, the gap is now between 20 and 30% in just two months. Why is that happening? As a byproduct of the geopolitical tensions between the US, Ukraine and Russia, Europe finds itself in the middle of this crossfire. Critically the Eurozone, the European Union more broadly, has understood that the Pax Americana that govern the 80 years post-World War II, the curtain of protection that has come from international cooperation with the United States is not as secure anymore.

In European circles and in European markets, the excitement is all due to the fact that there is now a generational shock in terms of the willingness and ability to push defense spending and therefore very large substantial fiscal stimulus, which was definitely not expected in the economic circle up to three, four months ago. It's a major change and inflection point in fiscal policy.

Most importantly, the European Union has clarified that defense spending will not be part of budget deficit ceilings with respect to the 3% rule of the Maastricht Treaty. This is very important for markets because it basically opens the door for unprecedented amount of fiscal stimulus in the Eurozone, which will do wonders to lift an otherwise relatively anemic private sector growth.

Jodi Phillips:

All right. Thank you, Alessio. Now we move on to the next topic.

Speaker 3:

I disagree.

Jodi Phillips:

Here we offer a rejoinder to something that we read recently that we do not agree with. Brian, that's your cue. Who do you disagree with?

Brian Levitt:

Okay. I'm going to go with Elon Musk. I'm not going to go with... Yeah. I'm not going to go with some of the DOGE cuts right now, but I'm going to go with his comments recently where he said, Social Security is the biggest Ponzi scheme of all time. I disagree.

Jodi Phillips:

Wow. Okay. Say more? Why? Why do you disagree?

Brian Levitt:

Okay. Look, people will say Social Security is a Ponzi scheme because it relies on current contributions to pay benefits. I get that art of the Ponzi scheme, but the similarities stop there. It's not fraudulent like a Ponzi scheme. You're bringing in money to pay somebody else. No. It's not fraudulent. It's transparent, it's legally mandated, and most importantly, it has mechanisms in place to adjust benefits and taxes as needed. True Ponzi scheme, you just got to bring in money to pay somebody else out.

Jodi Phillips:

Yes. These are very important distinctions.

Brian Levitt:

Very important distinctions.

Jodi Phillips:

Very important distinctions. Also, as you know, a Ponzi scheme collapses when there's an inability to bring in that new money, to bring in new investors or when you have high redemption demands. To your point, a Ponzi scheme can't just increase taxes or raise the retirement age.

Brian Levitt:

Correct. Correct. Yeah. Bernie Madoff couldn't rejigger his strategy, he couldn't increase taxes or extend benefits further out in order to fix his Ponzi scheme. Look, the reality, and you and I have talked about this a lot, I just think it's critical, which is why we keep coming back to it. The estimate is that the Social Security Trust Fund runs out of money in 2034. Okay? Between now and then there will be some adjustments so the trust fund doesn't run out.

Jodi Phillips:

Well, for the sake of my future retirement, I would hope that would be the case. Yes. To make adjustments.

Brian Levitt:

Right. If not, you would get a percent of the benefits you expected. It wouldn't blow up like a Ponzi scheme. I also think what's critical is that, remember, Social Security has done more than almost anything to alleviate poverty amongst the elderly, right? To call it a Ponzi scheme, I think that's a bridge too far for me, and so again, I disagree.

Jodi Phillips:

All right. We'll leave it there. Our next topic is...

Speaker 3:

The inbox.

Jodi Phillips:

Here's where I go to the mail bag, so to speak, and select one of your questions for Brian. You can always find Brian on X or LinkedIn, @BrianLevitt. Are you ready?

Brian Levitt:

Yeah. I'm ready.

Jodi Phillips:

All right. Here's the question. Do you think that the Trump administration wants weaker growth so that interest rates will fall and make it easier to fund the debt?

Brian Levitt:

No.

Jodi Phillips:

That's it?

Brian Levitt:

I am getting this-

Jodi Phillips:

Very clear, but that's it?

Brian Levitt:

Yeah. I'm getting this question often. It's surprising how often I'm getting this question.

Jodi Phillips:

Okay. How do you respond?

Brian Levitt:

I say no.

Jodi Phillips:

Then you just walk away?

Brian Levitt:

No. Okay-

Jodi Phillips:

I find that hard to believe. Give us more?

Brian Levitt:

I truly believe that this administration wants to rebalance trade, bring manufacturing back to the United States, improve government efficiency. I believe that the lower rates are a symptom of those policies weighing on sentiment, at least in the near terms. Interest rates are still low from a historical perspective in terms of funding the debt. This idea that you want to deteriorate growth so that rates go down, that's actually worse for your debt picture. Right? Because you bring in less tax revenue, you spend more in terms of automatic stabilizers. No. I don't think that they're trying to bring rates lower in order to fund the debt. Again, I'm getting that question all the time, but that's generally not how these things work.

Jodi Phillips:

Okay. Let's conclude with our last segment where we put Brian on...

Speaker 3:

The hot seat.

Jodi Phillips:

I'll ask Brian some questions, and you must answer in as concise a fashion as you can. If you have a one word answer, this is the segment for your one-word answers. All right?

Brian Levitt:

You know I'm so good at being concise.

Jodi Phillips:

All right. All right. Let's go. First question. Why did German bond yields spike earlier this month?

Brian Levitt:

Yeah. This is actually an interesting and maybe good thing. Germany now appear set to embark on pretty significant defense spending and government investment in the likes of which most believed wasn't positive. It's a seismic shift here. They really now appear willing to break their own fiscal rules to rearm Europe. Some might say, "Higher rates. Increased defense spending. How is that a good thing?" Well, remember, rates are coming from a very low level, and so they're adjusting to what the markets now believe will be a new level of growth for Germany. That's critical. That's important.

Jodi Phillips:

Okay. Next question. The Atlanta Fed's GDPNow estimate, are you concerned that it's pointing to negative growth for the US in the first quarter?

Brian Levitt:

No. No. I'm not. I think even they would say that it's being driven by the surge in imports that arrived and that came ahead of the tariff. That makes sense. If you're a business or you're a consumer and you need to import, do it ahead of what was going to be the tariff. I've got a ton of champagne now in my house ahead of... No. If you think about GDP, GDP is your gross domestic products, it's going to be the consumption, the business investment, the government spending, but also the net exports. When you import more than you export, that's a detractor in the GDP equation. Net exports will be a big detractor this quarter, which is dragging GDP down, but let's not overstate it. The bigger question for this economy is going to be the 80% of the economy that is consumption and business investment. Can they hang in? Of course, as we already talked about, it'll take some better policy clarity to improve sentiment in that part.

Jodi Phillips:

All right. Last question. Small-cap US stocks, why have they performed so badly this year?

Brian Levitt:

Yeah. I'm sure you're looking at the broad Russell 2000 Index.

Jodi Phillips:

Yes.

Brian Levitt:

It's a slowing growth story, plain and simple. Small caps need improving domestic activity or improving sentiment. I think if we can get through this bout of policy uncertainty and on the other side, the Trump administration starts focusing on things like deregulation, tax cuts, the Fed can lower rates, that becomes a better environment for small caps.

Jodi Phillips:

Great. You're now off the hot seat. Brian, before we go, where can our listeners follow you?

Brian Levitt:

Thanks, Jodi. Visit invesco.com/brianlevitt to read my latest commentaries, and of course, you can follow me on LinkedIn and on X @BrianLevitt. We're putting out a lot of stuff now, right? It's handholding during volatile times, and it's therapeutic for me. I'm holding my own hand most of that time.

Jodi Phillips:

Well, very good. All right. We'll just watch to see what you have to say next. Thanks everyone for listening. See you next time.

Important information

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 March 14, 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. 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.

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

Many products and services offered in technology-related industries are subject to rapid obsolescence, which may lower the value of the issuers.

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.

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.

Growth stocks tend to be more sensitive to changes in their earnings and can be more volatile.

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.

High yield bonds, or junk bonds, involve a greater risk of default or price changes due to changes in the issuer’s credit quality. The values of junk bonds fluctuate more than those of high quality bonds and can decline significantly over short time periods.

According to Bloomberg the S&P 500 Index peaked on February 19, 2025, and had fallen 10.13% on March 13, 2025, putting it in correction.

The S&P 500® Index is an unmanaged index considered representative of the US stock market.

The statement that there’s been a drawdown in the S&P 500 Index in almost every year is sourced from Bloomberg as of March 14, 2025, based on the calendar year returns of the S&P 500 Index from 1984 to 2024.

The statement that there was an 8% drawdown in the S&P 500 when the Bank of Japan raised interest rates is sourced from Bloomberg as of March 14, 2025. The S&P 500 Index fell 8.5% from July 16, 2024,  to August 5, 2024.

According to Bloomberg, the S&P 500 Index fell 19.8% from September 20, 2018, to December 24, 2018.

Statements that credit spreads have been widening are sourced from Bloomberg as of March 14, 2025, based on the option-adjusted spread of the Bloomberg US Corporate Bond Index, Bloomberg US Corporate High Yield Bond Index, and Bloomberg Emerging Markets Aggregate Bond Index.

Credit spread is the difference in yield between bonds of similar maturity but with different credit quality.

Option-adjusted spread (OAS) is the yield spread that must be added to a benchmark yield curve to discount a security’s payments to match its market price, using a dynamic pricing model that accounts for embedded options.

The Bloomberg US Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes US dollar-denominated securities publicly issued by US and non-US industrial, utility, and financial issuers.

The Bloomberg US Corporate High Yield Bond Index measures the US dollar-denominated, high yield, fixed-rate corporate bond market.

The Bloomberg Emerging Markets Aggregate Bond Index includes fixed and floating-rate US dollar-denominated debt issued from sovereign, quasi-sovereign, and corporate emerging market issuers.

The statement that European equities have outperformed US equities year-to-date is sourced from Bloomberg. Year-to-date as of March 14, 2025, the S&P 500 Index was down 5.9% and the MSCI Europe Index was up 12.3%.

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

The discussion comparing US growth stocks to European equities is sourced from Bloomberg. Year-to-date as of March 14, 2025, the S&P 500 Growth Index is down 8.9% and the MSCI Europe Index is up 12.3%.

The S&P 500® Growth Index consists of stocks in the S&P 500® Index that exhibit strong growth characteristics based on three growth and four value factors.

Discussions about the Atlanta Fed GDPNow Forecast sourced from the Federal Reserve Bank of Atlanta as of March 14, 2025.

GDPNow is a nowcasting model that forecasts real GDP growth by aggregating 13 components that make up GDP with the chain-weighting methodology used by the US Bureau of Economic Analysis.

The statement that 80% of the US economy is consumption and business investment is sourced from the US Bureau of Economic Analysis as of December 31, 2024.

Statements about US small-cap performance are sourced from Bloomberg as of March 14, 2025. Year to date, the Russell 2000 Index lost 8.34%, compared to the  S&P 500 Index losing 4.13%.

The Russell 2000 Index measures the performance of small-capitalization stocks and is a trademark/service mark of the Frank Russell Co.®.

Alpha refers to the excess returns of a fund relative to the return of a benchmark index.

A basis point is one-hundredth of a percentage point.

A bear market is an environment in which stock prices are falling and widespread pessimism causes the stock market’s downward spiral to be self-sustaining.

Carry trade is a strategy in which traders borrow a currency that has a low interest rate and use the funds to buy a different currency paying a higher interest rate.

Dovish refers to an economic outlook that generally supports low interest rates as a means of encouraging growth within the economy.

The federal funds rate is the rate at which banks lend balances to each other overnight.

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.

An inflection point is an event that results in a significant positive or negative change in the progress of a company, industry, sector, economy, or geopolitical situation.

The yield curve plots interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates to project future interest rate changes and economic activity.

An inverted yield curve is one in which shorter-term bonds have a higher yield than longer-term bonds of the same credit quality. In a normal yield curve, longer-term bonds have a higher yield. The yield curve plots interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates to project future interest rate changes and economic activity.

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

Profit margin measures the profitability of a company by dividing net income by revenues.

AI stands for artificial intelligence.

R&D stands for research and development.

EU stands for European Union.

The Greater Possibilities Podcast is brought to you by Invesco Distributors, Inc.

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 

The Greater Possibilities Podcast is brought to you by Invesco Distributors, Inc.

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. All right, so it's our first podcast of 2025, and our listeners are going to notice a little bit of a different format from us today. Instead of doing one deep dive interview, we're going to be introducing some segments for you and me to discuss. We're going to cover a lot of information really quickly. So are you ready?

Brian Levitt:

Yeah, I'm always ready.

Jodi Phillips:

Absolutely. So, yes, we want to make sure that we address what's on the mind of our listeners, and definitely today that would be the sell-off in markets that was sparked by claims from DeepSeek from China, which released an open source AI model in December. DeepSeek says it took only two months and less than $6 million to create this. So that's had a little bit of a ripple effect on markets as we record this. Those claims, of course, would be far less than the hundreds of billions of dollars that American tech giants have poured into AI models.

Brian Levitt:

Yeah, I suppose $6 million is a lot less than billions.

Jodi Phillips:

Yes, absolutely it is.

Brian Levitt:

I'm speaking to people, there's just a lot of uncertainty in the market right now. It's like this news is just really beyond most people's competence to assess. I think I would include myself in that.

Jodi Phillips:

You would, you're not the world's foremost expert on how to build a large language model, Brian, is that what you're trying to say?

Brian Levitt:

Are you?

Jodi Phillips:

Oh, no, no, no.

Brian Levitt:

I've used Copilot a handful of times, but no, I am not the world's foremost expert on how to build a large language model, but I'm fortunate that working here at Invesco, I do get to speak to some of the experts who are maybe a little bit more competent to assess it.

Jodi Phillips:

And what are they telling you?

Brian Levitt:

For one, there's still a lot of uncertainty around the initial headlines. This whole idea that the large language model was built in a couple of weeks for $6 million, that may not capture the full story. So there is more to know. The reality probably from what I'm hearing, lies somewhere between DeepSeek's... DeepSeek, you say that right three times fast... DeepSeek's claims and the costs that are related to the extensive investments made by the major US AI companies. So I guess that's a long way of saying the reality is probably somewhere between $6 million and billions.

Jodi Phillips:

And I would have to assume that those tech companies have been closely monitoring the progress of DeepSeek. It's hard to believe that those giants would be unaware of those advancements. So while we're kind of absorbing a lot of this news today as we record, I would think that those in the know would know a little more.

Brian Levitt:

Yeah, you would hope. That was my initial reaction as well. But clearly more will be learned in the coming days, I'm sure.

Jodi Phillips:

Yes. But of course, as we're talking, the news has hit many of last year’s high-flying stocks pretty hard, especially those that were providing the tools, the electricity, the data storage, the cooling to develop and operate these AI systems.

Brian Levitt:

Yeah, some of the chip names as well. Look, the assumption being that the build-out in AI does not require anywhere near the spending that had been believed.

Jodi Phillips:

Yeah. Well, we shall see. So is there any good news, Brian, from your perspective about this story?

Brian Levitt:

Oh, I think absolutely there's good news around this. I mean, just think of the possibilities with this, Jodi. If DeepSeek really does represent a game-changing direction and the cost to develop AI, then shouldn't it be beneficial across the whole economy? I mean, I think it would have impacts on productivity, it would have impacts on future growth, inflation, energy usage. Yeah, it feels like it would be really powerful, but again, more to learn.

Jodi Phillips:

So that sounds like it would probably broaden market participation instead of the concentrated tech story that we've seen for a while.

Brian Levitt:

Yeah, I would hope. Yeah, it would. And I think we've been suspecting for a while now that the market probably hadn't even begun to assess the downstream impact of AI. So we'll see if this is the impetus for it. But again, investors that want to focus beyond a handful of names, that's where we're heading. Right now, the market is rewarding those companies that have provided the picks and the shovels or the chips or whatever else. But over time, how are we going to benefit? I think maybe even our podcast will be automated.

Jodi Phillips:

How are we going to... I like that question. How are we going to benefit?

Brian Levitt:

It's all about us, Jodi.

Jodi Phillips:

OK, well enough about us, Brian. Let’s move onto our first segment, where we bring in an Invesco expert to help give us context around a current issue. We call it…  

Narrator:

Phone a friend.

Jodi Phillips:

So we called Ash Shah, a Senior Portfolio Manager and a Senior Research Analyst who covers the tech sector. We spoke with Ash about DeepSeek, what it could mean for the cost of AI, and the impact on the marketplace. Here’s what he had to say.

Ash Shah:

So in any technology era, there is like the costs come down and the volumes go up, right. Just like think about your personal computers — remember how personal computers you would carry it around, it was like heavy as hell and was like four grand. Okay. Well then the prices went down a ton and everyone has one. And you went from one personal computer to everyone in your household having one, you know, same thing with like your handsets. Right. The cost of the usage of the handset went down. The price of the handset went down. Same thing. When people put out servers, the client server era was a great era for hardware. You know, people have put servers in and the cost of the servers dropped dramatically, you know, and, and the server demand exploded.

