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Chief Investment Officer Tony Roth, Head of Investment Strategy Meghan Shue, and Chief Economist Luke Tilley discuss the twists and turns of the market and economy while keeping their eyes peeled for opportunities in the face of persistent obstacles, such as inflation. Discover why they believe that although equity values may seem fairly priced, there's still room for growth in markets. Gain insights into their predictions for Fed rate cuts and how these could provide a valuable tailwind for investors, turning market dips into strategic buying opportunities. Tune in now for expert analysis and actionable insights to help guide your investment decisions.

Navigating the economic terrain: soft landing or inflation obstacle course?

Tony Roth, Chief Investment Officer
Meghan Shue, Head of Investment Strategy
Luke Tilley, Chief Economist


Tony Roth: This is Tony Roth, Chief Investment Officer of Wilmington Trust, and you're listening to Capital Considerations. We have a very important episode today with a incredible lineup of willing to trust colleagues. We have our chief economist, Luke Tilley, and we have our head of investment strategy, Megan Shue.

Welcome, Luke, and welcome, Meghan.

Luke Tilley: Good morning, Tony.

Tony Roth: I'll start by saying that we came into the year with, as we typically do with certain expectations, and the market has, and the economy has done its best to make things a little bit tough for us by presenting certain obstacles, particularly in the inflation area. But notwithstanding that, we are fairly steadfast in our, in our views that we have a good economy, a strong economy that we're moving into a soft landing and frankly, even that the trajectory for inflation continues to be one that is constructive for the economy and one that will be even constructive for markets.

Notwithstanding the fact that inflation readings on the surface have seemed to come in a bit hotter than expected. At least that's the narrative that certainly the markets are telling, and most commentators are telling. But our view is that we continue to be in a disinflationary environment, and while it may be a bit slower, we will arrive at our destination of inflation that is solidly within the Fed's target range.

And in fact, from certain perspectives, we're already there, have been there for a little while. So we're going to try to reconcile that picture. And what that all means for investors is that we think that there's good opportunity for continued growth in markets, even though, when we look at equity values, we're fairly priced now.

We believe that ultimately the Fed will cut rates this year by three, four times, somewhere in that range, and that will continue to provide a tailwind. And so dips, meaningful dips in the market are going to present buying opportunities.

Luke, I think that the starting point for the conversation has to be around economic activity. We came into the year expecting a soft landing. I think that we're getting a soft landing. I think that our current forecast is for almost two percent growth for the year and expectations for a recession, not just for the year, but over the next 12 months continue to recede.

What's your take Luke on the economy? Have I set it up for you correctly? And what's the detail you think that is important to focus on as we move forward to continue to validate the idea that we're in a very nice economic environment, if you will, and we don't see that changing over the next 12 months.

Luke Tilly: Absolutely set up correctly. We're looking for 1.9% annual growth in 2024. that would be a slowdown from last year, the 2. 5% growth. And really, when we think about the economy, you just have to think about consumers and firms and what they're doing in terms of their spending and capex, respectively.

And we view the consumers is still in a pretty strong place. So a lot of the exceptional strength and consumer spending over the past couple of years was fueled by the excess savings, so to speak, savings that consumers had stockpiled that got so much attention over the past couple of years, and those have mostly been spent down or invested, except for the higher income groups.

And what that means is that spending is now returning to the traditional fundamentals. If you want to say, how much are consumers going to spend? It's going to rely on job growth. It's going to rely on wage growth and to what degree consumers are going to be borrowing. Those are basically the sources of being able to spend and what we've seen and what we expect to continue is that consumers have sort of returned to a trend, a level of spending. It was much stronger in the last six months of last year, two quarters of reacceleration that brings us in a year-over-year sense to sort of this, this equilibrium about 2.5% year over year real spending from consumers. And that's been pretty much what we expect to continue getting us for the consumer side that that soft landing narrative. I'd be remiss if we didn't point out some of the risks. A lot of our business. And a lot of what we focus on is, is something a new trend or is it returning to normal? And some of the red flags that we see out there have been over the past year, the increase in credit card delinquencies that rising that has certainly gotten people's attention.

