Midterm market effect: What to look for after the election

STEVE SAMUELS:  Well, good day, everyone. I'm Steve Samuels and I'm delighted to be hosting this very important and timely discussion on the 2022 midterm elections, and the potential impacts on the economy and markets. For all of our clients who’ll be viewing this, we really appreciate you and the trust you place in Bank of America and Merrill, and the advisors who take great pride in serving you and your families every day.

So with that, let us get started with our esteemed panel of experts. First we have with us today Jim Carlisle. So Jim leads the Federal Government Relations team at Bank of America and broadcasting to us live from Washington. Thank you, Jim, delighted to have you here this morning.

Next up we have Chris Hyzy, and Chris is our Chief Investment Officer, and he supports Merrill and Bank of America Private Bank. Great to have you on with us today, Chris.

Next up we have Ethan Harris, and Ethan is head of Global Economics Research. He coordinates and manages our Global Economics team, forecast and publications. By the way, prior to Bank of America, Ethan spent nine years at the Federal Reserve, Bank of New York, where he was assistant to the president and head of the Domestic Research division. You’re going to love the updates we get from Ethan today, very, very important.

And last but certainly not least, my friend Marci McGregor. Marci is a senior investment strategist who provides macroeconomic and market insights as well as investment guidance and portfolio positioning across the wealth management business working very closely with our advisors, who of course are working very closely with you.

Q1: So with that, let us get started. And Jim, let’s turn to you first given the topic of the day, with three weeks out as of the broadcast today from Election Day. So in your view, what’s the forecast, and let’s begin with the House of Representatives.

JIM CARLISLE:  Sure. Thanks, Steve. We’re 25 days out. For the Republicans to regain the House, depending on where you think you’re starting from, they either need to pick up five or six net seats. So the margins are pretty close right now. And if you just look, big picture, since World War 2, this is a midterm election, the average loss for the party that controls the White House in a midterm election, the average loss of house seats is 27. And it gets uglier if the president sitting in the White House, if their approval rating is below 50%. So in 2018, Trump was below 50%, Republicans lost 40 house seats. In 2010, Obama was below 50, Democrats lost 63 house seats. And Biden is sitting at 42, 43% approval right now so Republicans are very confident that they get there.

The Cook Report, Steve, which is a preeminent political analysis group, they have rated every race, and they say Republicans are at 211 seats that they’re likely, or lean Republican, to hold at the end of election night, and they need 218 to get to a majority. So they’re already at 211 which looks fairly solid. And then there are 31 seats that are rated as tossups. So Republicans would just need to win 7 of those 31 seats. They hold 10 of those 31 seats. Democrats are on the defensive in 21 of those seats. Just look back to 2020, Republicans won every race that was rated a tossup. So it looks like Republicans are positioned pretty well. They may be positioned pretty well in the tossups. So I think the table seems to be set for Republicans as people are generally looking at this. I will say that their expectations have been dialed back somewhat. So earlier in the year, Republicans hoped there could be a 30 or 40 seat pickup. Probably the biggest needle mover since earlier in the year was the Dobbs decision handed down by the Supreme Court,

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effectively reversing Roe v. Wade.

Democrats really believe that changed the landscape. And we saw in the generic ballot, who do you want to vote for, Republicans or Democrats? Pre-Dobbs, Republicans held a couple percentage point advantage in the generic ballot, which they almost never do. Post-Dobbs, Democrats are up to a 1 percentage point advantage in the generic ballot. And a 1% advantage for Democrats is actually pretty good for Republicans. But it has come back to Republicans gains and expectations of gains have been dialed back a bit. And while abortion is certainly a driver for Democrats potentially to get out to vote, polls still show that voters care more overall about the economy, about inflation, and Democrats have vulnerabilities there. But the bottom line, Steve, is that Republicans are in pretty good shape to win back control of the House, but maybe not by a huge margin.