So this is going to be no different in my opinion. The prices come down, demand will explode. The more the prices come down, the better it is really to be completely frank, because then all these companies can utilize this stuff a lot cheaper. Like one of the hindering things about AI is it's not cheap use if the if the token price is very high.

So I and I think this is I think it's really great for software companies because they can run this stuff on top of AI, on the models. I think that, you know, in the short run, I think people are going to be like a little skeptical because they just saw stocks just get hammered.

And, you know, people are a little bit freaked out. But even today, Nvidia's at 8% today right after being down 17% yesterday. So I think people are going to come and realize that, hey, this is just an evolutionary thing, but not a revolution.

Jodi Phillips:

Thank you Ash. Now we’ll move on to our next segment…

Narrator:

Trending Conversations

Jodi Phillips:

… where we talk about current headlines that are dominating the news. So what's on everyone's mind besides AI today, Brian?

Brian Levitt:

Yeah, best laid plans of mice and men or mice and women. So what's been on everyone's mind before the DeepSeek news really was inflation.

Jodi Phillips:

Okay. Well, that feels like we're going back in time a little bit, Brian, like we were recording this in 2022 or something.

Brian Levitt:

Exactly.

Jodi Phillips:

I thought the market last year had finally turned its attention from inflation to the growth story. We didn't have to feel like we were rooting for bad economic news anymore because inflation had returned to the Fed's comfort zone.

Brian Levitt:

Yeah, I'm like you, Jodi. I like rooting for good economic news too. And you may have noticed, as we came into this year, there was a good jobs report, a few good economic data releases where the market did a little of a, ooh, are things too good? Is this going to be inflationary again? So that's what we've been grappling with.

Jodi Phillips:

Okay, so walk me through it then. What is the story now with inflation?

Brian Levitt:

Okay, so let's just go back a few years. So the rate of inflation peaked in the middle of 2022. It came down pretty rapidly, maybe not as fast as someone would hope, but it did come down pretty rapidly.

Jodi Phillips:

Not prices, but the rate of growth in prices.

Brian Levitt:

Exactly. Yeah, you don't want prices to go down. That would be a bad outcome. But by the middle of 2023, so a little bit of time ago now, the Consumer Price Index had fallen to 3% year-over-year percent. So peaked in '22 and down to 3% by the middle of 2023.

Jodi Phillips:

So 3% basically represents the upper end of that perceived Fed comfort zone.

Brian Levitt:

Yep.

Jodi Phillips:

So we hit that policy tightening ends, markets rejoice, right?

Brian Levitt:

Market's rejoice, right. Because you don't want to fight the Fed generally. And so if the Fed's going to be done raising rates, then typically the next handful of years are quite good. Now since then, inflation, there's different ways to measure it, but in general, inflation has been going sideways. So if you use the US Consumer Price Index, which is released by the Bureau of Labor Statistics, it's been averaging 3.1% from the middle of 2023 through the last data point we got, which was December 2024.

Jodi Phillips:

Okay, that doesn't sound too bad though.

Brian Levitt:

No, it doesn't because that's good nominal growth. Nominal growth being real growth plus inflation, and that tends to be good for corporate earnings because businesses, they want growth and they also want to be able to pass on some prices. So no, that has been fine for markets, better than fine for markets.

Jodi Phillips:

Okay. So then with inflation though averaging 3.1% over the past, what was that, 18 months, then there's no reason for the Fed to significantly cut interest rates? Is that the problem?

Brian Levitt:

Yeah, I guess that's correct as of today, I guess. I think that's what the market was figuring, right? Where we were going to get some rate cuts, and I guess now we don't have to because we're averaging 3.1% inflation.

Jodi Phillips:

Well, and of course, compounding the concerns about inflation is the new Trump administration approach to trade and immigration. There's some who are definitely concerned about what that could mean for the direction of prices. I mean, do you think we could be talking about an acceleration of inflation and a tightening cycle?

Brian Levitt:

Yeah, I mean that's the bear case. That was always the bear case. And I think that's what has investors asking so much about it and worried about it. Because if inflation picks up here and the Fed does have to raise interest rates again, that's the challenge to these markets. I don't believe that's the base case for a variety of different reasons.

One, remember shelter prices, which obviously are a large percentage of the Consumer Price Index. We said, "Oh, just wait, just wait. Those will moderate." And they are finally.

Two, quit rates in the job market are following, not following, are falling. When less people quit their jobs, it suggest that the labor market is no longer as strong, and that usually correlates with easing wage growth. So I think that this concern about inflation is overdone.

Jodi Phillips:

Okay. Well that sort of sounds a little bit like rooting for bad news when you're talking about easing wage growth. So what about tariffs?

Brian Levitt:

Look, all we can go by is the history on this. Just remember in 2018, tariffs led to a one-off price increase in affected goods, but not other goods. So it wasn't broad-based increase in prices. If you wanted to buy a washing machine and had a tariff on it, that cost you more. But the rest of the basket that wasn't affected by tariffs did not. The uncertainty of the trade war actually slowed business investment. I think what people need to remember is the Fed actually cut rates in 2019. They didn't raise rates, they cut rates as a response to the tariffs.

Jodi Phillips:

That's definitely important to remember. All right, so then immigration, deportations. What are you thinking about the potential impact? And of course, we don't know a lot of details on that either, I suppose just yet, but what are you watching for?

Brian Levitt:

Yeah, it's going to depend on the pace of workers leaving the country, and I'm just not convinced it can happen that fast where the Federal Reserve is going to have to respond to a pickup of inflation from it in the near term.

Jodi Phillips:

Okay, great. All right, bottom line, have rates peaked and will the Fed cut rates this year?

Brian Levitt:

Yeah, look, a year is a long time. I'll say yes, rates have peaked. 10-year got to 4.8%, 5% earlier. I think that's the peak. And I actually do believe that the Fed will cut interest rates this year. Sticking my neck out.

Jodi Phillips:

Well we’ll stop this segment there. There you go. Bottom line. Next up is a segment we like to call …

Narrator:

I Disagree.

Jodi Phillips:

And this is a segment where we offer a rejoinder to something that we read recently that we do not agree with. So Brian, what have you read that you don't think is quite on the mark?

Brian Levitt:

Yeah, so I heard a quote from David Rosenberg who's been a strategist, macro strategist in this industry for years. His quote was, "I feel sorry for Donald Trump because just like George W. Bush in 2000, he is coming into the office at the peak of a massive price bubble in the equity market." So I disagree.

Narrator:

I disagree.

Jodi Phillips:

All right, emphatic. I like it.

Brian Levitt:

Emphatic I disagree. That's the point of this.

Jodi Phillips:

Okay, so why? I mean, I've always heard you say that starting points matter. What is it about this summation that just doesn't sound right to you?

Brian Levitt:

Yeah, I just don't believe that we're in a massive bubble for equities.

Jodi Phillips:

Okay. What about client questions? If that quote hit the news... I'm sure a lot of people were reading it. So what kind of questions do you get about these types of predictions?

Brian Levitt:

Oh yeah. I mean, as soon as somebody that prominent makes a comment like that, I do get questions. I mean, Rosenberg doesn't like to be called a permabear, but he does tend to lean bearish. I actually think even recently he's been maybe moving away from that comment. I actually remember when he predicted a depression in the 2010s, which wouldn't have been particularly helpful for investors either.

Jodi Phillips:

All right, so in your summation, stocks are not overvalued.

Brian Levitt:

Not really. And there's a little bit of nuance here. So I think it's important for investors to think about this. Yes, the S&P 500 price to earnings ratio is above its long-term average by a decent amount. But you have to remember that a lot of that is concentrated in a handful of names. I've always been taught that you want to look at the median stock in the market or an equal weighted market to get a better sense of valuation so you're not being so concentrated or susceptible to being concentrated in a handful of names. So I looked today, the S&P 500 Equal Weight is trading at a price earnings ratio that's only slightly above, or maybe after today at its historical average. So that does not feel to me like a massive bubble. And I always remind people, valuations are not timing tools. That is critical. Just because something's expensive, doesn't mean it doesn't stay expensive. All right Jodi, your turn. Who do you disagree with?

Jodi Phillips:

I have to keep this on finance, right? We can't talk football. I've got-

Brian Levitt:

We can't talk football. I heard it snowed in Houston, by the way.

Jodi Phillips:

It did snow in Houston. I built a snowman-

Brian Levitt:

Get out of here.

Jodi Phillips:

...in my front yard for the first time ever. I mean, I was born here, from here... Like a legit snowman. Not one of those sad ones where you just kind of scrape the ice off the hood of your car and pretend. It was real. It was real.

Brian Levitt:

Does Jodi Phillips own a shovel?

Jodi Phillips:

No, I don't own a shovel.

Brian Levitt:

You can borrow. I've got plenty. You could borrow mine. All right, so you disagree with the new weather patterns in this country. Who else do you disagree with?

Jodi Phillips:

Yeah, weather reports. Look, so it's hard to choose, but I'm going to go with Paul Tudor Jones, pretty prominent hedge fund manager who said, "We're going to be broke pretty quickly unless we get serious about dealing with our spending issues." So I disagree.

Narrator:

I disagree.

Brian Levitt:

You disagree? You know I disagree as well. Why do you disagree?

Jodi Phillips:

Yeah. And to be clear, because my teenagers would probably be very shocked to learn that I disagree with any quote that's talking about trying to rein in spending. But we're talking about governments here. He was talking about the US government. And so governments that borrow money in their own currency don't go broke, do they? I mean this isn't-

Brian Levitt:

No, they do not.

Jodi Phillips:

This is not an apples to apples comparison here, right?

Brian Levitt:

Right.

Jodi Phillips:

Like a Hollywood star on a spending spree. It's not the same thing.

Brian Levitt:

It's not. And I also remind people that yeah, the debt is elevated, probably moving close to $40 trillion, but American households have $155 trillion in total net worth. So that number dwarfs it. And the Fed, to your point, I mean the Fed, you got your own currency, you could always print money to pay it back. I don't know if that's ideal, but we're not about to go broke.

Jodi Phillips:

Well, that would take us back to the inflation story, wouldn't it then if we're just printing more money?

Brian Levitt:

Yeah, I guess that's the risk. Maybe the bond vigilantes show up to teach the Fed or Congress a lesson, but clearly we're not at that point right now.

Jodi Phillips:

Well, and if they do show up, I mean then the Fed or Congress might have to change direction to appease those bond vigilantes, but that's not the same as going broke.

Brian Levitt:

Totally. 100%. And look, that's maybe coming in some time when we have to make adjustments to the nation's social safety net, but I don't think that that's today. In fact, people may have looked at the recent backup in rates and thought maybe that's the bond vigilantes, they're finally here. I would argue very strongly that that was being driven by a repricing of Fed expectations and not being driven by fiscal concerns.

Jodi Phillips:

OK, well thanks Brian. We’ll wrap up that segment and move on to the next which is called …

 

Narrator:

You’ve Got Mail.

 

Jodi Phillps:

And in this segment we address questions that you're getting from clients. I mean, you're traveling all over the country talking to people, so you get questions in person. But people can always send their questions to you through social as well. You’re on LinkedIn and X, at Brian Levitt. So what is the biggest question that you've been getting from investors recently?

Brian Levitt:

Yeah, one of them is how much cash do you estimate is on the sidelines? And a lot of that was, do you expect there to be a further boon to the markets as a result of all this cash that's sitting on the sidelines?

Jodi Phillips:

Okay, so how much cash do you think?

Brian Levitt:

Well, look, part of me wants to say $23 trillion, but that would be disingenuous for me to say $23 trillion, although I could tell you how we add that up.

Jodi Phillips:

Well, yeah, sure. Okay, so is it $23 trillion? Is it not 23? What is it? I'm really confused at this point. So please do the math for me.

Brian Levitt:

Yeah, so there's $6.5 million in money market assets, $17 trillion in bank deposits, but that's not all household money.

Jodi Phillips:

Yeah, and to be clear, I think $6.5 trillion in money market assets, right? I think you said million, but that would be trillion.

Brian Levitt:

Did I say million?

Jodi Phillips:

Yeah.

Brian Levitt:

No, that's just in your money market account.

Jodi Phillips:

Oh, that would not be bad news whatsoever. But yeah, no, so you're saying that's not all household money. So some of that's businesses.

Brian Levitt:

Yeah. And I also think what's critical where people get this wrong is remember households moved over a trillion dollars from deposits into money markets when interest rates went up. Because some of those banks, particularly the big money center banks, did not have to increase rates on deposits. So you move your money from the deposits into money markets.

Jodi Phillips:

Okay. So those who were paying attention to where rates were going did that. So then it would make sense to view this as cash and not investible assets, is what you're saying?

Brian Levitt:

Yeah, perhaps. Right? Perhaps. I mean, if you were comfortable with it at zero and now you're happy with it at 4.5, maybe if it goes to 4 or 3.5, you may still be happy with that parked in cash. I also think if you look at cash as a percentage of household assets, because remember equities as a percentage of household assets have gone up a lot. Cash as a percentage of household assets is 15%. That's actually the 30-year median. So there's nothing to suggest that households are getting ready to take it meaningfully above that.

Jodi Phillips:

All right, so those of us who are hoping for a big wall of cash to go into the equity markets, that doesn't sound like that's necessarily the case.

Brian Levitt:

No, we're just waiting for your $6.5 million to go into the-

Jodi Phillips:

I'm hanging onto that for dear life. Hanging onto that. I got to buy me a shovel and some coats and scarves. I don't know what I'm going to have to...

Brian Levitt:

I'm proud of you for having built up that nest egg.

Jodi Phillips:

All right, so let's conclude with our last segment.

Narrator:

The Hot Seat.

Jodi Phillips:

Where we put Brian on the hot seat. I will ask you some questions and you must answer as concisely as you can.

Brian Levitt:

It feels like a job interview to see if I'm better at this than DeepSeek would be.

Jodi Phillips:

All right, nope, that might be coming one day, but today's not the day. We'll just ask. Here's the first one. Will markets broaden out in 2025 or will the same handful of companies continue to outperform?

Brian Levitt:

Well, good day to be asking it. I mean, we talked about how if we're right or if not if we're right, if DeepSeek is right and the AI could be brought to more, the efficiencies could pick up across the broader economy, then yeah, certainly. I'd also believe we've heard a lot from the new Trump administration about wanting to bring forward a new M&A, merger and acquisition, wave. I have to believe that mid-cap stocks, which don't appear to be excessively overpriced, would benefit from that as well.

Jodi Phillips:

Okay, very good. All right, next question. What do you believe to be the neutral Fed funds rate? So that point where the Fed's not too tight, not too easy.

Brian Levitt:

I don't think it's 4.5% and that's good because that's where it is. I may be in the minority, or at least I have been recently, but I think that'll prove to be too restrictive. Look, if nominal growth in this country is around four and that's a reasonable proxy for, call it the 10-year rate, I would expect the funds rate to be below that. So call it three and a quarter, three and a half, anything below that would probably be easy. So yeah, I think we've got some room to go before we get to the neutral rate.

Jodi Phillips:

Okay, next question. Can the Department of Government Efficiency make the government more efficient?

Brian Levitt:

DOGE.

Jodi Phillips:

DOGE. Can it work? Can they do it?

Brian Levitt:

Well, I'm sure there's ways to streamline the government, but we have to remember most of the spending is on the social safety net programs and defense. The rest isn't necessarily rounding errors, but maybe not too far from that, so we'll... I'm a little skeptical.

Jodi Phillips:

Okay. So what's your take on Bitcoin at 100,000?

Brian Levitt:

Quite a milestone. I think it's being driven by hope that Trump will champion a government reserve devoted to cryptocurrency. A Bitcoin reserve would be like gold or foreign currency reserves held by central banks. Legislation promoting it, not clear where it would go, not clear necessarily what the benefits of it would be. So certainly a milestone, but it still seems to me like Bitcoin is trading more like a high beta to the market asset.

Jodi Phillips:

Okay. And that's it. We'll take you off the hot seat now.

Brian Levitt:

Yeah, thank you. We should probably get sponsors for these segments.

Jodi Phillips:

We can try.

Brian Levitt:

Yeah.

Jodi Phillips:

I'll see what I can do for next time.

Brian Levitt:

All right, good. One can dream.

Jodi Phillips:

All right, so before we go, Brian, where can our listeners follow you?

Brian Levitt:

Visit invesco.com/brianlevitt to read my latest commentaries, and of course you could follow me on LinkedIn and on X at Brian Levitt.

Jodi Phillips:

Very good. Thanks for listening.

 

Important information

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 January 28, 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. 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.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.

