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Welcome to Stocks and Translation Broadcasting from the New York Stock Exchange. I’m Jared Blicker, your host, and with me is a People’s Voice, Sidney Freed, as always, please like, subscribe, and comment on Stocks and Translation on Spotify, Apple Music, Amazon, or YouTube. And today we are welcoming back Kevin Monn. He is a Henian and Walsh, president and chief investment officer, and today we’re gonna be talking.About market uncertainty, which has surged recently with all these tariff surprises, our phrase of the day flight to quality. are government bonds and gold really the answer? And this episode is brought to you by the number 30.5%. That’s how much the mag 7 stocks are down collectively from those February all-time highs. So what’s the future of the AI trade?And Kevin, let’s just begin with your assessment of all the recent market volatility. It’s been difficult to decipher. We have no idea what’s coming next. How are you making sense of this and talking to clients about it? Well,
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I guess they say that April showers bring May flowers, so let’s hope this April tsunami at least brings some green shoots in the month of May. And I do see certain factors taking place during the month of April, if not April, perhaps during the 2nd quarter, that could lead to a market rebound.First, any positive news with respect to trade or tariffs. Second, an extension of the tax cuts. Third, a potential rate cut. Yes, rate cut from the Federal Reserve later this quarter. And 4th, announcements during this earnings season that the spend taking place on AI is not slowing down and that defense spending is going to continue to increase. If those 4 things happen, you could see a rebound during the 2nd quarter and perhaps a strong second half to the year. All right,
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we’re going to tackle all of those things, I hope. First, weWant to get into our phrase of the day, which is flight to quality. This is when investors quickly move into safer assets like treasuries or gold during times of market stress, uncertainty, or fears of economic slowdown. Um, but the point that I would like to make is treasury haven’t done so well recently. There’s been this huge gyration and so we saw rates shoot up, then or actually shoot down, then they shot up, and it’s been a whirlwind not only in stocks but also bonds. Gold also got hit, so you know, it’s tough to stay in the.Physicians sometimes, what do you tell clients during
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periods of extreme volatility, we see correlations generally move to one where everything starts to sell off because people lose faith. What we saw last week, however, was that bonds actually held up relatively well. We saw municipal bonds rise by about 2%. We saw treasury bonds and investment grade corporate bonds hold up their strength as well as the stock market sold off. However, everything changed this week. Over the last two days now, we’ve seen yields spike.And there’s a variety of factors that could be taking place. One, are foreign governments selling US treasuries. Two, are people now concerned with the economic slowdown and the Fed may need to raise interest rates, and 3, just overall volatility that’s causing people to run to the sidelines or sell bonds to meet margin calls. I’m not sure which one of those factors is taking place, but I wouldn’t anticipate this situation lasting much longer, and that flight to safety trade will come back if we have more and more volatility.On the road. So
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howdo you play the bond market right now then?
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It really is more of a question of what your objectives are. So if you’re an income oriented investor and you’re looking for a reliable stream of income and principal protection on your investment when held to maturity, I can’t think of a better place to look for those two solutions than bonds, generally investment grade bonds. But if you’re a high net worth investor, how about municipal bonds that will pay you tax-free income and have very attractive tax equivalent yields right now. On the other hand,If you’re looking for growth, well, maybe you want to actually use this pullback as an attractive entry point to give you more growth by investing back into the stock market or adding more to the stock market. So it really does depend upon your objectives, your risk tolerance, and of course your investment time frame.
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I want to stick with bonds for a second. I get the whole cash flow thing, and that could be very valuable, especially as people approach retirement. But in the 2022 bear market, and I should say as of taping, we’re not in a bear market just yet, you know, we’re, we’re flirting with that, but bonds did terribly.So with a 60/40 portfolio had its worst two years in something like, I don’t know if it was decades or 100 years, but it did not go well. Our bonds is 6040. Is that still a viable solution forinvestors?
