Greater Possibilities

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 coming up at a bit, we will have a conversation with Hemant Baijal, who's the head of Macro Alpha and the co-head of Emerging Markets debt for Invesco Fixed Income.

Brian Levitt:   

That was my former job! Very timely, and with the US dollar under pressure at the start of the year, it's been a little bit more range-bound recently, but a lot of conversation about diversifying away from the dollar. And so it'll be great to ask Hemant where we go from here.

Jodi Phillips:  

Absolutely. So does that mean we get to talk about one of your favorite topics, the end of American exceptionalism? I noticed that one always gets your ire up.

Brian Levitt:   

Ooh, my ire. Do I have ire?

Jodi Phillips:  

Well, I mean there's a few topics that I've noticed can ignite your wrath. I'd put Fed independence in that bucket for sure. And also those seasonal calendar-based investment strategies that people like to reference every now and then.

Brian Levitt:   

All right, so I've got ire and I've got wrath. You're picturing a really nice picture of me today.

Jodi Phillips:  

So am I wrong?

Brian Levitt:   

No, I guess you're not. There are certain things that raise my ire, Jodi, and seasonality is a good one. I think we'll talk about Fed independence again today. But the seasonality one, so let me ask you this, if it raises my ire, should I have sold in May and gone away this year?

Jodi Phillips:  

Well, if you had, you would've missed a big US equity market advance. So I would say no.

Brian Levitt:   

Yeah, I would've. And so now I'm supposed to be afraid of a September and October?

Jodi Phillips:  

Allegedly.

Brian Levitt:   

Allegedly, yeah. I mean, look, historically on average we hear. We've run the data back to 1957, it's been a bad month. The media likes to repeat it over and over. The reality is though, as you know, averages lie.

Jodi Phillips:  

I hope they don't all lie. I mean, our average podcast rating on Apple is 4.9. And that's out of 5, not out of 10. So I hope not all averages lie.

Brian Levitt:   

Well, even if they do, I never read the extreme comments, good or bad anyway. But back to this seasonality thing, look, I'm old enough to remember last year, as are you, when the market was up 2% in September. 2010, the market was up over 8%. So look, again, averages are what they are, but I don't think these seasonality arguments are all that helpful. But I will try to control my ire going forward, Jodi.

Jodi Phillips:  

All right. We'll see how successful that is, at least with our first topic, which is...

Speaker 3:       

Trending conversations.

Jodi Phillips:  

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

Brian Levitt:   

I think it's been long rates.

Jodi Phillips:  

Long rates? I'm totally going to date myself here, but whenever you say long rates, I get a flashback to long distance telephone rates that we grew up with.

Brian Levitt:   

Yeah, not those. Although I do remember my dad being angry every time that bill came. So I'm glad that we don't have to deal with long distance rates anymore. And actually, Jodi, I'm making this call to you during that 30 minute period that the phone company gives us lower rates. You remember those things too?

Jodi Phillips:  

I do. I do. So that's why we need to step on it.

Brian Levitt:   

Yeah, let's move.

Jodi Phillips:  

Get this podcast a little more efficient here. So obviously you are talking about long-term rates in the global bond market.

Brian Levitt:   

Yeah, it's been a big conversation, although maybe a little bit less in the United States on this day that we're recording it. We've seen the 30-year Treasury rate flirt with 5% on certain days. Maybe there's something psychological about that 5% less so now in the US But French bond yields are up. Japanese bond yields of all things are now over 1.5%.

Jodi Phillips:  

Even the Japanese yields? Didn't we used to wish for that?

Brian Levitt:   

Yeah, maybe we need to be careful what we wish for. Actually no, it's reflective in Japan of a better nominal growth backdrop, and the markets have benefited from that as well. So I wouldn't consider that a bad thing, just a pretty big sea change.

Jodi Phillips:  

So tell me a bit about France? I mean there's been a collapse of the government, so what do you see going on there?

Brian Levitt:   

Yeah, so it's a political issue. There are high budget deficits. What the governments are finding out, and I'm saying governments plural because we seem to be doing this a few times, is that it is difficult to cut spending. Government loses a political vote of confidence when that happens. Now, perhaps you could tax wealthier people, but as of now it's a challenge for the French government.

Jodi Phillips:  

And so that brings us to the US, which let me guess, budget deficits from the One Big Beautiful Bill Act plus Fed independence.

Brian Levitt:   

There we go, my ire.

Jodi Phillips:  

The attempted firing of Lisa Cook, the Fed governor. So that all weighs in, right?