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

Many products and services offered in technology-related industries are subject to rapid obsolescence, which may lower the value of the issuers.

Cryptocurrencies are digital currencies that use cryptography for security and are not controlled by a central authority, such as a central bank.

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

Bitcoin reached $100,000 on December 4, 2024, per Bloomberg.

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.

References to Nvidia’s stock price refer to its fall on Jan. 27, 2025, and its rebound on Jan. 28, 2025.

References to the Consumer Price Index are from the US Bureau of Labor Statistics as of December 31, 2024. The Consumer Price Index  measures the change in consumer prices and is a commonly cited measure of inflation.

References to the 10-year US Treasury rate sourced from Bloomberg as of January 27, 2025.

References to the S&P 500 Equal Weight Index price-to-earnings ratio sourced from Bloomberg as of January 27, 2025.

The S&P 500® Equal Weight Index is the equally weighted version of the S&P 500® Index.

The S&P 500® Index is an unmanaged index considered representative of the US stock market.

The price-to-earnings (P/E) ratio measures a stock’s valuation by dividing its share price by its earnings per share.

Money market assets reached $6.9 trillion as of January 22, 2025, according to the Investment Company Institute.

Bank deposits reached $17.9 trillion as of January 24, 2025, according to the Federal Deposit Insurance Corporation and US Federal Reserve.

Data on households moving money from bank deposits into money markets is from the Investment Company Institute and the US Federal Reserve as of January 2025.

Data on cash as a percentage of household assets is from the US Federal Reserve as of December 31, 2024.

An AI token is a cryptocurrency designed to support and power artificial intelligence projects, applications, and services.

The level of the federal funds rate is from the US Federal Reserve as of January 28, 2025  

The federal funds rate is the rate at which banks lend balances to each other overnight.

The neutral rate is the theoretical federal funds rate at which the stance of Federal Reserve monetary policy is neither accommodative nor restrictive.

Bond vigilantes is a name given to bond investors who sell bonds in protest against a monetary or fiscal policy they fear is inflationary.

Beta is a measure of risk representing how a security is expected to respond to general market movements.

Capital expenditures (or capex) is the use of company funds to acquire or upgrade physical assets such as property, industrial buildings, or equipment.

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

Tightening monetary policy includes actions by a central bank to curb inflation.

M&A stands for mergers and acquisitions.

The Greater Possibilities Podcast is brought to you by Invesco Distributors, Inc.

Brian Levitt:

Welcome to the Greater Possibilities Podcast from Invesco, where we put concerns into context and opportunities into focus. I'm Brian Levitt.

Jodi Phillips:

And I'm Jodi Phillips. And today we have Matt Brill joining the podcast. Matt's a senior portfolio manager for Invesco Fixed Income, so we'll be covering all things bonds, especially where Matt sees opportunities for investors.

Brian Levitt:

And bonds have become very exciting.

Jodi Phillips:

Very exciting. Do you think too exciting?

Brian Levitt:

I guess investors have seen their share of rate volatility. They would probably prefer it to not be as exciting, but such is the world that we live in, we'll see what Matt thinks about it.

Jodi Phillips:

Such is the world. What do you make of it?

Brian Levitt:

Yeah, it's a little bit of a market trying to figure out where growth is going to be and what the expectations for the Fed will be. So you get these periods where conditions look too hot and the ten-year rate moves up. And then for a bit over the summer, I think people thought it was too cold and we saw the ten-year rate go down to 3.5%. And I don't know, I guess now we're not too hot, we're not too cold, just right I guess and the ten-year is sitting around 4% or so.

Jodi Phillips:

Not too hot, not too cold. I do have to say, as an aside, it's pretty remarkable to me that a 200-year-old fairy tale about talking bears and lukewarm porridge has worked its way into our vocabulary to this extent when we're having these market conversations.

Brian Levitt:

Yeah, Goldilocks with the porridge, the sitting in the chair, the line. I've always-

Jodi Phillips:

4% yields.

Brian Levitt:

Yeah, everyone keeps talking about Goldilocks. I actually have no idea how that story ends. Is it a happy ending? Is it-

Jodi Phillips:

No.

Brian Levitt:

No. Everyone says Goldilocks. Shouldn't we know how the story ends?

Jodi Phillips:

Look, I mean, it's been a while. I think she escaped unscathed. I don't know. In my mind that's how it ends.

Brian Levitt:

Anyway, I don't even know what she was doing there in the first place. I mean, she's trying the porridge and beds of bears.

Jodi Phillips:

Okay. Okay. We're done. We're done. I'm stopping this no more. No more.

Brian Levitt:

I mean, shouldn't you be respectful of people's property? What's she doing there?

Jodi Phillips:

Well... All right, look, so you were talking about 4% yields if I recall correctly and those have not been a fairy tale for investors. There's been multiple opportunities to get yields at that level, right?

Brian Levitt:

Yeah. It seems like every time we think investors have the chance to "lock in" a 4% yield, we return, not that there's anything magical about 4%, but it seems like people want four.

Jodi Phillips:

And five years ago, everyone was wondering how they got there, how they could get four.

Brian Levitt:

Right. 2019, how can I get 4%? I mean, I was just hearing it over and over again, and that was just from my father, but I used to have to say to him, back then you would have to lend money to the Russian government. And I guess you don't have to do that anymore.

Jodi Phillips:

Well, on certain days you've been able to get it in US Treasuries. So a different time it sounds like.

Brian Levitt:

Yeah, and I'm trying to remember actually if that Russian government comment is mine or if I stole it from Matt Brill. So I steal a lot of my comments and I'm sitting here thinking, well, we're about to bring Matt on. And I might've actually stolen the Russian government comment from him.

Jodi Phillips:

All right. Didn't you just say you have to be respectful of people's property? You clearly didn't read Goldilocks, did you?

Brian Levitt:

Well, we share in this industry.

Jodi Phillips:

No, back to you. You need to do your homework. Look, here's your chance to return credit where credit is due. We're going to bring on Matt. Matt Brill, thank you for joining us. Did Brian just steal from you? Yes or no?

Matt Brill:

Brian's allowed to use anything that promotes fixed income. So wherever you got it from, I don't really care.

Brian Levitt:

Yeah.

Jodi Phillips:

All right. Good.

Brian Levitt:

What's yours is mine. What's mine is yours. Correct? Matt, have you been surprised by the resilience of the US economy?

Matt Brill:

Well, we have been. I mean, to be honest, we did expect a soft landing, but just the continued notion that there might be no landing at all has been a surprise. And what goes up must eventually come down. So we do believe that you will have a soft landing. In many ways we actually feel like you've already gotten it. To be honest, I feel like we've gotten a pretty good result so far and the economy is plugging along really, really well.

Brian Levitt:

So when you say we've already got it, you mean different parts of the economy have already slowed and maybe seem like they're picking up a little bit again?

Matt Brill:

Yeah, so there's really no end date, right? So it's always we never know when the end to any of these things are, but for now, if you look around, what's happened is inflation is materially less than it was. So whether it's completely in check is still debatable, but overall, we're not looking at 8%, 9% inflation like we saw back in 2022. You're around 2.5% to 3%, which isn't where the Fed wants it to be, but it's pretty darn close. Growth is pretty good. The Fed is not in a panic mode at all right now. So I'd say that you've gotten a lot of middle-of-the-fairway, middle-of-the-runway type activity, which is exactly what the Fed wanted.

Brian Levitt:

A golf analogy Jodi instead of a 200-year-old fairy tale analogy.

Jodi Phillips:

I'm on better territory with the fairy tales. I'm going to let golf go by, but I'm glad to hear the Fed's not in panic mode. We don't want anyone to be in panic mode. But what do you expect the Fed to do over the next year?

Matt Brill:

Yeah, so the way that we're describing the Fed is that they are cutting because they can — not because they have to. And so what we mean by that is they can because inflation has come down, they can because there are signs the economy is slowing, but they don't have to, meaning that they're not behind the curve and they're not in this panic mode that I just discussed. So overall, the economy is still good, they're ahead of the curve and they're cutting because they're very far from neutral.

And so we can debate all day what neutral is, but I don't think any of us think neutral is five and a quarter to five and a half, which is where they just were. So they needed to get away from a very restrictive policy closer to neutral. And in order to do that, our expectation is they'll cut in the November meeting, they'll cut again in December meeting just 25, though not in the big 50 that they did just last time. So 25, 25. And then next year they will do every other meeting 25 basis points. So that gets you about 150 basis points lower than you are today, which is in the low threes.

Brian Levitt:

And the low threes... Go ahead Jodi.

Jodi Phillips:

I was going to say, you said we could debate the neutral rate all day. We don't exactly have that kind of time, but I mean, what would be some of the points that would be underpinning that debate?

Matt Brill:

So go back pre-COVID back when Brian was trying to get 4% in any which way he could, or his dad was actually...

Brian Levitt:

Russian government.

Matt Brill:

And lending to whatever EM or high yield company or country that could get you that when Fed funds was low. And if you recall, the Fed was hiking rates all through 2018 and then actually started to pivot in 2019 before COVID and they got to 2.25% in late 2018. That was their high point of Fed funds rate. And 2.25% was too restrictive for the economy. World has changed since then, but just put in perspective that was 2.25% and that was greater than neutral. That was restrictive. So how much have things changed since 2018, 2019? Well, quite a bit in terms of some of the things around tariffs, some of the things around de-globalization. There are some other strengths in the labor market that weren't there before. But overall, I think that there is an argument that maybe it's 3% or less, but to be conservative we would call it 3.5%. So just as kind of a high level, conservative — meaning higher than it could be — would be 3.5%, which we're still very, very far from.

Brian Levitt:

I get the sense that each time the rates move up and we have seen some days where rates have moved up quite a bit, I feel like I hear from investors saying this is the return of inflation where when I'm looking at it seems to me a bond market that's responding to pretty good real economic activity whether it's a payrolls number or a US retail sales number. So when you see those types of moves, do you have concern that it's inflation or are you comforted by the fact that it's growth and how do you know?

Matt Brill:

Well, they are often intertwined, inflation and growth, but you can have growth without inflation and we did for a number of years, but if you get too much growth, then inflation often kicks in. So anything in growth, two to 3% real growth can be okay, but you start getting above that, you're going to drag inflation with it generally. But overall, we would encourage... the market in general is going to be much better if there's growth than if there's not at all. So the worst combination is no growth and inflation.

So I think people can live with growth and 3% inflation. Now again, that's higher than the Fed wants, but it's not a particular situation that people were fearful of back in 2022, which was stagflation, and they were thinking, "Oh God, we can't get inflation under control and there's actually going to be a recession. This is the worst combo." So for us as credit investors, we don't just buy treasuries, but credit investors, it's better for corporations if there's growth and they can actually inflate their way out of a lot of their debt. But overall, we think that the economy is slowing in both in terms of inflation, we're calling it a disinflationary environment, not a deflationary environment, but a disinflationary environment, which basically means inflation is still happening, but at a lesser extent and your growth is still positive. Atlanta GDP Now is still around 3%. So again, as you stated earlier, this economy continues to be way more resilient than anybody thought, but I am not seeing inflationary trends pick up. It's just not slowing as fast as the Fed wants it to.

Jodi Phillips:

Excellent. Well, I definitely want to talk about some of the particular opportunities that you're seeing. Brian, should we dive into that or is there anything else we want to establish higher level first?

Brian Levitt:

No, I want to dive in. I mean, investors want to know if growth is too strong and the Fed isn't going to lower rates. Should I just hide out in cash?

Matt Brill:

Well, cash has been a great place to be for a lot of this, but I think if you look at where we are now, I think the journal had an article recently just that money market funds are now... the 5% money market funds are no longer there. So you're in the high fours but still pretty attractive on a historical basis and still have generally an inverted yield curve of at least overnight rates versus out the curve. So cash looks better on an all-in yield basis, but the question is are you renting it and how long are you going to be able to get it for? So reinvestment risk we do think is real. I think what people will be surprised to know is that if you look back over the last year, fixed income returns are in the double digits. So everybody was waiting for the Fed to cut before they enter the market, but yet you've just had 10%+ type returns in the ag as well as corporate credit markets.

So a lot of it has already started to happen and it's kind of the market running ahead of expectations or running ahead of the actual reality of the Fed cutting. So I think the Fed is going to be on a path to cutting and whether or not they're going super fast or just kind of snail pace, the high point I'm pretty sure has already been hit. So the numbers that you got, 5%+ are gone. Are you going to stop at 2%, 3% or 4%? We don't know. But I think along the way you are served to start stepping out the curve, again, if you like this 4% for back all these years, we were looking to get 4% for so long, we've been saying if you like it for six weeks, you ought to like it for six years.

Brian Levitt:

I thought that was my line.

Brian Levitt:

I thought that... So I'm not sure which one. I probably stole that line from you. I've been using it all year as well.

Matt Brill:

Good lines are to be shared.

Brian Levitt:

Jodi, did you see how happy Matt looked when he was talking about double digit bond returns?

Jodi Phillips:

I did. Well, let's go around to some more specific sectors. Let's start with investment grade credit, kind of your opinion of the fundamentals there at the moment and any potential concerns you might see.

Matt Brill:

Yeah, so if you look at yields and investment grade credit, they still look very attractive. But if you look at what we call spreads or the additional compensation you get over treasuries or risk-free securities, they're on the lower end, which means that there is not a lot of fear out there right now. The market is believing that the fundamentals are good and the technicals are extremely strong. So you've got yields of corporate credit, investment grade credit above 5%, right around 5%, but going to call it slightly above 5%. Supply is light, so companies have not been issuing a lot of debt. We're not seeing a ton of M&A activity yet, and corporations are not levering up their balance sheets to take advantage of these lower rates that they have now versus a year ago because they're still relatively punitive and earnings are way better than expectations. So we've been seeing kind of a, I was going to say it, the Goldilocks environment for investment credit.

Brian Levitt:

Right down the fairway-

Matt Brill:

The supply is light and the demand is incredibly strong. So demand is coming domestically from institutional investors, it's coming internationally from Asian as well as European investors. And then the new entrant to the party is the retail investor. So the retail investor has generally sat it out in cash and we and others are finally convincing them maybe step out the curve and we're starting to see retail inflow, which is overall very supportive. And as long as you don't have fundamental issues, we continue to believe this will do very well.

Brian Levitt:

They're finally listening to you. Matt, is it-

Matt Brill:

We've tried.

Brian Levitt:

Is it possible? I mean when we think about spreads, there's two sides of that. Is it possible that just... it means the risk-free rate is too high?

Matt Brill:

Well, the risk-free rate of the US, you could argue that the US balance sheet is maybe not as good as something like Apple, but at the end of the day we don't make that argument. But the risk-free rate in the US is elevated on concerns of maybe not getting this inflation under control. It's also elevated because of budget deficits. And so corporations are issuing less debt. However, countries are issuing more debt. So the technicals are less positive in the risk-free rate or the government rates, treasuries basically rather than corporate. So that's why we prefer corporate credit and other asset classes, but we prefer high yield investment grade as well as emerging market corporate debt over sovereign treasury debt right now because the technicals are that much better and the overall fundamentals we think are better just because these corporations have done a better job with their balance sheets than the governments have.

Jodi Phillips:

Let's talk a little bit more about high yield you just mentioned. Your thoughts on that at the moment, in your opinion, is it worth the risk?

Matt Brill:

If you have an unlocking of potential growth in the US potentially through what Trump is describing his policy as, that would generally be good for high yield. However, we'll get to the politics later, but in any environment where growth is doing well, high yield is fine. High yield doesn't do well when you enter recession. So if you can eliminate the tail risk of a recession, which I think the Fed has done by telling you that they have your back and there's basically a Fed put there, I like high yield and actually you're seeing a significant amount of upgrades relative to downgrades in high yield.

It's been in the range of anywhere from two to four times depending on what you look at, two upgrades to every downgrade and in some instances it's been as high as four upgrades to every downgrade into high yield versus high investment grade going into high yield, so into investment grade. So the wind is at your back from a upgrade standpoint, yields in high yield, you can easily get 6%+ in high quality, the highest quality double B rated high yield, but you could get 7% quite easily as well in high yield. So overall the yields are positive. And our base case is a very low tail risk for the economy of entering a recession. So a no landing or a soft landing are good for high yield and that's how we're skewing the portfolio.

Brian Levitt:

Let's keep moving around the world. I want to talk about emerging markets. I know that we can add emerging markets to a core plus portfolio. I think the thesis that most had gone with was that the Federal Reserve was going to lower rates, bringing the rate differential between the US and the rest of the world to a narrower place, which should weaken the dollar, which would be supportive for investors to go overseas, own the bonds, take advantage of the currency exposure. Has that story changed?