STEVE SAMUELS: Thank you for that, Jim, and it was really very well laid out there and I think gives us a very good perspective that that’s a likely outcome.

Q2: Now let’s talk about the upper chamber. What about the Senate, in your view?

JIM CARLISLE: So the Senate, neither party is confident there. It’s going to be close. The Senate is 50/50 now. Can the 35 seats that are up for reelection that are rated as competitive -- five of those are Republican, five are Democratic – of the five Republican seats that are competitive, Republicans feel pretty good about all except for one, and that’s Pennsylvania where Pat Toomey is retiring and this is the Fetterman/Dr. Oz race. Dr. Oz seems to be pulling a little closer to Fetterman, but this is a jump ball. North Carolina and Ohio where we also have senators who are retiring, they’re close, but Republicans feel pretty good about holding those. Of the five Democratic seats, Democrats are worried about two. Probably they’re most worried about Nevada where Catherine Cortez Masto is running against Adam Laxalt, and the polls show Laxalt with a couple point lead right now. And then there’s Georgia which is getting lots of attention. One possibility, Steve – it’s 50/50 right now – one possibility is Republicans flip Nevada and Democrats flip Pennsylvania, and next year we stay at 50/50, a divided Senate, that’s entirely possible. It’s also entirely possible that we may not know for a little while who controls the Senate. In Georgia, if the winner of the race does not get to 50% -- and that’s possible because it’s close and there’s an independent in the race – then Georgia heads to a runoff, and that would take place, a runoff election would be held December 6^th, so we could be well into December before we know who controls the Senate.

STEVE SAMUELS: Oh, that’s great.

Q3: Well, based on everything you’re saying here, Jim, it looks like there is a chance we could sort of have a divided political spectrum again. If it ends up being that way, what does that mean in terms of the legislative agenda and what that might look like into the next couple of years?

JIM CARLISLE: Sure. So let’s assume Republicans take the House, that seems to be the base case. That probably means for major legislation we’re looking at some level of gridlock. If Republicans take the House, I think they’re going to be focused a lot on investigations and oversight, potentially targeting the White House. We could also expect I think oversight hearings on things like border security.

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They will also probably want to push legislation that would extend the tax cuts for individuals that were enacted in 2017 which are set to expire at the end of 2025. So I’d expect to see legislation extending the tax cuts moving through the House Ways and Means Committee. I think there’s no chance the White House would go along. It’s probably not ultimately going to be litigated until after the 2024 elections. I think we’d also expect Republicans to be focusing on crime, energy independence, border security.

Might there be some bipartisan legislation? There always is, even in the worst of times. I think one could be legislation in the digital assets space, there is bipartisan interest in drawing up legislatively a regulatory framework around stable coins and potentially other aspects of crypto currency. There's also interest in data privacy legislation and there’s also bipartisan interest, even though the parties don't necessarily look at it the same way, in regulating big tech.

Democrats obviously, Joe Biden will continue to be in the White House, and I think the White House’s priorities may shift a little bit from enaction of legislation to implementation of the bills that were enacted in 2021 and 2022, so the bipartisan infrastructure law, the inflation reduction acts, clean energy provisions. I think a lot of the administration’s focus is going to be turned to the regulatory side and implementing what was signed into law in ’21 and ’22.

And I don't think we’re likely to see renewed pushes for major new social spending legislation. If Republicans have the House, they’re probably not going to be interested in that, and I think inflation concerns might argue against more federal spending. One other issue, Steve, that has to be addressed is the debt ceiling. It pops up every couple of years. In December of 2021 Congress raised the debt limit by 2.5 trillion dollars to 31.4 trillion. The expectation is another debt ceiling increase will be needed sometime maybe in the 3^rd quarter of 2023. And if Republicans take the House, they may make pretty aggressive demands for what they’d want to see in exchange for another debt ceiling increase. So this could be a flashpoint as we get into 2023 – a flashpoint for Congress, and maybe more broadly for the markets.

