This session, I ponder the motivations of and position our work against the "do this now!" punditry.

In this podcast, I provide some early glimpses of the power of artificial intelligence in practice. I also discuss some concerns I have for the technologies' broader usage in investment management and allow Microsoft's CoPilot to chime in.

Cash holdings may provide comfort, but inflation diminishes the value of uninvested cash over time. Outside of purchase delays and product substitutes, there is little more consumers can do to directly address inflation. Investors, on the other hand, have a range of options to address that potential drag. The greater the expected return of a portfolio, the potential greater success one may find in achieving financial goals, which may specifically include seeking to beat inflation. The constant caveat applies: the more return we seek the greater the risk we might not achieve that expected return: * Short-term Treasury securities may offer a reasonable alternative to plain old cash. But generally relatively low expected returns may mean they at times do not keep up with inflation * Stocks historically have provided among the strongest total returns across all asset classes, normally offering a substantial cushion against inflation. But stocks are volatile, and may see losses even over long periods * With bond yields now at multi-decade highs, investors need not see relative safety as a zero-gain alternative to risky stocks. Still, with time, stocks may provide relative returns commensurate to their incremental risk 202309 SAM CommentaryDownload Listen to this month's Notes from the CIO podcast: Inflation: Risk of Doing Nothing Fair to suggest that a minimal expectation for any investment strategy is to maintain purchasing power over time, implying returns in excess of inflation (a positive “real” return). While that goal might seem straightforward enough, achieving it isn’t always so simple. To wit: for the better part of the last 15 years, U.S. inflation, as measured by the year-over-year change in the Consumer Price Index, ran hotter than the yield one could earn buying 1-month U.S. Treasury bills. With short-term bond yields now comfortably above latest U.S. inflation figures (consumer prices roses 3.2% year-over-year in July, versus a 1-month Treasury Bill yield of 5.3% at the end of June), investors can take on very little risk while seeking to ensure their savings maintain purchasing power. That short-term Treasury yields are higher than concurrent inflation marks a return to a relatively more normal situation: As we show in Figure 1, 1-month Treasury returns were above inflation just under three-fifths (57.8%) of the time since 1949. Investing: Risk of Doing Something Over longer periods of time, the rate of success improves. While a “most, but not all the time” success rate might fail to inspire confidence, one must remember that T-bill investors are assuming very little risk. There are various ways to address inflation more directly in portfolios, including the purchase of inflation-protected securities and inflation-targeting hedges. But such strategies may come with their own unique set of considerations and risks and may at best only directly offset inflation, rather than provide meaningful “real” gains. As is generally the case when one seeks higher returns, “beating” inflation likely requires that investors assume greater risk. Equity investments may offer among the more straightforward options available to outgrow inflation. Looking back to Figure 1, while stocks achieve about the same rate of success over 1-month ...

So long as one did not carry too substantial an amount of interest rate risk in portfolios, markets provided a solid foundation for generally positive returns over the past quarter and year. While fixed income returns have yet to register the now higher yields on offer (recall that yields up = price down in bonds), global stocks took off from the October bottom. “Despite all that” is a common refrain when discussing stock performance over the past year. Though they fell behind in May, developed-market stocks nearly matched the performance of U.S. stocks. Emerging-market equities languished over the trailing twelve months. In the States, Large-Cap Growth stocks once again took the lead last quarter, adding to substantially stronger gains for the prior year, during which time Growth generally outperformed Value across all sizes of stocks. Meantime, Value turned in a better quarter abroad, while coming in close to Growth over the prior twelve months. Turning to fixed income, rates have proved remarkably volatile so far in 2023 as investors on several occasions seem to have been caught wrong-footed relative to evolving macroeconomic data and potential shifts in monetary policy. But the general trend was higher, leaving much of the domestic investment-grade bond market in the red for the trailing 3- and 12-month periods. Nonetheless, generally narrower credit spreads helped offset the impact of rising rates on corporate bond returns. But first...listen to this month's Notes from the CIO podcast: 2023Q2 SAM Quarter In ReviewDownload