Matt Brill:

Well, it's certainly been delayed just by the resilience of the US economy. So if the Fed cut because they are behind the curve, or even if the Fed just cuts because inflation just drops off a cliff and growth is okay, generally that would be bad for the US dollar. If the Fed's cutting like crazy whether they have to or because they can, that would be bad for the US dollar. If the Fed has to stay a little bit more elevated or a slower pace just because the resiliency of the US economy, that's generally strong dollar and that's not always good for EM local currency, it could be actually okay for EM corporations though, because at the end of the day, if the US economy is doing well, you would expect the derivative to be foreign economies doing well also. So it can be a difference of FX and things like that.

But in terms of really bad things happening to EM, not likely to happen if the US economy is doing well. Really bad things happen to the EM economy if the US is in a recession and people in the US are not buying goods. So overall I think there's little tail risk in EM. However, what are the opportunities? China is a very difficult one just given the volatility people have seen there. The Chinese property companies had a lot of losses for US investors. They didn't have them for local investors, which is kind of interesting, but overall you see a lot of stimulus coming out China. So if that's done appropriately and effectively, China could be a real opportunity from an emerging market debt standpoint. The other area, you have to talk about oil if you're going to talk about EM because it's such a large... any EM in general is very bifurcated.

You can't just paint it with a broad brush, but EM cannot be discussed without talking about oil. And just a few weeks ago, there was a lot of discussion of whether the Saudis would go for market share rather than price within the oil markets. And if they were to do that, basically they're saying they're going to flood the market with oil and drive the oil prices down. If they do that, that's not great for any commodity-rich EM country because the Saudis can win that game at the end of the day. That's probably the biggest risk out there is what do they do with oil prices and do they try to, I don't want to say manipulate it, but just drive it and basically break away from OPEC in that regard.

Jodi Phillips:

Matt, are there any areas, sectors, places of opportunity that you're watching that we neglected to ask you about?

Matt Brill:

Yeah, so the two hot spots have been commercial real estate and retail. And commercial real estate we've actually seen a huge turnaround and CMBS has done quite well. There've been opportunities and office reach that we've taken advantage of. And when I say that people just fall out of their chair and say, "Oh my God, I can't believe you're buying anything in there." This has been going back a year. And if you look at some of these REIT stocks, which we don't own, but this is representative of the activity, a lot of the office REITs have done incredible. You see things like Amazon telling people to go back to work, there's a huge push for this and the high quality or the highest... the best buildings basically are being leased and there is activity there.

Anything else? No. So you got to pick your spots there, but I would say the fear that we saw a year ago, for several years really, but really a year ago it was really getting a lot of people concerned that it could even spill over to the banks. We're not seeing that. And in fact the banks this week, you saw the bank earnings and Morgan Stanley actually said, "We're going to reserve less for our commercial real estate loans than we had before, reserve less for the losses because we don't think these losses are going to come." And that's the first time we've seen anybody do that since COVID in any material size. So basically no one's declaring victory there, but I do think at the end of the day, the worst is probably behind you in course real estate, which creates opportunities. Again, these are small opportunities, these are not major themes in the portfolio, but I just think it's good.

If you have eliminate one tail risk after another, generally it's good for the overall markets and course real estate has a lower tail risk of the day before. And then the other one is retail. And I think everybody was so concerned that we were going to hit this recession. We've called it the most anticipated recession and most forecasted recession in history. That never happened. And we had retail sales this week and they were fantastic. And you keep being amazed by people going out and spending, but guess what? If they have a job, they're going to spend and if you don't believe the US is going to go into recession, you don't believe that the job losses are going to be material. And in fact, we're still generating 150 to 200,000 jobs a month, people are going to spend. So I actually think that's an undervalued area of the market and mainly because of fear that's been there for so long, but the valuations are a lot better there than they are in other portions of the market. So I think retail could be an interesting play from here.

Brian Levitt:

And I am the living anecdote of all of that. The commute from New Jersey to New York City, as I always say now up to about 80 minutes and about 20 minutes to get a rice bowl at lunch. So I am the living anecdote of all of this. Matt, thank you so much, so informative, so great to have you on the show. You've always been such a great guest to bring on and a friend to the Greater Possibilities Podcast. So thank you.

Matt Brill:

Thank you guys.

Jodi Phillips:

Great. All right, Brian, that wraps it up once more. Tell our listeners where they can get more insights from you.

Brian Levitt:

Yeah, please visit invesco.com/brianlevitt to read my latest commentaries. And of course you can follow me on LinkedIn and on X at Brian Levitt.

Jodi Phillips:

All right. Thanks for listening.

Important information

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 October 18, 2024, 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. 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 risk of loss.

Past performance is no guarantee of future results.

An investment cannot be made directly in an index.

All data provided by Invesco unless otherwise noted.

Statements on the movements of the 10-year US Treasury rate in 2024 sourced from Bloomberg. The 10-year US Treasury yield was 4% as of October 18, 2024.

Statements on the current and historical US inflation rate sourced from the US Bureau of Labor Statistics as of September 30, 2024. Based on the core Consumer Price Index year-over-year percent change.

Statements about the level of the neutral rate sourced from the US Federal Reserve as of October 18, 2024. Based on the US Federal Funds Rate.

Statements on the level of the GDPNow model sourced from the Federal Reserve Bank of Atlanta as of October 18, 2024.

GDPNow is a nowcasting model created by the Federal Reserve Bank of Atlanta that forecasts real gross domestic product (or GDP) growth.

Gross domestic product (GDP) 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.

Statements on the yield of money markets sourced from Bloomberg as of October 18, 2024. Based on the Bloomberg 1-3 Month US Treasury Bill Index.

Statements on the level of fixed income returns over the past year sourced from Bloomberg as of September 30, 2024. Based on the 1-year return of the Bloomberg US Aggregate Bond Index and Bloomberg US Corporate Bond Index.

The Bloomberg US Aggregate Bond Index is an unmanaged index considered representative of the US investment grade, fixed-rate bond market.

The Bloomberg US Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes US dollar-denominated securities publicly issued by US and non-US industrial, utility, and financial issuers.

Statements about the yields of investment grade corporate credit and investment grade credit slightly above 5% sourced from Bloomberg as of October 18, 2024. Based on the yield to maturity of the Bloomberg US Corporate Bond Index.

Yield to maturity is the rate of return anticipated on a bond if it is held until the end of its lifetime.

Statements on the level of upgrades versus downgrades in the high yield market sourced from S&P Global as of September 30, 2024.

Statements about the level of yields for high yield bonds sourced from Bloomberg as of September 30, 2024. Based on the yields of bonds in the Bloomberg US High Yield Corporate Bond Index.

Statements on the returns of REIT stocks sourced from Bloomberg as of September 30, 2024. Based on the returns of the FTSE NAREIT All Equity REITS Index. REIT stands for real estate investment trust.

Statements on the number of jobs created in the US sourced from the US Bureau of Labor Statistics as of September 30, 2024.

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.

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.

High yield bonds, or junk bonds, involve a greater risk of default or price changes due to changes in the issuer’s credit quality. The values of junk bonds fluctuate more than those of high quality bonds and can decline significantly over short time periods.

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

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.

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.

Investments in real estate-related instruments may be affected by economic, legal, or environmental factors that affect property values, rents or occupancies of real estate. Real estate companies, including REITs or similar structures, tend to be small and mid-cap companies and their shares may be more volatile and less liquid.

The Consumer Price Index (CPI), which measures change in consumer prices, is a commonly cited measure of inflation.

The ”Fed put” refers to the belief that, when the economy falters, the Federal Reserve will jump in to support it through monetary policy.

The federal funds rate is the rate at which banks lend balances to each other overnight.

The neutral rate is the theoretical federal funds rate at which the stance of Federal Reserve monetary policy is neither accommodative nor restrictive.

The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time.

The yield curve plots interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates to project future interest rate changes and economic activity.

An inverted yield curve is one in which shorter-term bonds have a higher yield than longer-term bonds of the same credit quality. In a normal yield curve, longer-term bonds have a higher yield. The yield curve plots interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates to project future interest rate changes and economic activity.

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

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

Deflation is a decrease in the price level of goods and services.

Disinflation, a slowing in the rate of price inflation, describes instances when the inflation rate has reduced marginally over the short term.

Tail risk generally refers to events that have a very small probability of occurring. In finance, it is when the possibility of an investment moving more than three standard deviations from the mean is greater than what is shown by a normal distribution.

OPEC+ refers to the members of the Organization of Petroleum Exporting Countries (OPEC) and other oil-exporting non-OPEC members.

Spread represents the difference between two values or asset returns.

A basis point is one-hundredth of a percentage point.

M&A stands for mergers and acquisitions.

EM stands for emerging markets.

FX stands for foreign exchange and refers to the conversion of one currency into another.

CMBS stands for commercial mortgage-backed securities.

The Greater Possibilities podcast is brought to you by Invesco Distributors, Inc.

Brian Levitt:

Welcome to the Greater Possibilities podcast from Invesco, where we put concerns into context and the opportunities into focus. I'm Brian Levitt.

Jodi Phillips:

And I'm Jodi Phillips. And today, our guest is Andy Blocker, Invesco's Global Head of Public Policy. Andy's had a long career at the intersection of politics and business.

Brian Levitt:

Andy is here and we are recording this 24 days out from the election.

Jodi Phillips:

24, that's very precise. How many hours, Brian?

Brian Levitt:

Too many. I think I actually looked it up, I had a feeling you were going to ask me that. It's something like 14 hours as we're presenting it right now. I can't, obviously it doesn't make sense to give you a minute, so they're rolling as we speak.

Jodi Phillips:

Well, that's right. So this is our recording day. Of course, by the time the audience hears it, we'll be that much closer to the election, but, Brian-

Brian Levitt:

Mercifully.

Jodi Phillips:

It was about a year ago that you developed your presentation, People Care About Elections, Markets Don't. So, how many times have you given that presentation to investors since you came up with that?

Brian Levitt:

Oh, a lot. It's like an out-of-body experience at this point, but it's popular. People want to hear it for obvious reasons.

Jodi Phillips:

That's right.

Brian Levitt:

That was a good presentation title actually, Jodi, I think you were the one who suggested that.

Jodi Phillips:

I did, you remember.

Brian Levitt:

I do, I do.

Jodi Phillips:

Yeah. Well, look, honestly, it was time to freshen up your old headline. Hating the government is not an investment strategy, but we needed to freshen it up a little bit.

Brian Levitt:

I actually liked that one. I actually still say it occasionally.

Jodi Phillips:

Do you? Old time's sake, I guess.

Brian Levitt:

Was there something not PC about that or you just ready to move on?

Jodi Phillips:

No, not at all. We're just moving away from hating, I guess. But look, here's the important thing though, is when you're giving this presentation in front of crowds of investors, what are you hearing from them?

Brian Levitt:

Yeah, I mean, I hear a lot of things. I think a lot of people do appreciate the presentation, us saying that markets aren't going to care as much as you believe and giving a historical perspective for that. But I'm hearing everything from, the US is becoming a banana republic, to World War III is near. There's just a lot of concerns out there and I try to help people get over those concerns.

Jodi Phillips:

How? It sounds like you're talking to some pretty pessimistic groups. I'm glad you're doing that, but what's your tactic?

Brian Levitt:

Well, I mean I mostly listen and then I do try to just use facts to steer the conversation back to the right direction. I mean, for example, it's pretty hard to call the US a banana republic when you've got GDP where it is. You've got the unemployment rate historically low. You've got oil production historically high. The stock market at all time high. So it's fortunately, I think a lot of the data's on our side when we try to push back against these concerns.

Jodi Phillips:

So you're just bring in the facts. I keep thinking, Brian, about one specific fact that you had mentioned in late August. You tweeted that it had been 957 market days since Joe Biden won in 2020, and on that day, the S&P 500 was up 66%. And then you looked at the 957 market days after Trump won in 2016, and the S&P 500 was up 65%, so.

Brian Levitt:

Amazing, right?

Jodi Phillips:

It was, yeah.

Brian Levitt:

Amazing.

Jodi Phillips:

Very precise.

Brian Levitt:

I do love that chart and it couldn't have worked out any better for the point that I'm always making. And yeah, it's not quite as good as it was at 957 days when they were exactly the same. Right now Biden's is 71, Trump's is mid-60s. Not that I'm trying to say one is better for the other, better than the other for markets. Just to say that people were so worried about it and they basically got to the exact same point.

Jodi Phillips:

Yeah, absolutely. So, so much for Trump's claim that the markets would go to zero if Biden won.

Brian Levitt:

Right, you remember that? Yeah.

Jodi Phillips:

I do.

Brian Levitt:

401k will go to 0, and not to make this too one-sided, I think Hillary Clinton said that we would all go bankrupt if Trump won. He would treat the economy like one of his casinos, so that didn't work out well either.

Jodi Phillips:

No, they were both equally wrong. But I guess hyperbole gets people to the polls, right?

Brian Levitt:

It does.

Jodi Phillips:

Or does it? I don't know. Maybe it drives them away, but that's why Andy's here to help explain all of this to us. So, let's bring Andy on to discuss the race and the issues that are on investors' minds. So welcome, Andy.

Brian Levitt:

Andy Blocker.

Andy Blocker:

How's it going guys?

Brian Levitt:

How are you?

Andy Blocker:

I'm great. I could just sit here and listen to you guys all day. I mean, I don't think-

Brian Levitt:

Well, that's nice of you.

Andy Blocker:

... I could add much to this conversation.

Jodi Phillips:

All you have to do is subscribe to the Greater Possibilities podcast and you can do just that.

Look, so Andy, we want to focus on the issues of course, but I have to ask the obligatory horse race question. So, is this race as close as it looks?

Andy Blocker:

Well, being in Washington, you know my answer. So the answer's clear, it's yes and no. I mean, so on one level it is.

Brian Levitt:

Yes and no, oh.

Andy Blocker:

Yes and no.

Jodi Phillips:

Settled it.

Andy Blocker:

I mean I have to hedge myself, I have to hedge myself.

Brian Levitt:

Crystal clear, crystal clear.

Andy Blocker:

So look, I think... Exactly. We're the government, we're here to help, right?

So look, I think it is, it's historically one of the closest races we've seen according to polling. I mean, usually at some point in the election, at least one candidate's up five percentage points or more, and that hasn't happened at all. And not only is it not widened out to five point lead, it's neck and neck, not just nationally, it's neck and neck in all these swing states. You do the RealClearPolitics average is like one point or less than one point, or it's tied. And I'm doing my map, which kind of changes, based on, I use RealClearPolitics as okay, if you look to seven states today and RealClearPolitics is right, where is it going to be? And two weeks ago, Kamala was winning because she won Pennsylvania. Last week, Trump was winning because he won Pennsylvania, and this week Pennsylvania's a tie, so.

Brian Levitt:

So then why do you say yes or no?

Andy Blocker:

Well, I say yeah, so it's both yes and no. So I think the no part is, that's if you trust the polls, right?

Brian Levitt:

Right, right.

Andy Blocker:

So they've under-counted Trump multiple times, '16 and '20, and polls recently have under-counted Democratic turnout after Roe v. Wade. So I think-

Brian Levitt:

Yeah, 2022.

Andy Blocker:

Yeah, and the question is, have they adjusted and accounted more for Trump or are they still under-counting him? And then what's this abortion effect going to be?

So, and the other thing is, look, I don't think there are really that many, if any, truly undecideds. I think there's some people who haven't decided but are leaning strongly and just waiting for something to happen or something that's going to give them something to move one way or the other. But I think, and a lot of people think, that this election in the last two weeks is going to turn one way or the other. It may not show in the state by state winning by 100,000 or 200,000 votes. It might still be by 10 or 20, that's all it takes. But I think these seven swing states, I think six of seven of them are going to turn one way or the other. And so while-

Brian Levitt:

Oh, wow.

Andy Blocker:

... it may be close, while it may be close, electorally, I think there's going to be a trend happening.

Brian Levitt:

Was that you who made that big bet on Polymarket that drove Trump's odds to like 58% from 46%? Were you the one that put the billion dollars into that market or that wasn't you?

Andy Blocker:

I am not a betting man.

Brian Levitt:

Okay, okay.

Andy Blocker:

And if I were, I would be a lot poorer.

Brian Levitt:

So Andy, if we think about the most likely outcomes, do you consider the House of Representatives a fait accompli for the Dems, and the Senate a fait accompli for the Republicans? And does that mean either way, whether it's Trump or Harris, we end up with a divided government?

Andy Blocker:

So I don't think it's a fait accompli, but I think that's the prevailing wisdom, is that based on the numbers that the House will go Democratic, mostly. There's a lot of different factors, a lot of redistricting, a lot of different things. But it basically comes down to, there's more seats that the Republicans are trying to hold onto that Biden won in 2020-

Brian Levitt:

Got it.