Brian Levitt:   

Yeah, you got it. Absolutely. Those are the primary reasons for why we had seen the long 30-year rate near 5% in the United States.

Jodi Phillips:  

But the 30-year yield has largely been range bound for months, as you said. And as we record this, it's below 5%.

Brian Levitt:   

Yeah, it's absolutely true. So this idea of long rates, I mean the way to think about it was coming into the month, it was such a concern for people. If you listen to the Greater Possibilities podcast, we've said, nah, let's not get so overly concerned about this. And right now, the market does not seem to be overly concerned, at least in the US.

Jodi Phillips:  

Okay, great. And no need to talk about bond market vigilantes now, or do we need to talk about them?

Brian Levitt:   

I don't think. I mean there's clearly this fear in the market and yet we've seen a pretty big bond market rally. It hasn't happened. So look, we know that the Fed independence is going to be critical. I think the way the market's behaving, it does not believe that Fed independence is going away. So I would say meaningfully higher long rates are a tail risk, but certainly not the base case.

Jodi Phillips:  

Great. Well, then that brings us to our next segment, which is...

Speaker 3:       

I disagree.

Jodi Phillips:  

And in this segment, we highlight a quote in the news that has sparked Brian's ire, or at least one that he disagrees with a bit. Which one is it this time, Brian?

Brian Levitt:   

Yeah, I'm going to stick with this topic of interest rates and the Fed. This was Commerce Secretary Howard Lutnick who on CNBC in late August said, "Current interest rates are too high costing the US economy an estimated $700 billion annually."

Jodi Phillips:  

Okay. So usually when we do this segment, I can immediately see where your disagreement is, but I've heard you say that you think the Fed should lower rates. So where's the disagreement here?

Brian Levitt:   

Yeah, maybe this disagreement's a little bit more nuanced than usually. I do think the Fed should lower rates, thanks for having listened Jodi. Yeah, inflation expectations seem to be anchored, the economy is slowing, so why should the Fed be relatively restrictive with regards to policy with that backdrop?

Jodi Phillips:  

Okay, so where is the disagreement?

Brian Levitt:   

Yeah, okay, so look, this idea of it costing the US economy $700 billion, look, the Fed controls short rates as we know. They don't control intermediate and long-term rates. For example, the US Treasury right now has $10 trillion in 10-year Treasury bonds outstanding. And if the Fed were to cut rates for the wrong reason, then Jodi, what would happen to intermediate and long rates?

Jodi Phillips:  

Right. The interest costs would be higher.

Brian Levitt:   

Yeah, they would jump. And if the Treasury still wanted to issue intermediate and long-term bonds, yeah, like you said, the interest costs would be higher, the opposite of what Howard Lutnick said.

Jodi Phillips:  

So I suppose going forward, the Treasury could just issue short-maturity government bonds, which would be controlled by the Fed.

Brian Levitt:   

Yeah, exactly. So maybe that is the plan, of course they could. I think the challenge with that is you'd be funding long-term liabilities such as our Social Security and Medicare, which we're not going to get for a while, Jodi, but you're going to be funding that with short-term bonds and you'd have to keep rolling them.

Jodi Phillips:  

When has that gone wrong?

Brian Levitt:   

Yeah, exactly. We've seen that story before. And if it does go wrong, which I'm not necessarily suggesting it would, if it does go wrong, it'd be harder to fund those long-term liabilities. Meaning interest rates would be higher across the curve.

Jodi Phillips:  

Okay, got it. So the Fed can lower rates for the right reason, but you disagree that lowering short rates would necessarily save the US on interest expense.

Brian Levitt:   

Exactly.

Jodi Phillips:  

Does that summarize it? Okay, great.

Brian Levitt:   

Exactly.

Jodi Phillips:  

Well, the last podcast I said that I guess a silver lining here would be that the Fed may have to cut rates for economic reasons and not political pressure.

Brian Levitt:   

Right. And that brings us right back to our trending conversation on long rates, which is why the US bond market has been behaving, because the Federal Reserve is likely to lower rates for slowing growth, not political pressure.

Jodi Phillips:  

So our next topic is...

Speaker 3:       

Phone a friend.

Jodi Phillips:  

So we caught up with Hemant Baijal for a conversation on the US dollar and the global debt market. We talk about some big shifts this year that have upended some key trends of the past decade, one of which is that international markets have broadly outperformed the US this year. So here are his thoughts on the global economic cycle.