STEVE SAMUELS: All right. Well, Jim, thank you so much for all of that context, it really sets the stage nicely for our next guest. We’re going to move over to Chris now.

Q4: And Chris, everyone who’s viewing right now is probably thinking, okay, based on everything that Jim just said, the midterm elections, what kind of impact on the markets might it have? So maybe start with giving us a little level set in terms of your view of where the markets are now and why they are where they are, and what the midterm elections might portend for it going forward. Thank you, Chris.

CHRIS HYZY: Thanks, Steve. Jim had a great segue there. He talked about flash. So if we want to talk about flash, this has certainly been a year of flash. 60/40 portfolio arguably the worst performance collectively in 100 years, at least since 1976, and only 3 times have we produced double digit losses in that divide between 60 and 40.

So to level set, this is where we’re at, and Ethan will touch on a lot of this I'm sure, but the massive expansion of the balance sheet, and then arguably the tightest financial conditions movements by the Federal Reserve in at least six or seven decades if not longer, at least since post-World War 2. And the speed of that removal is where we’re at right now. Then you mix to it what you just talked about, Steve, which is the midterm elections, and if you go back in history, the average drawdown in the year of the midterm elections is 19%. We’re already down about 24%

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 in the United States, so we’ve kind of pushed further than that. It’s the fourth largest drawdown in history in midterm years. 1974 was the worst, then 2002, and then 1962. So you have to also look at the environment you’re in right now. Again, Ethan will touch more on that. Many of those environments except for ’74 didn't really include what we’re dealing with right now, which is inflation. ’78 was another year of inflation. But then you think about history, and you look at the drawdowns, and after that drawdown, what did the markets do heading into year three? Well, the average gain over that period from the low point of the midterm elect year, usually happens late September, early October, is about 31%. And then if you go back to 1942, the period post-midterm elections, every year’s been positive.

So there’s a lot of so-called data and math in the investor’s favor. And we always like to say, with great resets come great opportunities, and this is yet again another great reset. Maybe not great in terms of its beneficial aspects of it, but in terms of its largess it’s a big reset.

I would point to this though: every cycle’s different. Whether it’s a midterm cycle, or the economic or market cycle. And now you’ve got inflation, you’ve got a tighter Fed, you’ve got tighter central banks et cetera, stronger dollar. So the key question is, why do third year – president of midterm third years – ultimately produce positive returns? Most of the time, 100%, there’s never been a recession in the third year, if you go back in history. There’s nine in the first year, I believe, five in the fourth, one in the second, and generally zero in the third. Most forecasters – Ethan will talk about this – are forecasting at least a mild recession for year three.

So could this be the first time that we’ve had a positive up year in the markets and a recession? Could be. A lot of things have been different with this cycle. But the last point I want to make here though is, with large resets, given the drawdown, the opportunity set tends to be very wide coming out of it, and that’s where we are yet again right now.

STEVE SAMUELS: That’s a great setup for us, Chris, here, and thank you for that perspective.

Q5: If we think about sectors now, so we’re drilling it a little bit deeper here, how should clients and advisors be thinking about the various sectors coming into the midterms?

CHRIS HYZY: Yeah, you have to kind of look at a little bit of what works well coming into an economic revitalization, if you will, and that’s more than likely not going to happen until the tail end of next year in terms of the economy. And then if not, 2024. But markets look through the darkest points, and they start to discount that things will get better. And ultimately that discounting mechanism is what makes it so hard to time markets, and we don't like to time markets.