Andy Blocker:

... than there are seats that Democrats are defending that the Trump won in 2020. So, I think it all comes back to that there's redistricting in New York, California, and Alabama, all this, North Carolina. But, so that's the base case but I think in the House, the presidential election really, really impacts who wins the House. So if Trump wins the presidency, I think he could pull the House with him. And if Kamala-

Brian Levitt:

Oh, a clean sweep.

Andy Blocker:

Yeah, yeah. So the two scenarios. The two major scenarios are, Trump sweep or Kamala divided government with the House and not the Senate, because the Senate seemed really hard for the Democrats to keep right now.

Brian Levitt:

With Joe Manchin retiring, Jon Tester in Montana.

Andy Blocker:

Exactly. Now look, all these things, just like with this House, it could turn based on whether or not Trump wins and pulling the House with him. I mean, there's this slow moving feeling, or maybe it's hopeful feeling among Democrats that they can do something in Texas or Florida. So, but then on the other side, there's some of the latest polling show that maybe a few state seats you thought were safe, maybe Wisconsin or others, may not be as safe as you thought for the Democrats. So look, this can move either way here, but I think two weeks out, talk to me then and I'll actually tell you what I think will happen. But then when we're two weeks out, you're going to ask me, I'll say, "Well, give me another week."

Brian Levitt:

So we're still not putting our money on Polymarket?

Andy Blocker:

No, not at all.

Brian Levitt:

We'll leave that to Elon Musk or whoever else just drove that market.

Andy Blocker:

Exactly.

Jodi Phillips:

Well Andy, we'll bring you back in January so we can talk about 2028, because you know how we like to do this.

Brian Levitt:

Oh, God, oh my.

Jodi Phillips:

Get the early view.

Brian Levitt:

Please, no.

Jodi Phillips:

Andy, we established at the top that the investors Brian's been talking to lately seem to maybe have a little bit of a pessimistic view of things. What do you hear from clients? I know you do a ton of traveling across the US, across the world. What are you hearing as being the most important issue that people are really focused on?

Andy Blocker:

So it's a combination. So when I'm talking to clients, I'm usually talking to either institutional or retail clients, depends on where in the world they're from. So if I'm talking to retail US clients, I think it's the economy, it's... And what I mean by that, it's like taxes, tax policy, and who's going to be better for the economy. That's the number one thing people are... And they obviously want to know, yes, they do know, okay, they do listen to Brian and they're usually well schooled by the time I get to them that people may care about the elections but markets don't. so on the macro basis, yes, stay invested, but it's not about whether you're invested, it's about where you're invested. So they want to kind of know different industries, what's going on.

Internationally, they want to know geopolitics, and tariffs, and foreign policy. Realignment of allies, if it's Trump versus what Kamala might do, vis-a-vis, strengthening our current alliances. So those are it. And then just population generally, the top issues are economy, or should I say affordability, immigration, abortion, democracy. Those are the top four when you talk on the general population side.

Brian Levitt:

Andy, I remember, so you bring up taxes. I remember, I think it was around 2010, the big concern was the fiscal cliff that the Bush era tax cuts were not going to be extended, we were going to go over a fiscal cliff. There was a lot of fear about it. And if I remember correctly, the Obama Administration extended it and then extended the Bush era tax cuts, and then I believe in the American Taxpayer Relief Act, something like 82% ended up being extended. Do you think Kamala Harris, if she were to win the election, would be of a similar mind to what the Obama Administration was in the early 2010s? And does Congress have anything to do with it, or does the expiration just come down to what the President decides?

Andy Blocker:

So the baseline is just, I know you asked about Kamala, but for Trump, he's going to extend to all the tax cuts and he's going to try to get the corporate tax cut, which is permanent at 21% down to 15, so that's what he'll do. Kamala has already said that she wants to extend all the tax cuts for individuals if you make under $400,000, but she wants to let them snap back to the higher rates for those who make over $400,000. And for corporations, she wants it to go from 21% to 28%. So she's already said that.

Now, can she do that? I mean, I think reality shows, if I just go to the corporate tax cut, tax rate, most studies show that 25% is the actual optimal rate for actually bringing in income without hurting businesses. So I think if you actually, if she had all of Congress, which is not our base case, if she had House and Senate, there'd be some Democratic Senators who'd be like, "Okay, 25% is enough. Okay, we're not trying to go all the way back up to 28%." And I think they'll either do some, keep some of the tax cut for the wealthy or they'll do SALT (state and local tax deduction), bring SALT back, which is expensive. So there's all kinds of variations on that, but our base case is that she would have split government and that she'd have to negotiate with Republicans in the Senate.

So I think it's going to be closer, but somewhere between the $5 trillion of extending all of the tax cuts versus I think her is like $1 trillion. So somewhere between of the cost will be there, because she'd have to negotiate it out. She'll have a lot of leverage because if you do nothing, all tax cuts go up and so all the tax cuts revert. And so Republicans would want to deal with that, but then again, she won't have all the leverage because she doesn't want to raise taxes on those on the lower end, because she promised not to. So it'll be pretty brutal, hand-to-hand combat in those negotiations.

Jodi Phillips:

What about the cap gains tax, that unrealized cap gains tax on the ultra wealthy? I think it's like, what, over $100 million in assets? Is what Harris is talking about something that could happen, given hand-to-hand combat, or is it more of a political talking point?

Brian Levitt:

And let's be clear, that Jodi's asking specifically for the Phillips family because of their $100 million in assets.

Jodi Phillips:

I'm very concerned. Yes, yes, $100 million.

Brian Levitt:

You're asking for a friend, Jodi?

Jodi Phillips:

Yeah, well, once I got to 101, I started really caring about this.

Andy Blocker:

Well, no, I mean, look, this is important I think. Well, for all the tax cut proposals or tax increased proposals is important. So one of the themes I've had, just like Brian has this theme about people care about elections, markets don't. My big thing is, politics trumps policy. Right? And so you have to look at the politics of these things and from a standpoint of what's popular, what's not. Right? And so for that specifically, people, it's popular to raise taxes on the wealthy. Right? Because most people aren't wealthy. Now, they don't want you to kill them because everyone in America, good thing Americans, we all think, hey, we have a chance to be wealthy someday.

Brian Levitt:

It's coming, it's coming.

Andy Blocker:

So we don't want to really go after them, but.

Brian Levitt:

We will all be hanging out with the Phillips family soon.

Jodi Phillips:

Yes, yes.

Andy Blocker:

Yeah, yeah, and so I think on this specifically, this is a tough one. I think there's some issues with this. I think there's some constitutionality issues with it and there's some political issues with it. So, people are fine with everyone having to pay their fair share, but then how you do that may have issues. Because with this particular program you might have it where if it's unrealized cap gains, it's like, well, what if your cap gains are in the land you own and you not... How do you pay it? Right? There's lots of technicalities to deal with here, and so I don't really see that as something happening for a number of reasons. I don't think all the Democrats are behind that. And there's a practicality issue and there's a constitutionality issue, but it's out there and so it'll be discussed.

Brian Levitt:

Andy, I too get asked a lot of questions about tariffs. And I think back to my first day at university, and the professor in the class said every good economy needs to evolve. You shipped parts of things to other parts of the world, or you shipped other things that used to do at other parts of the world, countries that have comparative advantages, and that's how everybody gets wealthier. And so I've stuck to that theory or I've believed in that. And so when I answer questions about tariffs, it's really, if you're protecting industry or you're increasing the cost of bringing goods into the country, you're just going to get a less optimal economic outcome but it doesn't necessarily mean that you're derailing the economy or derailing the markets. I personally think clarity matters the most, right? Just let me know what the rules are. How do you like my answer and what have you been saying to people?

Andy Blocker:

No, I mean, I think that's as always, I mean, that's an intelligent answer. I think my big thing on tariffs is, yeah, these are choices, right? And so we may choose for national security reasons or for other reasons to say, "I want to protect XYZ industry," and you're saying, "I'm willing to have a higher cost in that industry because I want to be able to have it built at home or I want to save these jobs in this industry." Those are choices.

The interesting thing on tariffs and some of the proposals out there right now is, Trump did a... They actually tried to when they first, when they raised the tariffs on China, they were trying to raise tariffs on those that would have the least impact on the US. Right? But if you're coming and saying you're doing it across the board 60%, that's hard to do. Right? So the question is, do they say, "Okay, 60%, oh, but we're going to go in and try to parse it." It gets hard when you go to 60% and then you have the 10% across every country in the world, that gets hard too. So I think across the board tariffs, that's tough, but if you're targeted, you can actually get away with it.

Brian Levitt:

And do you think it will be targeted or you think that it'll be across the board?

Andy Blocker:

So, okay, I'll tell you how I think it will be targeted. It will be targeted vis-a-vis, country by country. So the countries that give Trump what he wants, they'll get a deal on the tariffs, right? Those who don't, they'll go in and I think with Lighthizer there, I think there will be some effort at targeting them, but it's kind of hard, right? So you have to... and that's going to, we'll see what Trump's thinking at that point, and that's the volatility moment.

Remember last time when he did it? Things kind of leveled off after about six months, once we figured out from the time of the proposal, but once a change he made, it created a lot of waves in the market as people were trying to figure things out. And I think that's what's going to happen here, except it's going to be whatever, every country in the world and those larger economies that impact us, right? Starting with China and then going to others. That's going to be the part, it's going to be the realignment and the rejiggering of our trade relations with other countries.

Jodi Phillips:

So Andy, when you were going through your list of topics that people ask you about earlier, I don't recall you mentioning specifically the Fed, the Federal Reserve, and maybe you did and I missed it, but I am definitely curious about whether the independence of the Fed is something to be concerned about or not.

Andy Blocker:

So I want to be careful with this one.

Brian Levitt:

No, it's the Greater Possibilities podcast. We're not careful here.

Andy Blocker:

You can have a lot of fun with this one, but look, I've met Jerome Powell and I think he's a credible person.

Brian Levitt:

Show off.

Andy Blocker:

No, I mean, no, no, I'm not showing off. I'm just saying, from what I've seen of him and having met him, I don't think he's ultimately totally swayed. Right?

So first of all, let's go to the Fed independence, the direct question. That would take an act of Congress to actually get rid of the current independence of the Fed. So that's number one. Number two, every president tries to influence the Fed. Doesn't matter how they do it, they'll just make statements like, "It'd be great if we had lower interest rates,” whatever. Trump is the most aggressive of that crew. Okay?

And so all I'll say is this, I believe that Powell has been data-driven, data-dependent, right? Whatever term you want to use, and I think it will continue to be that way. But as in baseball, we all know that tie goes to the runner. Going back to politics trumping policy, I don't think politics dictates Fed policy, but if you're telling me the data can go either way and you've got Trump breathing down your neck, you're not going to be influenced to go the direction Trump wants to go? So I mean, that's if it's truly a jump ball, as far as the data allowing you to go either way.

A lot of times the data's not there, the data supports going in one direction or the other, and I think the Fed will continue to make that case. But I think in that rare instance where there's flexibility and the Federal Reserve Board is split, I think those are instances where it could make an impact, but I think those are rare. I think most of the time there's usually consensus and because the data is saying one thing or the other and they go that direction. So I'm like, 1% of the time there won't be. It's still independence, it's that they're making an independent decision but if we're acting like they're not influenced by the world around them, I mean, I don't believe in that.

Brian Levitt:

And the key issue, of course, would be the bond market, right?

Andy Blocker:

Absolutely.

Brian Levitt:

Yeah, so as long as the bond market believes in the Fed independence, if it comes down to a jump ball or tie goes to the runner, whatever mixed metaphors we want to use here, as long as they're all sports related. Yeah, as long as the bond market feels comfortable with it.

So speaking of which, let's talk about the financial sector. What are you hearing as the most important issues or what are you focused on for asset management or the financial sector? Are there issues that are dependent on the outcome of this selection that could meaningfully impact the way we do business or the way our clients do business?

Andy Blocker:

That's a great question. So, how do I answer this? From a macro basis, I think Trump is much more deregulatory and there won't be this onslaught of new regulations from some of our primary regulators. So I think that would be true. Specific issues, I think, look, I mean, what are the areas that could impact our industry? I mean crypto, technology, all these impact how we may do business, how we have to adjust, what we have to offer our clients, what we have the ability to offer our clients. So in that respect, we're watching very closely.

The interesting thing is though, there isn't an intersection between the populist side of Trump-Vance, mostly Vance, and the potential Harris-Walz ticket, or at least some of the Democratic Party, about big being bad. Right? And so being anti-big corporations, being anti-merger, being all that stuff, so that's something to watch. I think every company's watching that. So, anyway.

Jodi Phillips:

So Andy, you mentioned geopolitics. I'll leave this kind of a broad question so we can address whatever geopolitical issue might be at the forefront your mind. But what are your thoughts when you get those kind of questions, how are you addressing them?

Andy Blocker:

So, we start off with politics trumping policy, right? And so let me go across the globe, let me start with China. Right? So what we've seen in China is that when Trump got into office in 2017, what, 47% of the American people had a negative view of China, when he left office, 76% had a negative view of China. Today it's 81% have a negative view of China.

Jodi Phillips:

Wow.

Andy Blocker:

So we knew going into 2020, no matter who's going to win that election, the politics would dictate you cannot be seen as soft on China. And what we've seen in the Biden Administration, I think even Trump mentioned in the debate against Harris said, "Look, you haven't even removed the tariffs I put in. You're complaining about them, but you haven't removed them." Yeah, there was no room to remove them. In fact, they've added targeted tariffs on specific industries, either to protect jobs or because they were national security issues.

So from that perspective, they may be different in their methods, like Trump being more volatile with Truth Social or tweeting something and being more bilateral, mano-a-mano taking on China, US, one-on-one. And where Biden or Harris would be more measured, predictable in their policies, and also being more multilateral working with allies. They're going in the same direction, and so there will be tension with China. The key is to keep the lines of communication open. Then there's the 60% tariff. You're going to have to deal with that. Day one, you're going to deal with that with Donald Trump. And that negotiation is going to be very important. A lot of Trump's folks have said the 60% is an opening bid. Okay, well, where do we end up on that? So that's China.

When you look, Russia, Ukraine, couple things there. Number one, NATO (North Atlantic Treaty Organization), we're not getting out of NATO. Okay? So you need a super majority of the Congress to get out of NATO, so that's not happening, so. However, and a lot of our allies and members of NATO, I think we started 2014, only three countries were meeting their 2% of GDP requirement for being members of NATO for defense spending. Now 23, this year. So they've made progress, and yeah, some of it's the rhetoric from Trump saying, "Hey, you're not paying your bills, you're delinquent. I'm not going to protect you." But some of it is Russia invading Ukraine, that nothing brings to mind like they're being a threat on your border. Okay?

So, and with respect to the main risks around Russia-Ukraine on the election, they're kind of in the same ballpark. I think we all agree at some point here, next year or the year after, we're going to have to work towards a negotiated settlement here. And the question is, is Ukraine negotiating from a position of strength with Kamala Harris fully backing them, or a position of weakness, where Trump has been pretty clear that he's not enthralled with this war? So that could impact. And there's also tail risk of, we can talk about that, but I don't want to spend time on that. What are the extreme options that could happen?

And then you go to the Middle East, how does that change? I mean, clearly Netanyahu prefers a Trump presidency. He feels like Trump would be much more behind him, being able to do the things he wants to do, whether it's with Hamas or Hezbollah or Iran. And then, but no policy has been articulated at all. All Trump has said is, "One, we need to fully support Israel, and if it were me, this wouldn't be a problem." So, what does that mean? We don't know. Right?

So there's a lot of different things geopolitically, from a trade perspective, from a foreign policy perspective. But I think the key is that with Trump, there will be volatility in the beginning, the normal change of administration. But then in addition to that, given all the different ways in which he would, not just with terrorists, but also with realigning our alliances across the globe, that realignment takes time and creates volatility.

Brian Levitt:

And yet Jodi, I come back to the point that economy is resilient and the Fed's lowering rates. So as long as, I mean, these geopolitical events are going to be with us. As long as those two things don't change, perhaps we still have a good backdrop for markets, even as investors worry themselves with those events.

Okay, so I just looked, we're 24 days, I think we're now 11 hours, 24 days, 11 hours away-

Jodi Phillips:

That's right, that's right.

Brian Levitt:

... from the election, so.

Jodi Phillips:

That's right. All right, Brian, I think we've asked everything we can at this point in time. It's just going to, we're all going to just see how this ends up.

Brian Levitt:

See what happens.

Jodi Phillips:

And get Andy back on as soon as possible afterwards to explain what to watch for when everything settles, so.

Brian Levitt:

And who's running in '28.

Jodi Phillips:

Oh yeah, that's the first question for sure.

Brian Levitt:

JD Vance vs. Tim Walz.