But a lot of it is level versus rate of change. And what we've seen is credit card delinquencies and sort of those red flags, they were very, very low after the pandemic. And over the past year, they've essentially returned to normal. That return to normal has a trajectory that looks bad if it were to continue.

So that's one of the main things we would be watching for consumers. And then on the capex side, I think that's where most of the slowdown would come relative from last year to this year, because firms are facing a higher interest rate environment, a little bit of a slowdown in spending. We've seen their appetite for hiring come down with the number of job openings.

And while we still view it as healthy, firms are pulling back a little bit, not in a retrenchment mode that would signal recession or, you know, real fears, but just sort of coming back down. And Tony, that's really how we get to that 1.9% outlook, the soft landing and a deceleration relative to last year.

Tony Roth: So, Luke, one of the things that has been really, I think, surprising to economists is the continuing strength of the labor market. And to me, there's sort of two levels of the impact of the labor market on the economy or the reality of the labor market as part of the economy.

One is that the absolute number of jobs that have been created is higher than expected, and that means that there are more people with salaries that are making money and have the money to spend. And I think that that reentry of the job market, whether it be immigration, or whether it be retirees or women or different demographics coming back into the job market are all powering the size of the consumer base in the sense. And then there is the relative level of wages to inflation, the real wage is being positive. When you think about those dimensions or other things, what is it in your mind that's accounting for the stronger economic growth than expected? And is it most evident in the job market in the labor market?

Luke Tilly: It comes through in the labor market for sure. And more than a year ago, we expected some challenges in terms of, the labor coming back, there's a lot of retirees who we didn't think were going to come back and that has all pretty much held.

The overall labor force participation rate has remained low within the details of that. The so-called prime age—age, 25 to 54—has surprised to the upside a little bit, a little bit more strength in the labor market. And then on the immigration side, fairly recently, the estimates of how much immigration occurred last year were revised upwards significantly.

And that has been a boon to the labor market, and that, combined with firms slowing down their number of job openings, has resulted in the, the normalization or the equalization of supply and demand for labor, and that has helped out with wages. Wages are still moving up, as you said, and pointed out, they are higher than and have moved up more than inflation, translating to real wage gains, and that certainly helps consumer spending.

And then aside from those things that we mentioned, of course, I should mention this year's Capital Markets Forecast, which is also commenting on productivity, the exceptionalism of U.S. firms. And I think that that has been the other driving force behind the upside surprise and economic activity. It's just that U.S. firms have done such an exceptional job getting new software, new methods of production, implementing new methods and techniques. And that has really helped them meet the demand for their goods and services with less people and that higher productivity is that other leg that has really helped economic growth planning.

Tony Roth: Let's translate this all into companies. One of the things that we see in the economy is that the big companies are doing well. They have the technology and the means to increase the productivity in the ways that you've described, and they've been able to get the employees that they need.

But the smaller companies aren't as levered to technology. They are grappling with a higher financing environment in terms of the rate situation. Higher meaning more expensive, which is the bigger drag on their ability to grow their businesses and invest. And at the same time, they're the ones that are often struggling to fill positions, small, smaller businesses, as opposed to larger businesses.

There's more competition there in the economy. Do you see this as a tale of haves and have nots where small companies are struggling relative to bigger companies. And there's really three different levels of companies. Of course, right? There's big cap companies. There's small cap publicly traded companies.

Then there's the main street companies. How would you describe the reality benefits of the soft landing across those three areas of the economy from a company size standpoint, Luke?

Luke Tilly: This is really important. And I think it's a different experience. As you point out 1st, as a broad statement, I would say that the productivity gains are across all sizes.