So thinking about sectors within the broader context of where profits are going to go, energy is the only sector in the S&P 500 this year that will likely produce positive profits, believe it or not. The weighting in technology, the weighting in consumer discretion and the weighting in financials, ultimately the largest areas of the S&P 500 give or take industrials and healthcare, and those areas are likely to struggle. So overall this year, consider a small gain in profits overall to neutral. Next year we’re forecasting somewhere around an 8% decline. It is our belief that the market starts to look through that. This is well told, well discussed. The sectors that we see right now heading into next year, given the midterms, given potential legislation, not just for this year but for future years and where the economy is going simply is a little bit of a barbell between what are so-called defensive nature of healthcare, parts of technology that offer solid free cash flow, more defensive technology, less long duration growth areas of technology, and then mixed with that the energy sector which is a small portion of the S&P, Steve, it’s give or take 6%. It started out as 3%, but the earnings contribution to the S&P is almost 10%. So it still has a ways to go before you could say that it is matching its earnings contribution.

And then last but not least, we’re moving into the part of this cycle, post-pandemic part of this cycle, and where we’ve come from, which has been a significant uptrend since the global financial crisis, we’re moving in to what we believe is looking at level two, below the sector. The industry group is going to mean a lot more than the sector itself.

STEVE SAMUELS: That’s really helpful, and I know that a lot of clients are thinking about that now.

Q6: When you think about

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age old dollar cost averaging concept, how should clients be sort of playing this now? We’re coming into midterms, we’re having very difficult markets here, is this the time to sort of be buying on the dips and it would be a sort of wait and see till the elections happen? What guidance would you give clients right now in terms of actions they should be taking prior to the elections, Chris?

CHRIS HYZY: Let me give you the core answer, and then of course there’s other answers depending on the type of investor, the type of client. Most importantly, the timeframe. When we look at where we are today in the latter part of the year of 2022 – again one of the worst years if not the worst in a hundred – we look at it twofold. What are the opportunities to add to your current allocation, whether you’re below in your equity targets or fixed income, and then you have to look at the relative opportunity set and the asset classes.

Right now it is our belief that the largest opportunity set, thinking forward just here in the very short term and through ’23, are bonds. Bonds have had one of their worst years ever this year. They haven’t been a hedge on equities. They haven’t been a diversifier on other asset classes, and that’s rare. It’s happened two or three times in a hundred years. So going into next year, lengthening duration if it’s appropriate for you makes sense. Adding into treasuries or municipals which have longer duration makes sense. Why? Because it is our belief that ultimately if there is a mild recession, or if the Fed ultimately pauses and inflation comes down, yields at the back end should start to follow from there and ultimately provide not just that diversifying element relative to equities, but also a little bit of dare we say yield and appreciation, total return in bonds, which we haven’t seen this year. So that’s one aspect.

The second aspect of it in the equity markets. Typically speaking, midterm election years, the three most important quarters are the fourth quarter, the first quarter, and the second quarter, coming out of the midterms. They are the highest grossing performance quarters of the S&P 500, so history is on your side in the next three quarters. Having said all that, this is a very different cycle. So we need to be very nimble, we need to be flexible, and look for the opportunity set.

And here’s where we believe those next two opportunities to average into equities begin. In between midterms and year end we should have a better outlook for what corporate profits are going to be and the momentum thereof for next year. That’ll be more of a reset moment. That’ll also be a time when a lot of the institutional investors begin to rebalance portfolios and get ready for a new fiscal year to some degree next year, and they’ll look at their ultimate risk budget and start to equate it amongst all different asset classes, generally speaking putting some pressure on the market before you start to climb out of that. And then last but not least, first quarter next year, Ethan will touch on this I'm sure, but as it relates to what’s the Fed’s ultimate timeline. Is the Fed done in the first quarter of next year both with tightening financial conditions, verbiage, communication, and that matches the fact that inflation is showing some accelerating momentum to the downside, that ultimately should crest two-year yields, crest the dollar. And if you get those two things, which is our belief, early next year, that helps establish stability, and that’s your next opportunity in our opinion to average in.

STEVE SAMUELS: Chris, great stuff. So we covered stocks vs. bonds. We covered sectors. We talked a little bit about where we are on the cycle.