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I would argue that 60/40 is just as viable as 70, 30, 80, 20, or 90, 10. Those are all arbitrary asset allocations. What took place in 2022, Jarrett, was that we saw a dramatic rise in short-term interest rates based upon the Federal Reserve looking to raise short-term interest rates that obviously.Had a negative impact on bonds. What we’re seeing now is really self-inflicted because of all the uncertainty around tariffs and trade, and now markets or investors fleeing the markets as a result. I still think bonds provide you with that diversification and income potential. And if you get these sell-offs and you are an income-oriented investor, I think this creates an opportunity for them to consider.
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Bonds do really confuse me. If you’re look, if you’re, yeah, no, no, like all the different types, the municipal.Investment grade, it is a little confusing. What’s the number one thing someone should look for if they’re hunting around for a bond? Is it duration? Like what’s the most importantfactor
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or just a good RIA advisor,
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a good advisor who’s a specialist in bonds or municipal bonds such as Henon and Walsh, no self-promotion there. So if you a bond is essentially a loan to a corporation, to a municipality, or to a government entity, they have an IOU to pay you back that loan over a set.period of time with interest along the way. So you have to look at the credit quality of that third party that you’re extending that loan to. So understand how the bond pays, what the credit quality of that entity is, and what type of coupon payment that you’re getting over the life of that loan. The coupon never changes, but the yield changes as the price changes. As price goes up, yields come down, as price goes down, yields go up. But over the life of the investment, you can generally rely upon that coupon income and also forbond to repay your principal at maturity,
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so you get your money back at the end.
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So you should getyour money back at the end,
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yes, assuming no default. And the case in the United States, we’re not really too worried about that right now. I want to talk about the Fed though, and this kind of ties into the bond market talk. We’ve been talking about 2022 as well. The Fed was fighting inflation, and you mentioned that that aggressive, it was an extremely aggressive rate hiking cycle, arguably we’re not in the same predicament, but the Fed might be behind the 8 ball on inflation again.Um, and even if we don’t get a repeat of that, what’s to say, let’s just talk the Fed in general. You said we might get a, we might get a rate cut. That didn’t even seem on the table two weeks ago, but things changed quickly in the wild, wild East here. Well,
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if you look back to the last Fed meeting, right, at the end of March, they were still forecasting two rate cuts this year of 25 basis points each. I’m just suggesting that that first one may take place at the end of the 2nd quarter if in fact these tariffs.Have enough of a pronounced impact on the economy, as some are suggesting. I believe the Fed is more concerned with this economic slowdown potentially heading into a recession than they are with inflation staying above 2%. However, if inflation starts to rise above 3% and gets closer to 3.5%, then they may have to sit on their hands or potentially consider a rate hike. We’re not there just yet. In fact, I think these tariffs pose more of a growth scare than they do an inflation scare.
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That’s interesting. So what should we be looking for from the Fed? Is there terminology they’ll signal to us that a rate cut is coming sooner than weexpect?
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Well, they don’t meet in April, so the next time they meet is in May, and I think we heard from Chair Powell last week that they remain at the ready to step in if situations weren’t. Again, that’s Fed speak for we’ll do something if we absolutely have to, but they’re not.There yet and there’s so much uncertainty about the tariffs themselves. Within the next 10 minutes there could be announcement about a country of reciprocity or a future trade engagement that they may have, so they’re very reticent to commit to anything, but we’re going to start to see the impact on GDP. We’re going to start to see the impact on earnings and forward looking earnings guidance, and that may cause theTo now stand up, pay more attention, and perhaps cut rates later this quarter. Well,
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so anything from earnings season you’re saying that the, that’s a good
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one. Let’s talk about
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earnings. Yeah, right now it’s forecasted that earnings are going to grow 7% on a year over year basis. That could be too optimistic right now. If that holds, that would mark the 7th consecutive quarter of positive year over year earnings growth.But I’m more interested in earnings guidance. We heard from Walmart polled, which is getting pulled. There’s so much uncertainty right now they can’t actually forecast the next quarter, much less the balance of this year. So how much are they going to indicate that they’re concerned about the longevity of these tariffs and the potential impact on revenues and earnings for these companies? So I think that’s the biggest question mark for me coming out of this earnings season and unfortunately we may not get a lot of guidance from them because they don’t know.