I use an example, maybe it's an overused example, of just a restaurant that you enable your customers to order with a QR code. And if that means a server can go from serving four tables to serving five, it's a 25% increase in productivity. And it's pretty simple. And that kind of activity that that's just supposed to be illustrative that that kind of activity can happen across small firms also with very little effort, but the experience that you describe, that higher productivity, is definitely concentrated the higher up you move in the size of the company, because of their ability to take on much larger implementation in terms of scale. Whether it's artificial intelligence, just updating non artificial intelligence type systems, large warehousing facilities that invest in smart shelves, you know, that deliver goods to the person that's filling up the orders and carts.

All of that kind of activity is tilted more towards the upper end of the spectrum. And we do see that show up. I know Meghan can talk about it in the performance of public companies, large versus small, but we can also see in a lot of the economic data. In particular, the National Federation for independent businesses, which is the group that represents pretty small companies, mostly between 10 and 20 employees, and they have not participated nearly as much in an optimism sense in a profitability sense and sort of a meeting the challenges of the higher interest rate environment, and the shortage of labor nearly as well as some of the larger companies. So the experience has been different across a company size, even though the overall economic experience has been pretty positive, Tony.

Tony Roth: Meghan, will you translate this into performance of companies and the ability of companies to grow earnings, which is ultimately is one of the key inputs to the attractiveness of company stocks. What does this say to us around markets, because what we've seen over the past couple of years is a big increase in the valuations of bigger companies, starting with the mega-cap companies, the magnificent 7, et cetera. And as you go down the spectrum of market cap, what you see is less expansion of earnings, less expansion of P/E ratios, and as a result of that, it's caused us to be positioned for a catch-up trade, a broadening trade into some other areas of the markets, including small cap. We're not necessarily seeing that in terms of stock performance and we're not necessarily seeing it yet in terms of company performance and earnings.

What do you expect going forward at this point from the, there's different areas of company sizes that Luke has just described for us.

Meghan Shue: Thank you, Tony. So I think was, we look at company valuations in the equity market, and if you're going to look at small versus large or even different sectors, there's a few things that have been really impactful and consequential for the way that stock prices have moved.

One, as you mentioned about the valuation premium that we've seen of late for larger companies versus smaller companies. I think this has a lot to do with the scale that larger companies have, as well as the importance of technology today, both in the market and the economy more broadly, as we look about artificial intelligence and different technologies really playing a much greater role in the way companies do business, the way that we interact as consumers, then even just a few years ago. And those companies that have that scale that have lots of data, that have lots of resources, deep balance sheets to invest. They're much better positioned in a tech-dominated economy.

The other thing that's been really important has been the movement in interest rates, and we know that smaller companies tend to hold larger debt balances and are therefore much more interest rate sensitive than larger companies. If you look at the Magnificent 7, for example, these are companies that have very, very high cash balances, very low debt levels. They're, they're not interest rate sensitive at all, other than the price that investors are willing to pay because of the discount rate, essentially.

But in terms of being dependent on the debt markets, the S& P 600, the small cap index, for example, has a much higher and earlier maturity wall for debt than we tend to see for larger companies, which just means that a lot more of their debt is coming due sooner, and therefore it's much more important what happens with interest rates for that part of the market.

Tony Roth: Rates have gone up this year. And they've gone up a lot and it hasn't been what we've expected. Fortunately, the small caps where we're slightly overweight have still had positive returns, not as if we've lost money in portfolios, but we would have been better off if we had put that overweight on large cap.

We're gonna get into a conversation about inflation and interest rates in a moment. But that's really the critical fulcrum, if you will, in order to see the expected broadening and broadening into smaller companies in terms of a catch-up trade in returns, is it not?

Meghan Shue: Yes, and I think that one of the reasons why we remain optimistic about small cap is our expectation that interest rates will move lower. That the Fed will be in a position to cut rates more than the market is expecting right now. And the last thing I'll say as it relates to interest rates is that higher interest rates are not really all bad. Especially if they're higher because growth is better than expected. I think it's a little bit of both higher inflation expectations translating into higher rates today, but we've also seen growth come in much better. And equities are a good inflation hedge. So, if we do see moderate inflation, even if it's a little bit above the Fed’s target, that could still be a good environment for equities, particularly if growth continues to surprise to the upside. I think that's why small cap has had positive returns.