Q7: One of the things I’d love is a final question here and then we’re going to move to Ethan, is on the international front, just thoughts. There’s thoughts about potential recession here, we’re seeing that in other places, but in different pockets. We’re seeing what’s happening in the UK, and I know a lot of our viewers want to know, could that sort of ever happen here as well? So what are your thoughts and how should US investors be thinking about the international space?

CHRIS HYZY: A great question, and it’s an interesting point in general as it relates to portfolios. But just in terms of how cycles in the future may or may not be linked together like they were in the past. So let’s just start from what we know. What we know is this – globalization is reglobalizing. Some say deglobalizing. You could argue West and East, you could argue regional trade zones in the future versus a hyper global competitive world yesteryear. How does that impact non-US markets relative to the US? That’s going to be a big question.

But let’s just start with the simple things that we know. In the last decade or two it’s been more US relative to non-US

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as it relates to the opportunity set and performance in the equity markets. It’s been large cap overall relative to small, particularly in the US. It’s been technology relative to all other sectors. Energy was in a bear market for 20 years. Technology was in a bull market since the lows back in early 2000, and then it started to climb out after a few years. And then last but not least, growth has outperformed value. So if you look over the last decade-and-a-half, potentially two, you’re looking at a very defined uptrend in four or five areas.

So then you have to ask yourself, does the next decade or two look the same? It is our view it’ll be a much more diversified marketplace in general. We do believe that the dollar – it makes sense why it’s so strong right now – but it is overly strong, not relative to where we are now, but relative to where we’re going. So when the dollar starts to crest out, typically a weaker dollar is a tail wind to non-US. We see that happening later in ’23 and into ’24. Last but not least, small caps relative to large. Small caps have dramatically underperformed relative to large, and they are inherently value oriented, which the international markets are inherently value oriented because of the way the indices are created.

So if you had to think about changes, value should have a slight tailwind relative to growth. It doesn’t mean abandon growth at all, it just means a relative tailwind. Non-US should have its pockets of optimism, and it’s not all about value, because they have had traditionally better values relative to the US because they don't grow as much as the US. But that’s an opportunity set that’s underowned, and the suspicion is that there’ll be more allocation going that way once the dollar peaks.

And finally, home country bias does mean a lot. The S&P is dominated by multinationals. So if you do not want to invest overseas for a variety of the reasons – you’re too concerned about what’s going on, you don't really know what the emerging markets are going to give you, you’re not sure about the dollar – the home country bias is not a way to deflect the opportunity set overseas, but because the multinational exposure in the S&P 500 is very high, very heavy, and you do get that business aspect through some of those companies.

STEVE SAMUELS: Chris, what a great comprehensive review, we so appreciate your sage advice and that of the entire CIO team, so thank you so much. Let’s now shift over to Ethan.

Q8: So Ethan, speaking of the home country, and we’re talking about the US today, can you just give us a little primer on the current state of the economy? That’ll just give us a nice level set and then we’ll move in to how the economy will react to the election and so forth, so let’s get started with you, Ethan.

ETHAN HARRIS: Yeah, I don't have a great message for everyone today here. As Chris suggested, we are pretty confident there’s a recession coming in the first half of next year. What’s going on right now is that for the first time in about 40 years we’re facing a very serious inflation problem. I don't think I need to tell this audience that. And so unlike historic recessions that we’ve all kind of grown up watching, this one is very much determined by how central banks react to the inflation. How much pain does the Fed and other central banks feel they need to impose to get the inflation numbers under control.