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This reminds me of the pandemic when we saw guidance getting pulled first you didn’t see, first of all, I just, I’ll say companies don’t want to pull guidance because their stocks tends to get whacked when they do that. But if they’re mitigating circumstances, what usually happens is you get a few big players who do it and then everybody else follows. So with Walmart doing it, uh, and that happened very recently versus this taping, I wouldn’t be surprised if that, if we kind of see the pile on there. But then you see all those, uh, that 7.5% earnings growth. Yep, does that go negative?Potentially, I mean, what happens withthat?
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I don’t think it’s going to have as much of an impact on first quarter earnings as the tariffs weren’t even in place at that point in time, but in terms of forward looking guidance and the earnings estimate for Q2 and the balance of this year, that’s what I’m talking about revised downward. And what does that create the potential for? Well, once some of this tariff mala gets lifted, which I think will take place in some way, shape, or form during the 2nd quarter, now you can see these companies actually beat those revised downward earnings estimates and.Provide tailwind for the markets.
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Side note, should you be allowed to pull your guidance? I feel like
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it’s optional, but it’s like
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if youcan’t have me at my best, you can’t have me at my worst. Like if you’re only giving guidance when things are good, doesn’t that defeat the purpose of issuing guidance
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of the plays.
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What do you think? I think at the end of the day what it’s really telling me as a professional investor who’s doing this for over 3 decades is that evenCEOs of major companies don’t know what to expect right now, and they’re willing to put up their hands and saying we can’t even provide guidance right now. We need more information before we feel comfortable providing guidance, whether they should be able to do that or not, I’ll leave that up to you to decide as the next chair of the SEC, but they can and they are, and that’s what it’s suggesting to me. They don’t know, they don’t have a crystal ball. I certainly don’t have a crystal ball, but I do think there is light at the end of the tunnel and hopefully that light isn’t an oncoming train.
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Um, about a minute to break here. Tax cuts. We haven’t talked about those yet. That’s just kind of sitting in the back pocket there. That could be a bullish catalyst once tariffs are over, but how do you think this plays out?
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Ithink we’re starting to hear the ramifications of that already some discussions taking place with the Republicans around the extension of the tax cuts. Look, if thoseTax cuts don’t get extended. That is a deal breaker. That’s a game changer, and the market can’t withstand that type of outcome right now. So there could be some additional back and forth and perhaps Trump will use these tariffs as a negotiating tool with respect to getting what he wants on additional tax cuts that he’s proposed.But I think at some point in time in the 2nd quarter, at least the original existing tax cuts get extended, and that’s a tailwind for the markets.
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All right, we have to take a quick break here, but coming up we’re going to be talking the AI trade. Is it still viable, along with two fashion icons strutting down the runway in our battle today.We are back in this episode is brought to you by the number 30.5%. That’s how much the mag 7 stocks are down, um, I believe from those February highs. Many of these stocks were the pillar of the AI trade. You think Nvidia, you think the hyper scalers from Alphabet to Microsoft. Is this trade still alive? Is there any future tailwind here because it’s been a huge drag on the market so far this year.
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Isthe mag 7 trade still alive, or AI? AI, let’s say let’s start with AI.So I believe that the AI revolution is in fact alive and well. If I can use a baseball analogy, as I believe I did the last time I was on air with you. I believe we’re still in batting practice of a doubleheader. Now there’s been a lot of questions thrown at that baseball game over the course of the past few months. Are companies spending too much on AI? Can they withstand and continue at that high rate of spend with respect to the AI infrastructure and how much will the supply chain be disrupted?These tariffs, but then I go back to the actual companies involved, and we continue to see the announcements with tens if not hundreds of billions of dollars being invested in AI infrastructure, whether it’s in video with their data centers, whether it’s the government with respect to the Stargate project, whether it’s Alphabet investing in their own power solutions for their data centers, these companies aren’t slowing down.