Tony Roth: Yeah, and as we sit here this morning, we've just got the very beginning of earnings season with J.P. Morgan and Citibank. While I hate to date the conversation, I think that those numbers have come in quite positive.

What's important to recognize, I think, is exactly what you've said, is that while there is a significant amount of agita on the part of the market around monetary policy, and the idea that the higher interest rates will cause bonds to be a competitive, if you will, alternative to stocks, the stock market can continue to grow its earnings and actually meet some of the targets that we have for 2024 S&P total earnings.

That's going to, I think, we're down very well to the return of equities. And so this strength of earnings season in an environment where. We may not get the monetary lift as quite as early as we had expected. Clearly not in March, that's behind us, June we're going to have to see. But if earnings can really deliver, I think that can provide some support for the market.

We think that earnings will deliver and quite frankly. If that's what happens, if we have some pullbacks in the stock market, that's going to be a buying opportunity, and we maybe will even add to our equity portfolio. What do you see as a target for that? Megan? In other words, we're at 51 plus on the S& P today.

Do you have a target in mind in terms of where do you think we start to deploy some additional assets into the equity portfolio?

Meghan Shue: Yeah, I'll answer that by providing some framing, which is that in the first quarter the S& P 500 was up about 10.5%, which is what many would expect and be thrilled with for a full calendar year return on the equity market.

And that comes after an equally strong fourth quarter of 2023. So we've had a really strong run in the market. We have not seen much in the way of volatility or the normal pullbacks that you would expect. It is very common to see 5% or even 10% pullbacks in any given calendar year. That includes years when the market ends in a positive return.

So I think going forward, we are looking for the balance between what the market's expecting and what we're expecting. And with valuations where they are, it just leaves the market as you said at the outset, what I would call fully priced, not overvalued. I would think that we would get an opportunity to deploy capital if the market pulls back 5%, 7%. I think 10% or more would require more of a growth scare. And it just doesn't seem like we are headed in that direction today. But we have not really seen yet or even in the last six to nine months, much in the way of the typical equity market volatility that we would normally expect and look to take advantage of.

Tony Roth: I'm thinking that we get down a few percent below 5000 on the S& P. It's going to start to look pretty attractive given our growth outlook, regardless of the monetary policy outlook, if in fact, companies are delivering on earnings. And I could see a scenario shape up where we have that kind of pullback because as you said, we're due for a pullback and the catalyst could simply be earnings that are solid, but not extraordinary. Market likes to sell on positive news along with maybe another inflation read that surprises to the upside.

Meghan Shue: That would be the number you're targeting would be about a 5% pullback in large-cap equities and given what we tend to see in the relationship between large and small cap. I would expect that we more likely get a larger pullback in the small cap part of the index. If our overall narrative remains intact, that would probably be a very good opportunity to consider adding to large cap, but also small cap because small-cap valuations are still very attractive relative to their history and relative to the relationship with large cap trading and about the 15th percentile relative to the S&P 500 looking back over the past couple of decades.

Tony Roth: Let's then talk about that catalyst, which is indeed potentially continued disappointment on inflation.

And when I say disappointment, we came into the year. With a fairly significant series of inflation readings in the 2nd half of 2023, Luke, that was really pointing to a very consistent and surprising, frankly, for some people, disinflationary environment. And now we've come into the year here where the disinflation hasn't stopped, but it's slowed down considerably.

And so the market has taken the hotter than expected inflation readings, looking specifically at poor CPI. And interpreted them to mean that due to the, the elements, mainly shelter and some other things, such as transportation, thinking specifically there about the cost of automobile insurance, costing so much more to fix these more expensive cars in an environment where we've had overall inflation, that we are going to be in an environment where the Fed is not going to be able to get to that sort of 2% on core PCE fast enough to start the interest rate a loosening cycle in the middle of the year. Our view at this point is that we continue to actually be on track for what the Fed originally described, which was a rate environment at the end of the year on a core PCE basis of around 2.5% or so. In fact, we're already there. Take us through, Luke, the narrative as to why it is that you feel the market's overreacted pretty significantly to these more recent hotter-than-expected inflation reports and why you feel as strongly as you do that, we continue to be headed in the right direction.