So it’s very much – I spend a lot of time thinking about inflation these days. So there are four things driving US inflation. Two of them should fade fairly quickly. Supply chains are improving, and we think over the course of the next year will be largely back to normal. That takes the pressure out of goods prices, and takes us a big step towards lower inflation. The other area we are I would say cautiously optimistic on is we don't expect big additional spikes in commodity prices, we think they’ll remain high, but they won’t go even higher. So those two drivers of inflation should fade. The problem is, and this is what the Fed has discovered much to its chagrin, is that the labor market is way too hot. We can’t have a labor market where you’ve got two job openings for every unemployed person. It has to cool off. And the challenge to the Fed is that the labor market is very resilient. It’s actually one of the strongest parts in the economy right now. And so what they need to do – and it’s very politically incorrect to even talk about this – is they have to cause a labor market recession. They have to get the unemployment rate to rise, get payrolls

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 to stop growing or turn negative, and get the very high wage growth to start to turn lower. And then there’s a fourth component which is a little more wonky, and that is inflation expectations.

It’s been a long time since we’ve had sustained inflation, and so Americans haven’t thought much about inflation, it’s not become a big part of, for example, your wage negotiations with your boss. That could be very different going forward. But that cost of living effect is the fourth kind of also very persistent inflation challenge.

So what’s going on right now is that the Fed started six months late. They’ve had some bad luck here, as I’ve just described, there’s a lot of supply effects that have created this inflation. But the part that they’re really responsible for is getting the labor market under control and getting inflation expectations under control. They started six months late. Now they are extremely aggressive. They’re hiking 75 basis points at a go. I don't see how you can avoid a recession. I think it’ll be mild, because the inflation problem we have isn’t anything close to the 1970s, but I think we are almost inevitably going to get a recession.

So one final thought before your next question, and that is, as a macro economist, I think that this story around the Fed and other central banks gradually capitulating and going from super dovish to super hawkish, I think that is the major challenge to the markets right now. It’s repeatedly given more fuel to higher interest rates, more fuel to a weaker equity market, and more fuel to a strong dollar. Every time the Fed ups the ante. The big call for an economist right now if you work in the financial sector is when does the Fed stop pounding us with new bad news? And as Chris pointed out, the hope would be that as we go into the new year the Fed’s kind of not done but they’re now starting to move away from this uber hawkish position. And for me, that’s an inflection point broadly for the markets.

STEVE SAMUELS: All right, Ethan, well, that’s a really good backdrop. And we just saw the news over the last couple days, there’s a lot of disappointment that inflation continues to run into paces higher than they thought given the moves that were made thus far, suggesting that there are going to have to be further aggressive moves.

Q9: Could you just comment on that or the reaction. We’re all reading it in the paper, but from your perspective, was it a big surprise to you and what will they have to do to actually temper it?

ETHAN HARRIS:  One thing I think’s fun about reading the business press is when the markets do the opposite of what you expect. There’s a nice little gymnastics that goes on in the market wraps. So investors think because inflation is super high now, it has nowhere to go but down. There’s a big technical aspect to this, shorts being cut, whatever, people getting profits or whatever. There may have been a lot of that, I have no idea. I'm not a technical analyst. But the economics news was terrible yesterday. The data keeps surprising to the upside on inflation, even with all the information we had the day before the CPI report came out, economists still underestimated it. So what’s going on is that there’s this kind of underlying persistence inflation that has not been fully endogenized into the thinking of forecasters. And that’s why we keep getting these positive surprises. This consensus is catching up, and the Fed is catching up, so my hope would be that we’re done with this thing where half the months it comes in higher than expected, hopefully we’re done with that. But it was not a great day and I worry that the longer term impact on the markets is going to be higher bond yields and some more pressure in the equity market.

STEVE SAMUELS: Ethan, that perspective is just absolutely critical for everyone to hear, so thank you for that. All right, so let’s talk about the elections.

Q10: And we heard earlier from Jim, there’s a good possibility of a split. But could you just quickly take us through the different scenarios. If it’s

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 all Democratic, which appears unlikely; if it’s a Republican sweep, which is possible, but then again, if there’s a split, which seems to be the most likely. Take us through those three in terms of how you see economic implications. Thanks, Ethan.