Jodi Phillips:

Yeah. Brian, while you were in economics class, I just took journalism classes, so all I know how to do is ask questions. So that's my role in all this, but Brian, where can our listeners find more commentary from you about the election or whatever else?

Brian Levitt:

Yeah, thanks for asking. Visit Invesco.com/BrianLevitt to read my latest commentaries. And of course you can always follow me on LinkedIn and on X at Brian Levitt.

Jodi Phillips:

Yes. And while you're on LinkedIn, be sure to follow Andy Blocker as well. And then you can get such resources as the new Investor's Guide to the Election that I saw featured on Andy's LinkedIn, as well as multiple, multiple media appearances where Andy gives the latest insights into what's going on in the world. So Andy, really appreciate you with everything you've got going on right now, making the time to come here and talk to us.

Andy Blocker:

Thanks, great to be with you.

Brian Levitt:

Thanks, Andy.

 

Important information

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 October 10, 2024, 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. 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.

This is not intended to be tax advice. The information presented is based on current interpretation of federal tax law. State income tax laws may differ. Please consult your tax professional for detailed information.

All investing involves risk, including risk of loss.

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

All data provided by Invesco unless otherwise noted.

S&P 500 Index performance during Trump’s and Biden’s terms sourced from Bloomberg. Based on index performance over 957 and 989 trading days starting on Nov. 8, 2016, for Trump and Nov. 3, 2020, for Biden.

Past performance is no guarantee of future results.

An investment cannot be made directly in an index.

The Greater Possibilities podcast is brought to you by Invesco Distributors, Inc.

Brian Levitt:

Welcome to the Greater Possibilities podcast from Invesco, where we put concerns into context and the opportunities into focus. I'm Brian Levitt.

Jodi Phillips:

And I'm Jodi Phillips. And on the show today is Justin Livengood. Justin is a Senior Portfolio Manager for the Mid Cap Growth strategy and a Senior Research Analyst for the Discovery and Capital Appreciation strategies with a focus on financials, real estate and health care.

Brian Levitt:

Yeah, thanks for the intro, Jodi. It's always good to have Justin on. I think our frequent listeners will remember, and I keep coming back to it, that Justin eased our concerns in 2023 during the week of Silicon Valley Bank failure, which I think was one of our more important episodes.

Jodi Phillips:

It was, absolutely. And earlier this year, Justin discussed his optimism about artificial intelligence (AI), which has obviously been a driver of market performance this year.

Brian Levitt:

I think you and I know the best people. I mean, I know the 45th president says it, but I think you and I know the best people.

Jodi Phillips:

Brian, no, we're not doing politics this week.

Brian Levitt:

Good, good. I think it's all anyone wants to talk about. So I am very good to take 20 to 30 minutes off from the political environment in the US.

Jodi Phillips:

For sure, and you may also be happy to know that we're also not talking about the unwind of the yen carry trade and a market correction on this podcast either.

Brian Levitt:

Yeah, we've come a long way since then. I know investors get upset every time these 5% to 10% downturns happen. They happen almost every year. People always seem to freak out. They're almost always the result of policy uncertainty, tend to abate when we get greater clarity, and this was the case as well this time.

Jodi Phillips:

Yes, they do. And this time it was the Bank of Japan that needed to clarify their policy stance instead of the Federal Reserve. But I did like the stat, I will mention this. I like the stat you included in your article when all of that was going on, your article about market corrections, just reminding investors that the US stock market has recovered within an average of three months after one of those 5% to 10% corrections.

Brian Levitt:

Yeah, maybe three months was too pessimistic, but these are averages, right? So we'll see what September looks like. September's not always a great month for stocks, but nonetheless, that three month number worked out pretty nicely.

Jodi Phillips:

Yes, it did. So yeah, great question, September, where do we go from here? So I revisited my notes of Justin's comments back in 2023, you mentioned that podcast. One comment I'd like to come back to today, I'll quote, "We are returning to a proper equilibrium in monetary policy that may help provide a stronger base for the economy and the stock market to operate from in the next two to three years." That what he said back in 2023.

Brian Levitt:

Yeah, great comment. And that was one and a half years ago, so does Justin still feel that way?

Jodi Phillips:

Absolutely. And what about this so-called great rotation. I mean, Justin is a small and mid cap manager after all, so he's a great person to ask about markets broadening out, including greater participation from small company stocks.

Brian Levitt:

He's also a growth manager across market capitalization. So where are we with the AI trade? How big can this be? And what other themes are exciting? I mean, I love talking to growth portfolio managers.

Jodi Phillips:

Yep. Well let's do it. Let's talk to him instead of about him. Let's bring him on right now. Hi, Justin.

Brian Levitt:

Hey, Justin.

Justin Livengood:

Hi, Jodi. Hi, Brian.

Brian Levitt:

So Justin, why don't we start with that quote that we brought up from 2023. Jodi and I take very good notes-

Jodi Phillips:

Thorough, very thorough.

Brian Levitt:

Copious notes.

Justin Livengood:

Do you?

Brian Levitt:

Yeah. So do we still have a strong base for the economy and the stock market to operate in the next, I don't know, can I still say two to three years or have we cut into that two to three year period?

Justin Livengood:

Yeah, no fair question. I think so. I feel a little better today, quite honestly than I did at the end of last year for two reasons.

First, we at least now are to the doorstep of the Fed easing regime. We'll see the exact magnitude, but a year ago, we still weren't sure if higher for longer was the reality, and now we can at least put that debate behind us.

The second thing that makes me a little more optimistic is that the economy has hung in better than I would've feared. There's definitely been some impact to the tighter monetary policy. We've seen some wobbly statistics. Clearly, the low end consumer, the middle income consumer even is feeling a little more strain, but it hasn't yet created a recession or pressure the economy even to get much below 2% GDP growth year to date. We overall have hung in a little better this year economically, both from the consumer, but particularly from the commercial industrial side than I might've predicted.

So I am optimistic going forward that maybe for the next couple of years, we'll go to the low end of that two to three year range, that the foundation for the stock market is pretty solid. To me, monetary policy is the most important thing. And so again, the fact the Fed is going to be cutting to some degree, my guess right now is at least 100 bps (basis points) over the next four meetings. Gives us a little bit of a tailwind.

The one thing that concerns me or that might change my answer the next time we're on this podcast would be inflation. So the fact inflation in the US has come down into the twos is a relief and it needs to stay there. If, for whatever reason, that starts to drift higher again, I do then worry the Fed slows or stops its easing campaign perhaps at some point next year and leaves the economy in a little bit more of a precarious position. I see no evidence of that right now, but I'm just saying, that would be the one scenario that I worry about and I'm hearing a lot of chatter about that from the buy side community. That is the one, if there is macro concern in stock market is, boy, it's great to see inflation get down to these levels, sure hope it stays here.

Brian Levitt:

Jodi, Justin mentioned that the economy was better than he would've feared. I feel like that's everything in my life. Everything ends up better than I would've feared.

Jodi Phillips:

You're taking the pessimistic approach, Brian.

Brian Levitt:

Well, I'm not-

Jodi Phillips:

You got to be more of an optimist.

Brian Levitt:

Well, that's the optimist's view, right? We worry about things, but things almost always end up better than we would've feared.

Jodi Phillips:

I suppose, I suppose. Well, in any case, we do have some good sound bites here that we can read back to Justin-

Brian Levitt:

A couple years from now.

Jodi Phillips:

... a year and a half from now.

Justin Livengood:

That's right.

Jodi Phillips:

But I'm curious, Justin, maybe what do you attribute that to? I mean, what perhaps were you expecting to see in the economy that didn't come to pass? What might be some of the driving forces behind that better-than-expected scenario?

Justin Livengood:

Yeah, I think that a handful of things have helped. First of all, even though as I said a minute ago, the low end consumer struggling, the broader consumer economy is doing pretty well. The stock market having held in there, the housing market having held in there, people actually have decent savings and that has propped up spending. Travel has been resilient. So some things like that have been pleasantly surprising.

On the commercial industrial side, there's been a lot of reshoring going on as companies have brought operations back from either China or perhaps parts of Europe. And so that's driven a little bit more of demand than maybe we would've expected to see a year ago. So again, I don't want to, by any means, give the sense that we're all clear, but the downside case that Brian correctly was referring to, and I take that glass half empty view as well on most things, fortunately hasn't played out yet. And I think with the Fed now ready to cut, the downside risk or that tail risk to the downside is smaller.

Brian Levitt:

When I think of the balance of risk though, it's interesting to hear you talk about inflation. I view inflation as something that we didn't have for decades and then a pandemic caused it, right? I think we all had too much money right at the exact moment businesses got rid of all their workers and all their stuff, right? I have a hard time envisioning that coming back. If I were to look at the balance of risk, it would be on the growth side. What would you need to see to have fear that there would be a recession coming? Is there anything that you're looking at that would give you that fear?

Justin Livengood:

Well, I think, yeah, on the demand side of the economy, if China's problems spilled a little bit more into the global economy and we had just less exports and a little bit more stress on the industrial side of the economy here domestically, that would concern me. That would cause some of the growth fears that you're referring to. I think if the problems the low end consumer is feeling as they are having to increasingly prioritize their spending, if that creeps up the economic spectrum a little bit more, it could get a little tricky. That's going to be very much dependent on employment. I think we need to see employment get a lot worse before that really becomes a major concern, but it could. So those are probably the two things that worry me the most, again, from the demand side. Assuming inflation stays behaved though, I think the Fed's going to pull this off. If I had to bet right now, I think China and the consumer are going to hang in there just long enough for them to get rates back down to a level that avoids these types of demand or growth issues.

Brian Levitt:

Are they lucky or are they good, this-

Justin Livengood:

I'm going to say a little both, right?

Brian Levitt:

All right, I like that answer.

Jodi Phillips:

It's a good combination.

Brian Levitt:

Just in case Jay Powell's listening.

Justin Livengood:

Yeah, I'm sure he will.

Jodi Phillips:

So Justin at the top, we mentioned the great rotation during our intro. Would love to get your views on that. What do smaller cap companies need in order to outperform and is that more dependent on the rate environment we've been talking about or the growth environment or, again, a combination of two things?

Justin Livengood:

Well, it's a combination, but in that order, so the rate cuts, the monetary policy is the most important thing. Small cap stocks are particularly sensitive to the yield curve given they're more dependent on financing than their large cap peers are. And just to put some numbers to that, in the last 13 periods where the Fed was cutting interest rates, going back over 50 some odd years, 10 of those 13 times, small caps outperformed large caps three and six months after the initial Fed cut. So if history's a guide, then what's about to happen here in September should, by the end of this year, demonstrate small cap outperformance as we move into 2025.

But that's not sufficient. It's a necessary first condition to have rates come down. But the second almost as important condition is you need to see earnings start to come through more for those small cap companies. And happily we've seen that here. In Q2, small cap earnings for the first time in over a year outperformed large cap earnings. Not dramatically, but that gap that had been present for a while where large caps were really doing better has finally started to turn a bit. So if that continues at least somewhat into the end of this year, beginning of next year, that earnings recovery should pick up the baton, if you will, from lower interest rates and help this broadening out that the market's seen for a while. I've been getting this question all summer and at first, the question was, "Can the markets broaden in small caps?" But now it's been like four or five months where small caps have at least maintained equal performance with large if not outperformed large caps. And so there's growing evidence that this has some legs to it.

The last thing I'll say on this rotation or this topic is 10, maybe even 15 years ago, small caps as a percent of the overall US stock market capitalization were about 10%. 10% of the market was the Russell 2000, 90-ish percent was everything above that. Today, small caps, the Russell 2000 represent only 4% of the market's capitalization, which means that when people want to go invest in small caps, the door's a lot smaller for everyone to jam through. And so you get a lot more volatility. And we saw that a little bit at periods this year where you would have, like earlier this summer, that big spike in small cap relative performance. It was in part just because there's not as much to buy.

So when traditional investors like me want to get more engaged, I'm always engaged. I'm not really the incremental buyer small caps, but when asset allocators, when quantitative trading strategies decide they want to move some money back to small cap, that has a much more pronounced impact on the market since it's a smaller slice. And so there's going to be more volatility. My point here is just be ready for it to be a little bumpier than normal.

Brian Levitt:

How did we get to 4%? Was that the result of just market moves or was that the result of more businesses staying private for longer?

Justin Livengood:

More the former. Mostly just the significant outperformance of the big, big stocks, the terra caps as Ron Zibelli likes to call them. That is-

Brian Levitt:

The terra caps.

Justin Livengood:

Yeah, yeah, that's his favorite word.

Brian Levitt:

I like it. Ron Zibelli being your co-portfolio manager on a number of strategies, yes.

Justin Livengood:

That's right. And he's right. I mean, the biggest companies have generated an enormous amount of incremental market caps since the pandemic ended, and that has moved mathematically a lot of that market cap shift that I referred to. A secondary reason is that the private economy is financing a lot of companies longer, and that's a durable trend. That's going to have an impact, I think, for a long time. I may have mentioned this on a prior podcast, but I'm pretty bullish on private credit, private equity for the longer term. I think those asset classes are going to continue to grow a lot, make a lot of sense. There's obviously a lot of money there for companies to tap, and often, it's the right thing to do. It's if it's not cheaper, it's least an easier form of capital for a lot of private companies to access.

And so I think that's going to be a durable trend. And you're right, that has an impact on the public markets. It definitely has had an impact on my opportunity set, but I think it will have a bit more pronounced one over the next four or five years if I'm right, and these private markets keep growing.

Brian Levitt:

So what would you do about that as a investor in more publicly traded names?

Justin Livengood:

So it probably will have, over time, a little bit of an impact on valuation. I think the public companies that are doing really well that stay public and choose not to go private will get a little bit more valuation. So I think it's important to not be too valuation sensitive. Remember, I'm a growth guy, so that's always my mantra, but I think perhaps a little bit more so going forward.

I think the other thing that is happening here is some of it is public companies today are perhaps going to go private because there's going to be great offers from private investors to take them private, but some of it's just trading among private equity funds, alternative asset managers where companies never get public and they stay private throughout their company's life. So it's incumbent on me and my team to be more aware of those kinds of companies while they're private and just better understand that ecosystem because there's competitive information that's relevant there for the companies that I do own and invest in.

I'm not necessarily going to get to see everything in an industry because some of the relevant competitors in a particular sector are going to stay private forever, but I still need to understand what they're doing. I still need to make sure that I have an opinion on them. And so that's something our team is increasingly doing. It's funny, when I go to investor conferences, the next two and a half days, I'm going to be at one of the biggest health care conferences of the year, they're increasingly are tracks for just private companies. It used to be you go to these conferences and it's just all the big public companies. Now there are dedicated tracks for private companies. And it's not just because those companies are looking to go public. It's this dynamic I described of folks on my side of the table wanting to learn more about that private universe.

Jodi Phillips:

So Justin, as you said just a minute ago, you're a growth guy, so we have to ask you about AI as we teed up in the intro a little bit. What are your thoughts on the AI trade right now? Is this just about NVIDIA, four or five big customers or is it bigger and broader than that? Just wanted to get your thoughts about how you're thinking about it.

Justin Livengood:

I definitely think it's bigger and broader than that. I think in our small and mid-cap portfolios, we've been able to find a lot of great companies that are providing pieces of the puzzle that are going to help the data center and electrical grid get big enough to support all of these artificial intelligence applications that hopefully are going to emerge over the next 5, 10, 15 years. So there are a lot of parts of the ecosystem that we can invest in. I don't think the trade is over.

I will, however, say that in the last few months, there definitely have been indications, particularly from some of the largest companies, hyperscalers in this space, that we're evolving from the first phase to maybe a second phase of this whole AI boom where the clients, the companies that are spending on AI need to start to develop more use cases to justify their investments. So I think in '23, '24, when chief technology officers were looking at their budgets, it was, "I'm going to invest anything that smells like AI. I don't want to miss out. I want to make sure my company is doing everything it can to keep up with our competitors." Now as we go into the '25 budgeting cycle, there's a little bit more of, "Okay, I did everything last year. Now I'm going to refine that a little bit. I want to be a little more specific in where I put my money. I want to see more ROI."

So we're hearing a little bit from the Amazons, the Facebooks of the world, that they're still planning to spend a lot on capex to build out their services for AI, but the incremental demand might be, on a scale of one to 10, it was an 11. Now maybe it's a nine and a half, which is still extremely healthy. But there's, again, that little bit of an element of prioritizing within spending by clients. That's healthy, that's understandable. And so we're evolving into this next phase of the AI trade. And so you're seeing a little bit of that in the reaction, the stocks that are involved in this theme. And that's good. I think it's healthy to have some of these companies and expectations around these companies get reset to a little bit more reasonable levels. That'll just add to the length that this opportunity, this trade plays out, which I still think will be several more years.