Hemant Baijal:              

So I think we are in a pretty asynchronous global cycle, so it's not that surprising that the old trends are being upended. I mean since the GFC, the global markets have been pretty much in sync, the US has been leading. But after COVID, that started to get out of sync. And particularly since I think the last election in the US, that's been materially out of sync. So it's not surprising. So in that scenario, international markets are doing better because the dollar has started to go down. I think the very high valuations that we had for the dollar, there'd been a lot of flow into US assets. It's not that the flow is going to reverse, it's just the valuation, the starting point is extremely expensive.

And when you combine it with ultra-loose fiscal policy and expected looser monetary policy in the US, you get this sort of cycle which can take the dollar lower, which has significant benefit to the rest of the world. Credit quality improves, the central banks have greater room to ease policy outside the US So generally, you get a mix which is different than the mix you had for almost 15 years.

Jodi Phillips:  

Another shift we talked about was the US dollar. Is this a short-term event or are we at a potential inflection point? Here's what he had to say.

Hemant Baijal:              

Dollar cycles are never very short-term. They are never also linear in that they don't start and just go in one direction, but we are at a point where all the building blocks are there for the dollar to go lower. You've got, again, as I mentioned before, huge overhang of international funds owning unhedged US dollar assets. You can see that the net IIP position of the US now is minus 30 trillion. It's a huge overhang of assets. You combine that with the fact that the differential in monetary policy between US and rest of the world is narrowing once the Fed starts to ease policy. And if there is greater pressure on the Fed, I think then because you've got the tariff policy, which can also slow the economy down, et cetera, then you've got a set of circumstances which cyclically and structurally mean that the dollar can go lower over a period of time. So I think it's an inflection point, it's the start, but definitely not in the middle innings yet.

Jodi Phillips:  

Finally, we discussed where he's seeing opportunities across fixed income markets.

Hemant Baijal:              

It's almost like where do you not see opportunities? Because in an asynchronous global cycle, as you would expect, there are opportunities on both sides of the market, right? There are opportunities in countries like Mexico and Brazil where there's a lot of room for central banks to cut interest rates. There's places like Japan where the central bank has not even started the hiking cycle, and it's a country where they need to hike because inflation is actually above target and the curve is extremely steep, indicating there are some issues that they need to address.

So there's opportunity sets in all different areas of the bond market. I would say there's opportunities in Europe where the curve is relatively steep and you can get pretty good roll down on the curve, so Europe looks good. Some emerging markets look good. And then there are of course countries, places like Australia where the credit quality underlying government credit quality is excellent, but the curve is still very steep because of external factors. So we see opportunities everywhere, both in rates and in FX. Not so much in credit though.

The questions that need to get asked over a period of time is whether market moves can become disorderly. And I think that is probably not the case today. But if we enter into a situation where the Fed is easing policy for the wrong reasons, then market moves are going to get disorderly in the market. But that, we will not know. It's one of those things where you won't know it till you see it. It's hard to plan for, it's hard to construct portfolios for that.

Jodi Phillips:  

Thanks for joining us, Hemant. And now we're going to conclude by putting Brian on...

Speaker 3:       

The hot seat.

Jodi Phillips:  

In this segment, Brian's going to answer some key client questions as quickly as he can. So here's the first one. The job market is slowing. Are you expecting to see a big increase in the unemployment cycle?

Brian Levitt:   

I'm not. I mean, we had some big revisions on jobs. So it is pretty clear that the demand for workers is going down, but so too is the supply of workers. So if they're both going down together, you wouldn't necessarily see a big increase in the unemployment rate. And it's possible that the economy just likely needs less jobs than it used to, given that people are retiring and the amount of people immigrating to the country is decreasing.

The other thing I would say, Jodi, is that the sectors of the economy that have been responsible for a significant amount of hiring, parts of the economy like healthcare, social services, those tend to not be overly cyclical. So no, I don't expect this slowdown to lead to a meaningful pickup in the unemployment rate or a coincident recession.

Jodi Phillips:  

Okay. So the next question, there was a big move in small cap stocks back on August 22nd when Fed Chair Jerome Powell indicated at Jackson Hole that they were likely to cut rates. So why didn't that rally continue?

Brian Levitt:   

Little bit of a head fake. Small cap companies do tend to benefit from lower interest rates, so that was the big move as the Fed Chair was speaking at Jackson Hole. But lower interest rates alone or the prospect of lower interest rates isn't enough for small cap businesses. They tend to also require a pick up in the domestic economy, because a lot of their business is going to be done within the borders of the United States. And right now, not really conducive for that. In fact, the US economy is slowing right now. And so I'd argue that's why the small cap, the one-day small cap rally didn't sustain.