ETHAN HARRIS: Sure. I don't view this as a watershed election. Going into the election, in effect we’d already had a bit of gridlock going on in Washington, even with Democrats controlling both houses. The Senate is so close that when inflation picked up, Manchin and other more conservative Democrats kind of put the brakes on fiscal policy. And inflation is not going to go away quickly, so that constraint on policy is going to remain under any government. If we get a Republican win in the House – I think that if we get almost any outcome there will be limited legislation.

So let’s go through the scenarios and I want to reinforce some of the things that Jim said earlier. If Republicans take the House and/or the Senate, it’s just rock solid gridlock. The one thing I would add to what he pointed out, I agree with him that there’s a big chance of budget brinkmanship if Republicans take the House, and it’s going to be a very fractious environment in Washington. On the other hand, we’ve all gotten used to the kind of circus going on there, so I'm not sure how big an impact that will have on the economy and the markets.

The other thing that I haven’t heard from people, and maybe when we get to Q&A he’ll want to comment on, what’s the probability that we get a major refusal to accept election results in a number of districts across the country, and we get contested vote totals, in a way that normally wouldn't happen. I do think that’s kind of a potential risk factor that we shouldn't completely ignore.

Now, if Democrats do sweep, which seems unlikely given how ugly the inflation picture is, even then they’re going to be hesitant to go for big fiscal packages. Janet Yellin just yesterday pointed out the lesson from the UK, which is, when you have inflation running hot, do not do stimulative fiscal policy. Don't do tax cuts and spending increases when you have high inflation. It’s like the markets penalized the British government in a major way, and every treasury secretary in the world looked at that and said, “I do not want to get that happening in my country.” So I think even with a Democratic sweep a lot of those kind of bigger plans are going to be on hold. So that’s the way I think about the scenarios.

STEVE SAMUELS: Well, Ethan, thank you so much, I think everyone is taking a lot of notes as you spoke through that, and you know what, everyone will be ready with those different scenarios and how to react to them. So thank you so much for all that insight.

Q11: Okay, Marci, let’s move over to you now. Thinking about everything that we just heard here, what are some of the key themes that we should be considering when thinking about portfolio positioning? Thanks, Marci.

MARCI MCGREGOR: So when I think about portfolio positioning, in the near term I think it’s really important to stay really diversified, right? This is a world of high inflation. I think that means using all of the tools in our investor tool kits, not only being diversified across stocks, bonds, cash, but potentially considering things like alternatives. I think it’s a world where we need to stay really disciplined. Chris talked about plans for dollar cost averaging. I think it’s also really important to have a plan for rebalancing as markets, especially equity markets, seem to be moving in the trading range. And then I think this is an environment to also stay pretty balanced, and that’s how I think about our portfolio positioning guidance where we’re in a world where we want to be up in quality. We like sectors like energy for the world we live in today, like Chris mentioned, but then sectors like maybe utilities where if we’re anticipating a potential earnings downturn, a more defensive sector like that has historically weathered that storm a little bit better. Recently we saw some opportunity to allocate some of our cash and put that to work on the fixed income side, specifically in high quality fixed income. Given the move in rates,

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potentially in a peaking process on the rates side, we saw the opportunity there to put some money to work in treasuries, in mortgages, we still like investment grade corporates and Munis, but to lengthen duration out a bit where we have been sitting below benchmark.

On the equity side, we still have the preference again for quality. For us right now with a strong dollar and a world with slowing growth, we still like the US over the rest of the world, but I would think about going beyond that, things like dividend paying stocks, high quality stocks like that.