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Do you think there’s um, do you think there’s some kind of threshold that makes them theDown like the rubber meets the road. Tariffs are too bad. Suddenly earnings are in doubt and Facebook, you know, Facebook has had some aggressive moves in the past. Their stock gets cut 75%, then it’s up 200%. Do we see some move like that
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strategically? I think the bigger risk is to underinvestment in AI infrastructure as opposed to overinvestment because it’s going to be very difficult to play catch up with respect to artificial intelligence, and these companies appreciate it. And now it’s becoming a geographical battle.As well with respect to the supply chain elements with China and domestically here as well as it relates to semiconductors and chips, so I don’t think we’re going to reach that point where these companies say, you know what, AI is no longer a transformative technology. We don’t need to be a part of it. They may look to invest more strategically and through more joint ventures and partnerships, but I don’t think they’re going to abandon it completely, at least not at this point.
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So what should investors be watching for in the next in Q1 earnings season from these AI companies?What should they be looking to hear to kind of bolster those expectations and make them more confident?
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Sure, not to make this only conversation about Nvidia, but let’s do it anyway because it’s always fun, right? So later on in the quarter we’ll get the announcement from Nvidia about their earnings and about their revenues and their forward looking guidance. What I’m keenly interested in is how much their data center business has grown, not necessarily the semiconductor and chip swords. We know they’re a leader in that capacity, but they continue to invest more and more in.Data centers, the nerve center of all these AI algorithms, giving them diversified revenue streams. If they see more growth in that area of their business, that’s good for the whole AI revolution because that’s not limited to just Nvidia chips. It’s related to that one stop shopping solution for everything AI that Nvidia is trying to supply. So I’m very interested. I know it’s going to take some time until they report, but I’m very keenly interested in seeing what they report on their data center business.
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What about the side bets in AI? We saw utilities exploding.And that was when there just was not enough electricity to be had and I’m thinking with this downturn, maybe there is a surplus of electricity, so maybe that’s not the trade, but we also have these bolt on acquisition AI acquisition trades by some of the Sass plays, some of the software companies incorporating AI into their rundown like Salesforce for instance. How any of those plays, do you see that coming down the pike this year or is that farther off in the district
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utilities is still my favorite sector for 2000.And 25 they are, they are backdoor play into the AI revolution. They do provide defensive characteristics during periods of volatility as we’re seeing, and they generally pay a high level of dividend income. And if interest rates continue to come down, even if marginally over the next couple of years, utility stocks that pay dividends will be attractive. So I believe there is powerful potential in the power solutions that are necessary for AI and where do they come from? Utilities. All these data.Centers can’t manufacture their own power, at least not yet, so they have to turn to the utility of the states that they operate within, whether it’s natural gas, traditional electricity, or even nuclear power, and companies like DTE Energy, Duke Energy, they not only supply natural gas, but they supply nuclear capabilities that these data centers can plug into. So I wouldn’t give up on the utility trade just yet. In fact, I think it’s got more room to run.
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Any uh AI plays you would buy the dip in right now besides utilities perhaps?
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Or even quantums or that’s just out there in space. I,
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I still like the cooling solutions that are necessary. We know data centers require tremendous amounts of electricity and power, but they also run very hot. So we heard names last year like Vertive. We heard names like Modine Manufacturing, Train Technologies, or even Comfort System. They supply the HVAC and cooling solutions to warehouses and.Data centers they’ve sawed off during this market pullback as well. I think there’s very attractive entry points as those cooling solutions don’t go away just because there’s more market volatility. The data centers need them. So I think that’s an area of the market that you could expect to see a rebound in in addition to the semiconductor and chips, certain the data centers and then some of the software and hardware plays too.