Brian Levitt:

I always like a Spinal Tap reference. We'll turn things up to 11. And it seems like just by saying that, you gave such a, without even mentioning, just a good explanation for the NVIDIA earnings report, which was so outsized, and yet the market took it a little rough. And that's, I think, just going from 11 to nine and a half is probably all you need to say about that.

Justin Livengood:

Yeah, yeah.

Brian Levitt:

Do you think that the market has even begun to contemplate, beyond just who's going to provide the hardware or the software, the services on AI, has the market even begun to contemplate the productivity gains to the economy or what that may mean downstream to other businesses?

Justin Livengood:

I don't think so. It's a great question. And that's the really strong bull case for what I was just describing as far as this trade has some years to go. We need to see more of that. It needs to be more than just, "Oh, we can, through AI, cut out a few headcount positions in companies where there were maybe some redundant operations and things that AI can now replace. It needs to be more revenue generating, more client-facing. I think that's what we're hearing companies try to find more of. I've heard a lot of companies in financial services, for example, where I spent a lot of time on the research side.

It's one thing to parse data and try to find the best customers and clients for a credit card or a bank account. AI can help with that, but it's not just managing claims and doing back office stuff. Again, it's helping be more efficient on the front end to make sure we find new clients more efficiently and that those clients end up spending more and doing more with that credit card company or that bank so that there's a really high growth case, not just an expense savings case. I don't think the broader stock market probably has factored in the revenue upside possibilities from AI. And so that's probably where we're going to see, over time, more excitement and upside if the markets ascribe value there. That would be my hope for what pushes this trade to the next level later this decade.

Jodi Phillips:

Great. So what other themes are we missing here, Justin? What else are you watching that has you excited about the future?

Justin Livengood:

Yeah. Well, there're always a bunch of different things going on, particularly in my parts of the market, the small and mid-cap universe, that excite me. I'll throw out two right now that I think are really interesting and timely. The first is commercial aerospace. And Brian, I don't know if you travel much, but-

Brian Levitt:

You know I do.

Justin Livengood:

The airlines are still pretty crowded. Those planes you're on are still pretty full, maybe not quite as much as last year, but demand remains really healthy and that demand is offset by the reality that the planes in this country and globally are getting older, not getting replaced as quickly as they used to. The issues with Boeing and now Airbus are material, they're going to last a long time, and what it's doing is putting more and more strain on the commercial fleet of airplanes. And so that is requiring a lot more repair, a lot more maintenance and upgrade than we've ever seen before.

And so there are a bunch of companies that do aftermarket support, not just for Delta and American and United, but for international airlines and for even the original equipment manufacturers like Boeing and Airbus. The last two to three years has been probably the best operating environment for that collection of companies in the aerospace supply market and repair market that I've ever seen. And the outlook going forward for the next year or two is just as good. I mean, Q2 earnings for a bunch of those companies were off the charts great. So we have a lot of exposure to aerospace companies in all our portfolios, but particularly our small cap and mid cap portfolios, and they are some of our largest holdings and some of our highest conviction ideas right now.

The other theme I'll quickly mention is real estate.

Brian Levitt:

Interesting.

Justin Livengood:

One of the best performing, quietly, parts of the stock market year to date has been REITs. REITs, particularly in the last four months, have been on fire. A lot of that's interest rates, people getting excited about the Fed cuts and the way the curve is starting to re-steep, and that's good for REITs, but it's also more than that, it's fundamentals. The office issues are well known and well documented, but even there you're starting to see transactions happen. Commercial real estate brokers are increasingly talking about even places like New York and San Francisco, buildings that for the last year or two have been troubled and no one's willing to go in and either refinance the mortgage or consider taking out some of the equity. Now stuff's starting to trade. We're starting to have price discovery and even in stronger markets away from the coasts, that's been happening more consistently for over a year. So the office markets are gradually perking up.

Other property classes though, like multifamily apartment, to some degree, warehouse, industrial, very strong. Even senior living, some of the health care senior living companies are doing exceptionally well. There's a ton of incremental demand there and not enough supply. So the REIT market and commercial real estate more broadly, really, really interesting. I think we're early stages in what is going to probably be a multi-year run for that part of the market. That's been a laggard group for three plus years, and it's just turning. Valuations are still not too extended. I really like senior living. I really like apartment and warehouse. I like the commercial real estate brokers that are not really exposed on the property value side. They're more just transaction exposed types of businesses. All of that is really compelling to me, and the stocks are starting to move, and so we're very much exposed in that area as well.

Brian Levitt:

As a guy who spends most of his life on airplanes and in office buildings, you are definitely speaking my language. Any parting shots from you, Justin? Anything before we go?

Justin Livengood:

No, I guess the only thing I would add is going into the end of the year here, I think we're relatively well set up for the markets. As you alluded to earlier, Brian, I think September will always be a little bit of a choppy month, but I think the backdrop is relatively constructive going into 2025. I'm not too concerned about the election-

Brian Levitt:

Me either.

Justin Livengood:

... in so far as I don't think it's going to derail the broader thesis around the stock market. It'll certainly create a little bit of headline noise here and there, but I don't think much is going to happen that changes the outlook for the next year or two. So like I said, compared to a year ago, I'm feeling okay right now.

Brian Levitt:

Good. So as Green Day's saying, we'll wake us all up when September ends and we'll be on our way. Justin, thank you so much.

Justin Livengood:

That's like your fourth reference to a band in this podcast. That's impressive.

Brian Levitt:

Yeah. Well, I need my pop culture references, otherwise I feel like I didn't give the audience what they wanted.

Jodi Phillips:

You have to listen to music when you're sitting on airplanes for as long as you do. It's just top of mind.

Brian Levitt:

That is so true, so true.

Jodi Phillips:

Well, thank you so much Justin, for joining us. And Brian, where can we find more commentary from you?

Brian Levitt:

Well, thanks for asking Jodi. Visit invesco.com/brianlevitt to read my latest commentaries, and of course you can follow me on LinkedIn and on X @BrianLevitt.

Jodi Phillips:

Thanks for listening.

Important information

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 September 3, 2024, 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. Investors should consult a financial professional before making any investment decisions.

Should this contain any forward looking statements, understand 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 is not a guarantee of future results.

An investment cannot be made into an index.

Growth stocks tend to be more sensitive to changes in their earnings and can be more volatile.

The health care industry is subject to risks relating to government regulation, obsolescence caused by scientific advances and technological innovations.

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.

Many products and services offered in technology-related industries are subject to rapid obsolescence, which may lower the value of the issuers.

REIT stands for real estate investment trust.

Investments in real estate related instruments may be affected by economic, legal, or environmental factors that affect property values, rents or occupancies of real estate. Real estate companies, including REITs or similar structures, tend to be small and mid-cap companies and their shares may be more volatile and less liquid.

All data provided by Invesco unless otherwise specified.

The average length of time it has taken the US stock market to recover from downturns was sourced from Bloomberg, based on the performance of the S&P 500 Index since 1957.

The level of US gross domestic product, or GDP, was sourced from the US Bureau of Economic Analysis.

Year-over-year US inflation was 2.9% in July 2024, according to the US Bureau of Labor Statistics.

Statements about the performance of small caps versus mid caps during the last 13 periods of rate cutting by the Federal reserve sourced from Bloomberg. Based on the performance of the Russell 2000 Index versus the S&P 500 Index.

Statements about small cap earnings outperforming large cap earnings in the second quarter sourced from FactSet Research Systems, based on the earnings of the companies in the Russell 2000 Index and the S&P 500 Index.

From May to August, the S&P 500 Index was up 13.1% compared to 12.5% for the Russell 2000 Index, according to Bloomberg.

Comments on small caps as a percentage of the overall US stock market capitalization sourced from Bloomberg as of September 2024.

Comments on the performance of REITs year to date sourced from Bloomberg. Based on the performance of the FTSE NAREIT All Equity Total Return Index, which is an unmanaged index considered representative of US REITs. That index returned 10.7% year to date ended August 2024 and climbed over 21% from May 2024 to August 2024.

The Russell 2000® Index, a trademark/service mark of the Frank Russell Co.®, is an unmanaged index considered representative of small-cap stocks.

The S&P 500® Index is an unmanaged index considered representative of the US stock market.

BPS, or “bips,” stands for basis point, which is one-hundredth of a percentage point.

The yield curve plots interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates to project future interest rate changes and economic activity.

ROI stands for return on investment.

Capital expenditures, or capex. is the use of company funds to acquire or upgrade physical assets such as property, industrial buildings, or equipment.

The Greater Possibilities podcast is brought to you by Invesco Distributors, Inc.

Brian Levitt

Welcome. This is the Invesco's Greater Possibilities Podcast, and today we are going to be, as always putting concerns into perspective and opportunities into focus. I'm Brian Levitt.

Jodi Phillips

And I'm Jodi Phillips. And today we have Brian Watson on the podcast. Brian is the senior portfolio manager of Invesco's Master Limited Partnership strategy, investing in midstream energy infrastructure.

Brian Levitt

All right, Jodi, I am going to put you on the spot immediately with a tough question.

Jodi Phillips

Oh. All right, go for it.

Brian Levitt

Okay. Since the pandemic, March 2020, you and I are fetal positions sitting in our homes, trying to figure out what the heck is going on in the world-

Jodi Phillips

Accurate.

Brian Levitt

... whether we'll ever travel, whether we'll ever shop, whether we'll ever do anything again. Since then, which has had the better performance, the Alerian MLP Index or the S&P 500 Index?

Jodi Phillips

All right. I'm going to use my context clues here, Brian. We have an MLP manager as our guest, so I'm going to have to go with the Alerian MLP Index.

Brian Levitt

Yeah, well there's a method to this. It's like lawyers in court. I would never ask my co-host a question that they don't know the answer to.

Jodi Phillips

Thank you for that. I appreciate it. Look, naturally I knew coming in today that MLPs have had a strong four-year period, but the S&P 500 has rallied nearly a 100% since March 2020. It is somewhat surprising, at least to me, that the MLP Index has beaten that. I wouldn't have guessed it otherwise.

Brian Levitt

Yeah. And since we're being candid, I will say the same. I did not recognize. I knew MLPs had had a nice turn. I did not realize that they had outperformed the broad equity market. I did run another screen to see if they beat the Mag Five or Mag Seven. We'll have to tell Brian sadly, no, they haven't beat the Mag Five or Mag Seven, but they certainly have outperformed the broad market

Jodi Phillips

Absolutely. Look, you pretty accurately described the atmosphere four years ago, sheltering in our homes, staying put, not traveling. A lot has changed in four years.

Brian Levitt

Yeah. Now, we're producing a record 13 million barrels of oil per day or something like that. Presumably, it's being transferred in pipelines throughout the country.

Jodi Phillips

Yep. And in addition to that, I imagine there could be a little bit of AI, artificial intelligence helping to fuel some of this. I understand it requires quite a bit of energy.

Brian Levitt

Well, you said the magic two letters. Our producers have said to us, "Have a podcast. Say artificial intelligence. Say AI as many times as you can and that's how we get more people to tune into this podcast."

Jodi Phillips

That's the key. That's the key. Just mention AI and the rest takes care of itself, I guess.

Brian Levitt

Yeah, we get those high ratings.

Jodi Phillips

Well, let's digress. Let's bring Brian on to discuss three different letters, MLPs. We can discuss AI, we can discuss Brian's expectations for the future, whether AI will play a role in a structural bull case for the asset class. Let's go ahead and bring him on now. Welcome, Brian.

Brian Watson

Thank you for having me.

Brian Levitt

Brian Watson, welcome.

Brian Watson

Thank you.

Brian Levitt

Brian I want to start, you and I have worked together for a long time, and we've had a bunch of different conversations, and we've worked together through some different environments for the MLP market. I wanted you to just give us a little history lesson on that last decade or so. We've seen oil price collapse in 2014. We had a pandemic that we talked about. And yet, the MLP market has, like Jodi and I talked about, has responded in the last four years. It seems to be that these partnerships are in better fundamental strength than they were perhaps in past times. Can you talk about that?

Brian Watson

Yeah, so I guess a little bit of a history of the asset class I think helps explain why it's been doing so well lately and why we're pretty optimistic going forward. But if you go back to the mid/late '90s, this is when I'm beginning to invest in midstream and energy. Midstream was really servicing all of these basins that had no real growth potential. This is pre shale, so midstream companies with these boring entities just maintaining assets, some of them even in slight declines, offset by per barrel tariff increases. They were just very boring, spent, no capital. All that free cash they were generating were dividend to out to their holders and it was a nice boring life. Then shale comes around and suddenly, these parts of the world, parts of the country that hadn't produced much ever or much in decades, suddenly we're producing massive amounts and beginning to compete amongst the globe's greatest producers for their production capacity.

Brian Levitt

That was about the time that I was being invited to North Dakota for the first time in my career because there was money in the state.

Brian Watson

Yeah. Yeah. Barnett, West Texas.

Brian Levitt

West Texas.

Brian Watson

Dakotas. Marcellus, all this stuff that had always been trickles became gushes of oil and gas. And so the sleepy companies that weren't really designed to spend a lot of capital, they were designed to provide these big dividends, were being asked by their customers to build them hundreds of billions of dollars of new pipelines, and storage facilities, and processing facilities, and all this stuff that's required. And so they did. For about a decade, they attempted to build all these new things and keep paying their dividends. They did that by issuing new equity into a fairly receptive market. They could do this without diluting shareholders or at least, I mean there's always dilution, but providing growth still on a per share basis.

And then as you mentioned, '14 comes along, and we end over a decade of oil essentially trading 90 plus very reliably, and gas of seven, eight bucks. The energy markets go through, in my experience, the worst cyclical break in history. And really, there was several cyclical breaks in a row, and so the equities didn't trade great. And suddenly, all these midstream guys realized that they couldn't issue equity, they had to become self-funding.

We went through a period where midstream company after midstream company set their sights on becoming self-funding. Another way to say that is everyone's distribution coverage, or the amount of cash they made versus what they paid out, it was always about 1.0. The cash you made, you paid out 1.0 coverage. Everybody wanted to get closer to two so it's a massive shift in just a structural way that these guys are operating their finances. They go about doing that. Really, that is achieved, I'd say shortly before COVID hits in 2020 COVID upsets everything and puts everything back another six months, but that had essentially been done as this great three years you were just talking about began to emerge.

And what you really saw was I think a confluence of events where you had A, the worst fears of COVID and its impact on the energy markets become alleviated. The market comes and looks at midstream and they see now companies with hefty distribution coverages, so dividends that have been de-risked quite a lot. They see balance sheets that are repaired or quickly repairing, and they see companies actually that started this process of becoming self-funding, finding themselves with room to begin to grow dividends again. That's really what we saw the last three years I think, is the market coming to realize the asset class had really de-risked itself.

Jodi Phillips

All right, so then summarize it for me. We definitely have been through a journey here, but today, how do midstream companies as a whole look in terms of debt levels and free cash flow?

Brian Watson

Free cash is still healthy. We're high single digits. Leverage is on average now below four, which is for a midstream or pipeline company, pretty healthy. And obviously, a lot of names better than that. Coverages are right around two times. Now, I think since COVID, you've had about half of the group move to raise their dividend, and the average of those increases is about 15% We think over the next couple of years you'll get a good portion of that other half that's still concentrating on de-leveraging or in some cases, buyback shares with their free cashflow began to raise their dividends too. We look at it as we're back to the simpler days. Capital spending has really come in. We don't need thousands of miles of new pipelines. There's stuff being built, but it's not these huge, huge multi-year-

Brian Levitt

We like simple days.

Brian Watson

We do, yeah.

Brian Levitt

We do.

Jodi Phillips

It's refreshing. Yes.

Brian Levitt

It's nice to be back to simpler days. Brian, I want to talk. Jodi and I were thinking about some of the structural tailwinds that might exist for the master limited partnership energy infrastructure market, and so we want to talk about each of them. Before we even do that, when you say the infrastructure is built out, does that apply to a lot of the structural tailwinds that we're considering? You heard us mention AI in the intro and we want to dig deeper into that, but are we in a place now as a country where the infrastructure's in place and these companies don't have to commit additional capital for all of these structural tailwinds?

Brian Watson

Yeah, I don't want to say that on an absolute basis, but these thousands of miles, these huge, huge multi-state pipes are pretty much built. You'll continue to de-bottleneck. In West Texas, natural gas production continues to rise with crude oil production. And as most every field ages, crude oil field ages, the amount of gas coming out of the ground per barrel usually trickles up. Your gas growth is usually better than your crude growth in an oil field like that, so we'll continue to de-bottleneck, but you're talking about an interstate system, additions on interstate pipes that are much easier, cheaper to complete than something that stretches across six or seven states.