Jodi Phillips:  

Okay, next question. Are you concerned that credit spreads are too tight?

Brian Levitt:   

I'm not. Credit spreads rarely trade at average. You've seen those charts, our listeners have probably seen those charts where you look at credit spreads, they're either really tight for a long period of time during good periods of economic activity, resilient growth. Examples of that would be 1995 to 1999 or 2003 to 2007, you can remain tight for a long time. So you're either tight or then you're quickly blowing out to much higher levels if a significant deterioration in economic activity were to occur, like you saw ahead of 2001, like you saw in 2008. So again, spreads are rarely average.

I would say if you looked at the current level, they are tight. Again, which is pretty consistent of the middle part of a cycle. So investors may not look at it and view them as enticing, but credit spreads are just a valuation tool, and those are never timing tools. And so if you believe this economic cycle is going to continue, that incremental yield that you're getting in corporate and high-yield bonds should continue to look enticing to you, regardless of spreads being "too tight."

Jodi Phillips:  

Okay. Last question. In the US, residential investment is weak. Now in the past, a weak housing market typically coincided with recessions. Why isn't that the case now?

Brian Levitt:   

Yeah, it's a great question, and the reality is perhaps the makeup of the economy has shifted a bit. So yes, it's right, weak residential investment typically coincides with a recession, but what we're seeing right now in the United States is big investment related to artificial intelligence. That doesn't totally offset residential investment, but is expected to over time. So it's coincident with a slowing economy, but one that is not collapsing.

Jodi Phillips:  

Okay. You're off the hot seat. But before we go, Brian, where can our listeners follow you for more insights?

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 @BrianLevitt.

Jodi Phillips:  

Thanks for joining. We'll 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 September 9, 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.

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.

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.

According to Bloomberg, the S&P 500 Index advanced 15.79% between May 1, 2025, and August 31, 2025.

Statements about the historical performance of markets during the month of September sources from Bloomberg as of August 31, 2025. Based on the average monthly returns of the S&P 500 Index since 1957.

30-year US Treasury rates sourced from Bloomberg as of September 8, 2025.

French and Japanese bond yields sourced from Bloomberg as of September 8, 2025. Based on the 10-year government borrowing rates in France and Japan.

The statement the inflation expectations appear to be anchored based on the US 3-year inflation breakeven, sourced from Bloomberg as of September 8, 2025.

Statements that the US economy is slowing based on nonfarm payrolls sourced from the US Department of Labor.

The amount of Treasury bonds outstanding sourced from the US Department of Treasury as of August 31, 2025.

Statements that international stocks have outperformed US stocks this year sourced from Bloomberg as of September 9, 2025. Based on the year-to-date US dollar returns of the MSCI ACWI ex US Index (23.40%) compared to that of the S&P 500 Index (11.73%).

The net international investment position, or IIP, of the US sourced from the International Monetary Fund as of August 31, 2025. Net (IIP) measures total external liabilities versus total external assets. 

Statements about Japan’s inflation and yield curve sourced from the Ministry of Internal Affairs and Communications and Bloomberg as of August 31, 2025.

Statements about the yield curve in Europe sourced from Bloomberg as of September 9, 2025.

Statements about government credit quality and the yield curve in Australia sourced from Bloomberg and the International Monetary Fund as of August 31, 2025. Based on the debt-to-gross domestic product of the Australian government.

Statements about the rise in small-cap stocks on August 22, 2025, sourced from Bloomberg, based on the one-day return of the Russell 2000 Index, which advanced 3.87% that day.

Statements about historical and current credit spreads sourced from Bloomberg as of September 8, 2025. Based on the option-adjusted spread of the Bloomberg US Corporate Bond Index.

Statements about investments in artificial intelligence sourced from the US Bureau of Economic Analysis as of June 30, 2025.

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 MSCI All Country World (ACWI) ex USA Index is an unmanaged index considered representative of large- and mid-cap stocks across developed and emerging markets, excluding the US. The index is computed using the net return, which withholds applicable taxes for nonresident investors.

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

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

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

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

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.

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

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

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.

Tail risk generally refers to events that have a very small probability of occurring.

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

GFC stands for global financial crisis.

FX stands for foreign exchange.

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

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.

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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.

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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.

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