But to bring it back to the election, it seems like we all agree that the days of big fiscal spending are over, but there are some bipartisan issues. Two areas that I would add to Jim’s list are the conflict and support that the US has for Ukraine, and also the pretty bipartisan hardline that we’ve been taking with China. When I think about these two pretty bipartisan areas, that tells me that defense spending is likely to continue in support of Ukraine, but also to refresh our peacetime arsenal here in the US. Also when I think about the world we live in today, another industry that comes front of mind is cybersecurity, also front and center in the conflict in Ukraine. But more broadly than that, as we know that for much of the western world for software and hardware, cybersecurity and security on that was really an afterthought after the construction. So cybersecurity has really leveled the playing field in the geopolitical space and we live in a red-hot geopolitical world. I don't think that changes regardless of the election outcomes, even if we get a divided government.

STEVE SAMUELS: All right.

Q12: So Marci, let me ask you then, in big picture, how should we consider anchoring investors’ outlook going forward. Sort of similar question I asked Chris before, should they wait and see a little bit? Should they just stay with their longer plan? Anything they should be doing between now and call it three-and-a-half weeks from now?

MARCI MCGREGOR: Yeah, so it’s a great question. I think it’s so important. Especially with the headlines and the news that comes at us every day, week and month. Sometimes it’s so important to take a step back and just look at the big picture, right? Because many of our goals, which are all so personal to us, are a little bit longer term in nature. They don't necessarily end with a calendar month or a year. These are long-term deeply personal goals that we’re trying to stay disciplined and on track with achieving.

We took a look back at the last hundred years for the equity market, and what we saw was, unfortunately it wasn’t one pandemic we’ve been through, it’s been a few. There have been multiple periods of elevated inflation, not only the 70s but the late 1940s. And I don’t need to tell everybody on this that there’s been multiple geopolitical conflicts.

And Chris mentioned that these periods of market turmoil and market upheaval are followed by periods that are much longer of regeneration. And what we see is that those periods of regeneration are really what carry long-term returns for the market and for us as investors. So I think it’s really important despite all of the strain around the election and the volatility we’re seeing around every single move from the federal reserve and every inflationary datapoint, I think it’s really important to also keep an eye on the long term and consider what that means for our long-term goals. So we took some time and thought about, well, what could this next period of market regeneration be driven by? What gets us out of this turmoil and into the next market cycle?

So there’s a few areas. We think that digitalization of the economy is a theme that while it may be out of favor with growth and we have a bit of a value preference right now, that long term trend isn’t going anywhere. I would also point to the trend that was mentioned earlier about global supply chains and economic blocks. This idea that in the future there may be a world where there’s dual supply chains that serve the US and China and their allies. Those supply chains are going to be more automated. Think about things like industrial robotics and things like that to deal with a world where labor is in tight demand. Coming out of the Covid crisis on a global scale, I would think about investment in global healthcare infrastructure. Every crisis reveals a crack. Clearly what we’ve been through in the last few years shows especially

[00:45:00]

outside of the US the need to invest in healthcare infrastructure. I often think about the crossroads of innovation and healthcare for parts of the world where people may not have physical proximity to the healthcare that they need. And then the last trend that we’ve been thinking about that may be a big driver of this regeneration that comes with markets is climate change and this transition to a greener, cleaner world. Yes, we like energy in the near term, right? This is a world where energy is in short supply, even though we’re talking about the risk of a recession. But if I look further out again at that big picture, there’s a lot of policy support, not just here but globally, for a transition to a cleaner world. So these four areas I think could be real sources of regeneration and ultimately what underpin markets as we get into a brand new cycle on the other side of this volatile world that we’re in right now as investors.

STEVE SAMUELS: I love it, Marci. So it’s bigger picture, long term trends, and as Ethan said, we’re going to have a midterm election, it is not going to turn the world upside-down, there could be shifts one way or another. But stick to your plan, stay connected with your advisor who helped you put the plan together, and just all really, really critical.

I just thank all of you for a truly terrific discussion. I'm sure all the viewers who are on today are going to gain a lot of insight, as I certainly did. We so appreciate all of our panelists for you taking the time today, and also a special thank you once again to our clients for the trust you place in us every day to help you with your financial needs and goals. Thank you so much, everybody.

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