Luke Tilly: This is obviously critical to the way that markets go. I think I'll frame it as three high level things.

First is that, the numbers for core CPI have come in and surprised to the upside, as you said, for the first 3 months. But I think of it less as how did the number come in relative to the consensus expectations in that particular months, the less that and more has it really changed the overall inflation narrative. And I don't think it has, as you just mentioned, there were some really low numbers in the 2nd, half of last year, particularly in the last 3 months.

And now these numbers are a little bit to the upside. And I, I think that there are some issues with seasonal adjustment, especially around the holidays. But broadly, the inflation narrative of a slowing of inflation pressures has not really changed in my mind. Actually, Chair Powell said something about this in the most recent press conference too, basically framing it that way.

He said, we didn't get really excited about the really low numbers in the back half of last year. And we're not that dismayed by the 1st two readings of this year. He did not have the most recent CPI reading for March yet. We'll have to see how they react to that. But I don't think that the broad narrative has really changed.

And it's because of this 2nd topic. So the 2nd topic is what's really going on with the inflation data. There's a couple of things that are keeping inflation high. Mainly shelter. And shelter is coming down. It's come down pretty significantly from its peak and has come down from 8.2% to 5.6% year over year.

And that is it a real lag from what we see and that I'm citing the official CPI inflation data. That is that a lag more than a year lag of what we see in the real world with rents and with home prices where they had decelerated sharply and come back down to normal more than a year before. So, what we're seeing is that the slowdown in asking rents for apartments and houses and home prices had already decelerated.

We're finally seeing it flow through to the CPI data and it is coming down the other main category. That's keeping, uh, CPI inflation up is auto insurance. In fact, over the past year. Auto insurance and shelter alone have made up 75% of all inflation just coming down to those two categories and they're important.

You know, they're spending items. But when we look across all the other categories, only even when auto insurance is included, even though it is running so high. Outside of shelter, consumers are dealing with about 2% inflation. It's been pretty low compared to pre coven norms and also to the high inflation that we've had over the past couple of years.

So, one, as that shelter continues to catch up and move down as the actual rents and home prices did from a year ago, we're going to have a more and more normal looking inflation picture. And then the third point that I'll make, and I think that this is probably the most important one, is that the Fed focuses on PCE inflation.

So, listeners may or may not be aware that there are two major inflation gauges for the U.S. economy, the CPI, which is causing such a big stir, and then PCE, which for a lot of reasons is the one that the Fed is more focused on. It's the one that they specifically target. It's the one that they forecast.

We will get the March inflation data here at the end of April. They've really diverged, I mean, where the core CPI and the markets have really hinged on a little bit of a challenge and, you know, some upside surprises for core CPI core PCE continues to move down. There's been a big divergence. It continues to move lower.

And as you said, right now, as through the February data, we're already at. 2.8% for core PCE, and that's within the range of the forecast that the Fed has for the end of this year, where they say they're going to cut by 75 basis points if they're in that range at the end of this year. Now, there is upside risk.

You have to acknowledge that if the numbers continued to surprise to the upside, and it would pull that tracking out of their range, then, yeah, they are going to hold off and they are not going to cut rates. I don't see that happening. I really see the, uh, the core PCE numbers is coming in right in what they are expecting and that would merit some cutting of rates.

Tony Roth: One of the things that the Fed is very focused on and in ascertaining whether it's time to cut rates is how tight financial conditions are. And there seems to be a very broad spectrum of perspectives on this question, where if. The so-called neutral rate, which is an abstract, unknowable idea of at what rate of fed funds would the Fed monetary policy be neither stimulative nor restrictive on the economy?