Now, Haynesville which I can probably get into it a little bit more, but is almost certainly going to be called on to grow significantly in the next five, six years. That'll need some more pipes. But again, these will be pipes taking something within the state of Louisiana or perhaps Texas to Louisiana. They're just very manageable projects.

Brian Levitt

Jodi, these are all the states you vacation in, you get in the RV with your husband and you drive across.

Jodi Phillips

Yep.

Brian Levitt

These are the states that I probably still have some touring left to do.

Jodi Phillips

Yeah, get in the RV, cross these really massive states like Texas. We're doing our part for energy consumption, I can tell you that much. Brian, you mentioned at the top of the show that mentioning AI gets ratings. Let's try to boost our AI mentions here.

Brian Watson

Let's do it, yeah.

Jodi Phillips

In terms of these structural forces Brian was talking about, let's just start there. What, in your mind, is the potential impact? I don't know how much energy companies are talking about this on their earnings call and whatnot, but what are you hearing?

Brian Watson

AI has become a hot topic amongst the energy companies as well. They try to say AI as many times as they can. Say AI one more time, data center-

Jodi Phillips

They all got the same memo.

Brian Watson

I don't know if the people want data center or AI, but yeah, so for midstream energy generally, AI is just additional tailwind. If you think about the drivers mostly for natural gas consumption going forward, first is LNG, which is just enormous. We export about 11/12 BCF per day of LNG today, and we're in the process between now and 2030 of doubling that. It's just a huge amount. We produce about 100 BCF That's in context.

AI, everybody's trying to wrap their hands around it, but obviously, these are massive users of energy power generation. We've looked at a bunch of different research reports. We've got a block coming out here shortly and we used some Goldman data because it seemed in the middle, and conservative, and thought out. Goldman is estimating 47 gigawatts of new power demand between now and 2030, taking the total power grid draw for data centers from three to eight percent, which is obviously a massive increase.

Then you're trying to wrap your head around what's that mean for natural gas demand? They've estimated somewhere in the three and a half to six BCF per day range. It's very significant, less than LNG, but still very significant. That takes the total increase between now and 2030 to somewhere in that 14 to 18 BCF per day increase in demand.

Brian Levitt

Is that enough-

Brian Watson

And it's...

Brian Levitt

Is that enough to fuel the DeLorean, the time machine?

Brian Watson

I think it's just shy.

Brian Levitt

Just shy.

Brian Watson

In a lightning bolt.

Brian Levitt

That was 1.21, I think?

Brian Watson

I think that's right.

Brian Levitt

88 miles an hour.

Brian Watson

Yeah. Yeah, I think that's correct.

Brian Levitt

AI, Jodi from now on, it stands to us, always incorporate into our conversation.

Jodi Phillips

Always incorporate. All right, understood.

Brian Levitt

These ideas, so AI is going to use as much energy as small countries that maybe is already doing. Brian, that probably concerns some people, right and you see it more as an opportunity? Is there a way to square that?

Brian Watson

Well, I guess obviously, on Goldman's analysis anyway, they assume 60%. For the three and a half they use 60% net gas and 40% other, which is potentially wind and solar. It would possibly be the non-retirement of coal, which is not probably what someone worried about that wants to hear.

The good news is natural gas is significantly less CO2 intensive than coal, something on the order of 60% less CO2 The molecule, the bolt is fungible. If you look at AI data centers, these must run 24/7. They don't really lend themselves directly to wind and solar because the intermittency. If you are running Bitcoin or something in West Texas, which is a fairly healthy draw of our power generation, when the price moves up and down with the wind blowing or the sun shining, and that's impact on inner day power pricing, they can throttle back and forth. They can make the most money they can. That's just not an option for AI data centers. I do think this demand growth is a little bit easier to meet with a fuel like natural gas.

Jodi Phillips

Brian, we got the other keyword in, Bitcoin.

Brian Watson

There you go, yeah.

Jodi Phillips

We just put that in there. But yeah, no, for sure. AI is obviously, not the only innovation. Electric vehicle, just the continued electrification of the economy. I don't think I got that word out, but you know what I mean. More things we’re plugging into the wall. Can you talk about that a little bit, just the impact of those trends as well?

Brian Watson

Yeah, they're all power hungry trends. There's not a lot of non-power hungry trends occurring currently. If you think about EVs, it's hard to guesstimate the penetration rate, just like it's hard to guesstimate AI's penetration. But again, most people are going to charge at night most likely, and that's what the data has shown. It's probably going to be a fuel works at night.

The flip side of this is that you can add wind and solar, and it can provide power during the day, and so offset that daily use. It's not all bad news for generation coming from wind and solar. It's just not going to be the same generative megawatt. It's going to be coming. You're not going to get it from both sources, which is something we've been saying for a while. I think you go back a couple of years ago, there was a lot of expectations that wind and solar plus batteries would allow the retirement of natural gas generation. I think more and more that's just proving not to be a very realistic option, just from the budgetary premise alone.

I don't know if we're supposed to say individual research providers, but we use a group that's very thoughtful on the topic and they recently looked at a scenario where a wind turbine field is backed up by a natural gas power plant. Over the first part of the year, I think there was several periods where the wind didn't blow enough for three to four days in a row where the natural gas power plant had to operate to provide battery backup that would've lasted that long, would've required a $12 billion install of batteries, which is just... A power plant that size would've been $500, $600 million. In this case, I think it was just a plant that was already there.

It just gives you a sense for how challenging really handling the intermittency of wind and solar is. Natural gas is just, again, a much better choice than coal from an emissions perspective, but really just the only logical choice in many cases.

Brian Levitt

Brian, let's go to conflict in the world. We'll talk about more things that seem to get ratings. When Russia initially went into Ukraine in February 2022, I think there was a perception that Europe would struggle mightily and that the world would really be challenged to diversify the energy mix away from Russia. It appears as if the world has largely come through that without significant incident. I'd love to hear a little bit of how that was possible and then what does that suggest going forward for US exports?

Brian Watson

Yeah, I think one thing that happened was that Russia and exports did not... Oil did not really get pulled back as much as originally thought, that they found ways around it. You look at, there's a lot of data providers for exports by country and their exports really didn't go down that much.

On the natural gas side, Europe used significantly less natural gas and benefited from a not so cold winter. And so initially, they were bidding away LNG from the rest of the world essentially, and skyrocketed LNG prices, which LNG is liquified natural gas. When natural gas is traded amongst countries, they have to freeze it, put it on a ships, and that's called LNG. They were able to fill up their storage pretty well. What happens if this winter is particularly cold or next summer is particularly hot? We'll have to wait and find out, but that's how they got through it.

Of course, we're talking about this 12 BCF per day of new US LNG exports that are coming due. There was a rash of new LNG contracts signed in the wake of the Russian invasion of Ukraine, as the world's natural gas consumers quickly realized that they needed to de-risk their supply. Some of that LNG we're talking about came through. It is coming about because of actions taken post the Russian invasion and we certainly might see more. As you know, the current administration paused new LNG licenses by the DOE. There was recently a court case that stayed that pause, but it's unlikely to make a big difference. What we do think is going to happen, is probably those new LNG licenses will begin to be issued again at some point.

We talked about 12 BCF. Most likely, that continues to grow after 2030. We talked about the three to six BCF related to AI data centers, AI data centers, AI data. That's probably going to keep growing. It's a decent place to be for midstream or US energy producers because there's just a very healthy tailwind. If you think about historically natural gas demand has come... It goes up and down with the weather. It's hard to predict. In this case, we have some demand drivers that are fairly easy to predict. They're going to complete LNG facilities and they're going to run.

Brian Levitt

Jodi, have you been adding that up on your calculator?

Jodi Phillips

Well, you know what, I've been trying to add it up in my head, which was my first mistake. But BCF here, BCF there, what is the total? At least for the US, what is the demand total that we're looking at right now, just to put all of these different pieces into context?

Brian Watson

Yeah, so it's 15 to 18, based on what we see between now and 2030, and likely keeps going relative to base of about 100 BCFs.

Jodi Phillips

Okay.

Brian Watson

Percentages are easy there, but it's good. If you think about a midstream operator, the most profitable thing that can happen to you, is have more volume flow through a pipe that's already been built. There's no capital spending. You got to use some fuels for increasing the flow or the pressure in the pipe, that kind of thing. But it's an incredibly profitable thing just to move more volume. When you have what seems to be lying in front of us as a very predictable and meaningful increase in natural gas demand, we suspect the beneficiaries would be manyfold. You'll have the pipes feeding the power generation directly and the pipes and the other facilities feeding the LNG facilities directly. Obviously, that's good for them, but that gas has to come through the whole system. If you're in the fields and West Texas and the Marcellus, as we talked about briefly earlier, the Haynesville, which is very near much of this LNG export capacity, likely really begins to grow in fairly short order.

Brian Levitt

I want to get to a little lightning round for investors, so I'm going to ask three questions one at a time. What type of yields are available now broadly on MLPs?

Brian Watson

Yeah, I think the average yield today is right around seven percent for the asset class, maybe a little bit above.¹

Brian Levitt

Yeah. Are you at all concerned about valuations given the run-up that we talked about in MLPs?

Brian Watson

No. We will look at our internal models, which are valuing the companies bottoms up. But even if you look at broader multiples our enterprise is right around eight and a half. It's almost two turns below the historical average. Which we have made this comment before, people in the recent past, and it seems confusing that we'll be trading relatively healthily despite this great run in the last couple of years. I think what's missed is how great the denominator has been doing. EBITDA's been growing high single digits, close to double digits for the last several years. Even though the sector's done pretty well price performance, the valuations have remained pretty reasonable. We think we're on deck for some more pretty healthy cashflow growth. And notably, this growth the asset class is benefiting from today is not being funded by accruing tons of new shares like it was in previous growth phases. On a per share basis, it's a great way to grow because there's not really dilution occurring. It's flowing through to the same number of shareholders.

Brian Levitt

And I said I had three of them, Jodi, so I'll go one more. Are you worried at all about an economic soft patch in here, or are you looking forward to a fed easing cycle, or anything on the macro horizon that you consider?

Brian Watson

Yeah, you always think about crude, and gas prices, and the impact on drilling. That's never going to go away. If you'd had a real sharp pullback, you'd have a slow-down in volume expectations, which would be a slow-down in EBITDA growth expectations. I will say that you've just seen a very significant change in producer behavior. Since that incredible period of energy market volatility that started in 2014, producers just aren't getting over their skis. If you look at the producer community, capital discipline is number one goal.

We've seen crude prices and gas prices go up pretty healthily and down pretty healthily over the last several years, and you just, we haven't seen in rig counts or activity changed that radically with these price moves, which in previous pre 14, they would have. When crude went above 100 and post Russian invasion of Ukraine, if that was pre 2014, we would've seen rig counts spike with it, and then we would've seen production expectations explode, and then we would've seen the price come down more radically and we would've seen rig counts come down more radically, and they're just not behaving that way anymore.

And so it's softened the impact of economy that's going great, or bad, or food prices are going skyrocketing, or coming in. We're just not seeing the volatility that we used to see, which is good for midstream. Not only does that remove some of that worry from investors' minds, that volatility, but it's from a very real perspective, midstream companies aren't being asked then to build this brand new pipe, or this new processing plant, or whatever during that high price environment where producers think they're going to be producing 10% more on exterior, only to have that expectation be disrupted by a pullback. The deployment of midstream is also being very steady and measured. That's good. That's good for midstream. It keeps their capital demands in check.

Jodi Phillips

All right, Brian, so at the risk of killing the ratings that we worked so hard to build up in the first part of this podcast, I'm going to ask you quickly about politics. Just curious-

Brian Levitt

Are we going to ask about religion after? Or just stick with politics?

Jodi Phillips

No, that's for the outtakes.

Brian Levitt

Okay.

Jodi Phillips

Politics, how much do you focus on the election? I think that the instinct of at least some investors is that a Republican Trump administration would be better for the energy patch, but we kept talking about the last four years and this growth, and clearly that's been under a Democratic administration. Does it matter?

Brian Watson

Yeah, I don't know that it matters as much as people think. Certainly, maybe from a sentiment perspective it's helpful. From the LNG perspective, I think it's assumed if the Trump administration would stop the pause on LNG export licensing, it probably, as I mentioned earlier, it probably goes away anyway eventually. Perhaps you could achieve... There's been some federal lease hold back from the current administration on providing the ability to operate on federal lands. That probably loosens up. It's not a game changer, but a producer might be able to then produce in a region with better economics. They have more freedom of choice there.

All in all, it's not bad. But you think about some of the biggest roadblocks to building midstream has really come from the state level and the local level, not so much the federal level. And as we talked about, we don't really need to build a whole bunch of new thousand mile pipelines that go across multiple states. There's just the opportunity for friction due to politics has decreased with the maturation of the infrastructure in the country.

Brian Levitt

You had me at it doesn't matter much.

Jodi Phillips

That's the theme for Brian, for sure.

Brian Levitt

You also complete me. Thank you so much for joining us. Really appreciate the opportunity to speak with you. We know that you sounded very similar messages when we talked to you in 2022, and it's nice to have seen them in hindsight play out in most of the ways that you suggested it would play out. Thank you for being with us.

Jodi Phillips

It was two years ago. Oh my gosh. I can't believe it.

Brian Watson

That's wild.

Jodi Phillips

Well, if you want to hear about the MLP industry more often than that, Brian does write a monthly commentary on MLPs that you can find on our website. Just head over to invesco.com/us. Click on that insights tab at the top and head over to Investment Insights to get monthly insights into the MLP industry and much more. And so, Brian Levitt, how about you? Where do we find more from you?

Brian Levitt

Yeah, if you want to follow the other Brian on this call, visit invesco.com/brianlevitt to read my latest commentaries and of course, you can always follow me on LinkedIn and on X at BrianLevitt.

Jodi Phillips

Sounds good. Thanks for listening.

Brian Watson

Thank you.

 

Important information

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 July 10, 2024, 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. Investors should consult a financial professional before making any investment decisions.

Should this contain any forward looking statements, understand 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 is not a guarantee of future results.

An investment cannot be made into an index.

Many products and services offered in technology-related industries are subject to rapid obsolescence, which may lower the value of the issuers.

Most MLPs operate in the energy sector and are subject to the risks generally applicable to companies in that sector, including commodity pricing risk, supply and demand risk, depletion risk and exploration risk. MLPs are also subject to the risk that regulatory or legislative changes could eliminate the tax benefits enjoyed by MLPs, which could have a negative impact on the after-tax income available for distribution by the MLPs and/or the value of the portfolio’s investments. Although the characteristics of MLPs closely resemble a traditional limited partnership, a major difference is that MLPs may trade on a public exchange or in the over-the-counter market. Although this provides a certain amount of liquidity, MLP interests may be less liquid and subject to more abrupt or erratic price movements than conventional publicly traded securities. The risks of investing in an MLP are similar to those of investing in a partnership and include more flexible governance structures, which could result in less protection for investors than investments in a corporation. MLPs are generally considered interest-rate-sensitive investments. During periods of interest rate volatility, these investments may not provide attractive returns.

Energy infrastructure MLPs are subject to a variety of industry-specific risk factors that may adversely affect their business or operations, including those due to commodity production, volumes, commodity prices, weather conditions, terrorist attacks, etc. They are also subject to significant federal, state and local government regulation.

All data provided by Invesco unless otherwise specified.

From March 2020 through June 2024, the S&P 500 Index returned 125.82% and the Alerian MLP Index returned 350.43%. Data from Bloomberg L.P. as of June 30, 2024.

The Alerian MLP Index is a float-adjusted, capitalization-weighted index measuring master limited partnerships, or MLPs, whose constituents represent approximately 85% of total float-adjusted market capitalization.

The S&P 500 Index is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States.

Data on production of oil and liquefied natural gas, or LNG, is from the US Energy Information Administration as of June 28, 2024.

Data on oil and natural gas prices from Bloomberg as of June 30, 2024.

Background on distribution coverage, free cash flow, leverage, and divided increases of midstream companies from Wells Fargo Securities as of June 30, 2024

Estimates of power demand growth to 2030 and its impact on natural gas demand are from Goldman Sachs as of April 28, 2024

Comparisons of the CO2 impact of natural gas compared to coal is from the US Energy Information Administration as of June 28, 2024.

Comparisons of the cost of battery backup for a wind turbine field versus the cost of a power plant are from Thunder Said Energy as of June 5, 2024

Discussion of yields on the Alerian MLP Index are from Bloomberg as of June 30, 2024.

Information on enterprise multiples and EBITDA are from Wells Fargo Securities as of June 30, 2024

An enterprise multiple is a company’s enterprise value divided by earnings before interest, taxes, depreciation and amortization, or EBITDA.

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

BCF stands for billion cubic feet.

DOE stands for the Department of Energy.

The Greater Possibilities podcast is brought to you by Invesco Distributors, Inc.