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Did we talk max7? Did you say?a little bit, a little bit. Well, we
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talked for scalers, but you know, Mag 7 is this broad umbrella. We didn’t talk Tesla at all. Well, if
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we separate Tesla from the Mach 7, then we have a discussion on AI and technology. When you bring Tesla into it, now we’re talking about automobiles, tariffs, and Amazon, the political nature of it as well, right? So if you take Alphabet, Amazon, Microsoft, I still.I think Microsoft’s going to be the ultimate winner of the AI race, but there’ll be more than just one winner. But they just got to the party so quickly and they continue to invest and they continue to look at partnerships in that regard. So as much as I want the other 493 non-magnificent stocks to start taking over leadership of this rally, we can’t have this bull market rally continue.If we don’t hit fair market territory without those seven magnificent technology stocks, right, because technology has the largest market cap waiting in most stock market indexes and is the most widely held sector by retail investors, and that impacts investors’ psyche. So we need the mag 7 to continue to do well, but it’s nice to see the other 493 stocks get their just do as well. Whether it’s from the utility sector, the industrial sector, consumer staples, or perhaps.Even some consumer discretionary stocks later in the year.
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Let’s talk aboutconsumer discretionary. It has gotten hit the hardest at various times right along with tech. It also has a huge market waiting because of Amazon, because of Tesla. But let’s just talk retail broadly in the midst of these tariffs. Any opportunities there you’re looking at.
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I, I think they’re part of that second half of the year comeback and the strength that I see developing for a strong close to the year, right? Because what impacts consumer spending the most?Disposable income, I guess 1 but 2 is investor and consumer confidence right now consumer confidence is at a significant low because they have the same uncertainty and concerns that CEOs and members of foreign governments do right now. So they’re.Sitting on their hands and they’re not spending that affects the consumer discretionary sector and it also impacts the economy. But if those four factors I spoke about earlier do take place, positive announcement on tariffs, a potential rate cut from the Federal Reserve, an extension of the tax cuts.Companies still spending in AI and security and defense solutions. Well, guess what? Consumer confidence will increase. They’ll start to spend again, and consumer discretionary sector will start to rebound. All right,
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hard pivot here. We got a runway showdown to make a classic style showdown between two investing icons. First on the catwalk, giving timeless elegance a whole new meaning.It is time in the market. Dressed in compounding returns and draped in diversification, this look doesn’t flinch when volatility struts by. It’s seen recessions, pandemics, booms and busts, and still, still holds a place on the mood board in investors’ portfolios. But wait, slinking in with tactical moves and seasonal flair, here comes market timing.She’s all about agility in and out of positions, reacting to Fed hikes, trade headlines, and technical signals, high risk, high reward, but when she gets it right, the look turns heads. So very alluring choices here. Kevin, please help us decide who is wearing the current market environment better time in the market or market timing?
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Such acatchy and clever intro. So I’ve been doing this for over 3 decades, right? I can’t time the market.Right, because you have to get it right twice, when to get out and when to get back into the market. A lot of investors generally know when to get out when things get uncertain, when volatility picks up, but when do you get back in is the bigger question.So trying to time the market is often an exercise in futility. It’s time in the market that matters. Consider this. Over the last 20 years, 7 of the 10 best trading days over those entire 20 years took place within 2 weeks of the 10 worst trading days. That volatility clusters, volatility clusters. No, I don’t know when those days are going to get.Happen, but rest assured, if you’re not in the market on those 7 of those 10 days, you’re likely to miss out on the most significant returns that the market has to offer. So stay invested, consistent with your risk tolerance, making adjustments when necessary, but don’t play this game of I’m gonna go to the sidelines. I’m gonna come back in. I’m gonna go to the sidelines.
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People just don’t come back inat the right time.
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They don’t just come back in and you can make a short.Investment decision that has a long-term investment consequence on your overall financial plan, and that’s generally where unfortunately for retail investors get it wrong.
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Wejust have 20 seconds left. Last word to investors. Final thoughts in this volatility.
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Yes, keep volatility in perspective. If you’re unnerved by this volatility, that’s not surprising. Talk to your financial advisors and make sure.portfolio is positioned consistent with your risk tolerance, what your goals are, whether they’re income or growth, and what your overall investment time frame is, but try and avoid the temptation to trade the headlines or time the markets because again that short term investment decision that you may make may have a long term investment implication,
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and we’re going to leave it right there on this episode of Stocks in Translation.