The Fed thinks it's around 2, 6 or so. To 5 to 6, and a lot of people are coming out and saying, no, it's much higher. It's 3 and a half or so. Therefore, the Fed is not really that restrictive today. And part of that is because the stock market is so high, which creates a lot of spending power on the part of consumers, so on and so forth and the Fed pivot last December significantly, he's financial conditions when rates dropped for quite a while. Where do you think we are in that picture today? How tight our financial conditions when you look at all the various perspectives and is, in fact, the current monetary posture of fairly high fed funds rates from where we were at the beginning of the cycle, really causing financial conditions to be tight?

Or is it really not having such a big impact?

Luke Tilly: The short answer is I view them as tight and tight enough to contribute to move towards the Fed's goals. There are a lot of, as you mentioned, a lot of synthesized financial conditions, trying to taking in sometimes hundreds of indicators, and there are very simple ones, which I frankly prefer when you look at a real interest rate, like you're describing what is the nominal rate and you subtract the inflation going forward and in some way, and you get to those, those real rates. My preferred indicators, just the 2year real rate, it's not as high as it was back in October, but at 2%.

It greatly exceeds where it was before the hiking cycle when it was negative. It's also higher than it was at any point between the global financial crisis and the onset of covet I think it's tight enough to continue to bring inflation down and we see that I think in the inflation data. This is also one of those areas of discussion where I think it's important to point out that it's not just the Fed That is bringing down inflation.

It's not just the Fed that drove it up. It's not just the Fed that brought it back down. We've had that diminishing of excess savings that I talked about. You've had the improvement in labor supply and supply chains. Like we've talked about earlier, Tony, you've got stronger productivity when all that comes together.

With a rate environment that is still keeping mortgage rates high and keeping actual borrowing rates high for firms, even if the spread is not wide, it's still a higher rate that firms are borrowing at. You're getting that slowdown in the economy that we talked about and also the slowdown in inflation.

So I think financial conditions are where they need to be. And that's the reason we've seen inflation come down so much and that they don't need to be any tighter than this.

Tony Roth: Are you surprised at all, Luke, that if I have it correct, when I listen to the fed fund governors that are in the public this week, talking about the environment, they seem to have really backed off the narrative that it's time to loosen that policy significantly. It seems as though they, as a group have really moved into a camp that they need significant additional confirmation, which would suggest that we would have to get a pretty dramatic change in the April and May inflation reports that are coming in May and June relative to what we've gotten so far this year in order to see the Fed to start to cut in June. Do we think I've described that correctly? And I'm saying that not based on our analysis but based on simply their own words.

Luke Tilly: I would characterize their comments as broadly being that, you know, that they want to see more confirmation before they cut and I see a lot of headlines like that.

And then when I go in and really look at what they said, it's usually. A lot of wordsmithing around the upcoming meeting. So making statements like, I don't think we need to rush, or I don't think a rate cut is imminent, or I don't think we need to do it soon, or usually language that is trying to tell the market, I don't think we're going to cut at the very next meeting, which is an attempt to communicate that without being real specific about it.

Some of the governors will explicitly say that they've moved a meeting cut later, but I think that they use that language in order to get to the next meeting and then have a conversation about all of the data, because they're not necessarily talking to 1 another about these things on a on a day-to-day basis.

It's at the table that they do it. They have tons of other parts of their job. This being the highest profile one. But we know that they are parsing and splitting and doing all of the data just as much as anybody else and looking at shelter and looking at auto insurance and looking at PCE versus CPI.

I very much expect that at the upcoming press conference in a couple of weeks here that Powell will stress the difference between PCE and CPI. He did it a couple of times last year. Now, that doesn't mean that he's going to have the same take on it that we do, but they will use that discussion on April 30th May 1st in order to craft a message about what they think about the upcoming meeting. And of course, we'll have the PCE data before that. So, broadly, yes, I mean, they make a high-level comments about how they think the inflation reports are affecting things, but it's also if you parse the words, I haven't seen that much of a change broadly, even though it's happened with a couple of speakers, Tony.

Tony Roth: The way I would describe our views right now is that we continue to have a base case. For the equivalent of about four cuts this year, which is 100 basis points of easing, it doesn't mean that it's going to necessarily start in June. And I don't think it has to start in June in order to reach that target of 100 basis points of easing this year.

I think that there's a tremendous amount of obscurity right now as to when the process will start. But we continue to feel good that once it does start in earnest, we'll get about 100 basis points this year of total cuts.

Meghan, I'm going to give you the last word today. When you think about managing portfolios, and we think about typically 9 to 12 month view. Given that we believe fairly strongly that inflation is continuing to come down into this range where on a core PCE basis, the Fed is going to be where it needs to be. Do you continue to feel good about the positioning with the overweight and small cap? And do you think that we're most likely to add more to small cap if we get that pullback? Or would we go into a large cap? And what are you going to be looking for most critically when making that call?

Meghan Shue: Yes, I do like our positioning in light of the summary that you just gave, and I think being fully allocated to equities, even with valuations where they are given our expectation for trend-like growth as well as continued disinflation and more Fed cuts this year and over the next 12 months than the market expects. I think we're well positioned to be fully allocated to equities.

But within that, choosing a part of the market that should respond more favorably to rate cuts and is also more attractively valued when you look across asset classes. And there's various ways that you can look at what's priced into the market. We tend to look at the fed funds futures market as a way of gauging what the market's expecting for Fed activity.

And if you look at just that, then the market's moved from expecting six to seven rate cuts this year, and the pendulum has swung all the way to just two. Even with that, we have seen the equity market digest it very well with very low volatility and continued strength of the market. I think that this has been a little bit of a surprise.

But again, we do think we'll get a little bit of an opportunity with maybe some churn or a pullback in the market, whether that is catalyzed by inflation, disappointments or Fed speak, or even something happening in geopolitics. We do have a modest overweight on investment grade fixed income, which clearly has not been the best place to be with interest rates backing up this year, but the current level of interest rates, along with what we expect in terms of the trajectory of rates does put this asset class as a really nice spot to be allocating more than our benchmark. And that's because you kind of get the best of both worlds. If we're right, then you're getting a very nice total return from fixed income, specifically investment-grade municipal bonds. If we're wrong, and we get a sell off. That's maybe more than we would expect.

We would also expect that asset class to protect fairly well that situation where fixed income would continue to drag as if the 10year goes to 5%. I don't really see that happening. If it does, I think it would be again. The market sort of overshooting before it comes back down to reality. So, I think that there's a lot of attractive destinations for additional capital if you were adding to risk. We've already talked about small cap, large-cap valuations are pretty full, but there's parts of the market that we think could still see some additional catch up.

Technology remains really interesting and has performed very well, even with interest rates moving higher. I think that's because you're getting more and more defensive type of characteristics in technology today because of the, structural growth and secular growth stories that we're seeing happening there. But outside of technology, some of the more rate sensitive industrials should continue to do well.

We're also seeing signs of life in commodities, which might pass through into better earnings for the energy sector. And then lastly, I'll finish. We've talked a lot about the U.S. But we are keeping our eye on parts of the market outside of U.S. equities, specifically international developed and emerging markets where growth there has been very challenged.

Equity markets have done okay. But the economic performance has been vastly inferior to what we've seen in the U.S. We talked a lot about that in our Capital Markets Forecast, and we're finally seeing some signs of life, whether it be from Chinese exports and manufacturing or Germany industrial production.

So I think there could be some interesting storylines to follow there, especially if you get a little bit of maybe a snap back in the dollar and some dollar weakness. I think you could see non-U.S. equities do well. So we're keeping our eye on all of the different options and we'll just have to see how it plays out.

Tony Roth: Okay. Well, you guys have done an amazing job synthesizing a lot of information. In an environment that I would describe as, as uncertain as we've seen in quite a while, particularly given the inflation situation. And on the one hand, our conviction, but on the other hand, consensus has moved so far away from where we are, which puts sort of amount of stress on our thinking. Thank you guys so much. I want to remind everybody that wilmingtontrust.com is your destination for a full roundup of all of our latest thought leadership. And we'll be back with another episode soon.

Thank you so much.


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