While it’s understandable that investors may get excited about future prospects of new industries and business models, that enthusiasm may need to be tempered when it comes to the associated investment cases. Early investors may see substantial gains from the immense risks they took on when potentially grand success was merely imagined. But even later buyers-in may be arriving when measurably optimistic prospects are still baked into the valuation pie. Past examples of the resulting heartburn may provide reason for caution: * Market history is strewn with examples of investors rallying around emergent business themes, only to find their return expectations to have proved wildly optimistic. Disappointing outcomes may be especially acute when investments are concentrated across relatively few participants in the new models * Perhaps better to spread investments across a wider range of potential future winners from yet unforeseen advantages than buy into an already widely priced-in story * Though it may seem painful in the short-term to have not fully participated in hyperbolic gains, more rationale perspectives may lead to improved longer-term outcomes Listen to this month's Notes from the CIO podcast: 202306 SAM CommentaryDownload So Top Heavy One can argue that the outsized gains experienced by its largest stocks over the past few years have seen the domestic equity market become a good bit less diversified. Rising from near a tenth of the U.S. market in early 2016, the five biggest names in terms of market capitalization now account for more than 20% of the broadest market exposure and represent an even higher concentration when one looks at large-cap stocks alone. Definitionally, that heavier concentration may have allowed some investors to benefit from the gains that have led to that declining diversity. One naturally wonders, though, to what undue risks might the ongoing ownership of these now far weightier names expose investors. As with most things in investing, the answer must be a nuanced one. From our perspective, the ongoing risks are less about the size than they are about how that size has come about. Most meaningful: what happens if the optimistic investment themes that have been driving some of what we see as excess returns fail to meet expectations? Imagine an Ill Wind… Given the expectations reflected in the current valuations of these large-cap, mostly technology-oriented names, we don’t doubt that investors in any one or all of the current Big-5 U.S. stocks could experience future disappointment. Such are the natures of corporate, industry and macroeconomic cycles. One need only review the jostling about for fifth position on that top-5 list to find a fine example of the consequences of a failure to achieve growth-oriented goals implied by a soaring stock price and accompanying valuations. Then arguably reflecting a “they’ll own the whole car market!” narrative, Tesla (TSLA) shares traded near $410 in November 2021. Investors who piled in on the way from $200 to $400—now that the stock made a round trip from that prior peak—may have learned the lesson that high multiples require lofty goals to be met for the stock just to stay still. Further gains require even loftier goals be set and eventually achieved.

Over the four-plus decades since Americans last braced against a high-inflation environment, investors have seen interest rates sink to fresh lows and rise to lower peaks with each successive economic cycle. Rates are well off recent depths on account of ongoing efforts to ease upward price pressures, bringing positive and negative impacts along with: * The objective of the “tighter” monetary policy being pursued by the Federal reserve is to pressure the economy in various ways in order to inhibit growth, dampen employment and, thereby, ease inflation * But higher rates may bring benefits, too. It’s been a long time since we’ve been able to look to bonds as much or more for their expected return as we have for their tendency to suppress overall portfolio volatility * More generous yields may help investors meet return- and risk- specific targets * Nonetheless, as ongoing woes within the banking sector demonstrate, the rapid shift higher in interest rates has left some market participants overly exposed to potential losses from the forced sale of bonds now underwater on account of those now higher yields 202304 SAM CommentaryDownload Listen to this month's Notes from the CIO podcast: Out of the Valley In each of the three major market crises since the turn of the millennium—the Tech Bubble, the Great Financial Crisis (GFC) and the COVID-19 Pandemic—the Federal Reserve pushed interest rates lower to foster an investment environment more amenable to growth-as-cure remedies. As the sharper impacts of those crises abated, the Fed sought to withdraw its theretofore extraordinary market support. Prior to each subsequent dislocation, though, interest rates never returned to their prior “normal” before realizing new lows on account of even more creative and aggressive attempts by the Fed to maintain proper market function and provide a foundation for macroeconomic stability. By the summer of 2020, rates on U.S. Treasury securities languished at levels not seen in history. Among the consequences of those paltry yields was the increasing inability of savers to look to bonds to generate income. Latest Episode Post-GFC, various forces left the Federal Reserve (and other central banks around the globe) concerned about deflation, or insufficient upward pressure in prices, which is thought to hamper macroeconomic growth. We’re collectively still learning about these forces to this day, but the list is thought to include increased regulation of the financial sector and the sobering effects, including heightened fiscal austerity, that tend to come along with financial crises. Conversely, the path to “normal” interest rates after the pandemic has seen central banks fighting burdensome levels of inflation, or too much upward pressure on prices. We’ll similarly for years be pondering aloud the drivers that have resulted in the highest rates of inflation the U.S. has experienced since the early 1980s, with the list of influences currently thought to include easy-for-too-long Federal Reserve policies and way-too-generous fiscal responses to pandemic-related macroeconomic issues in the form of cash handouts, debt repayment delays and outright forgiveness.

We must be honest in accepting that, exemplified by the conundrums the Fed and investors presently face, macroeconomics and investing offer few truths to hold. Rather, most policies and processes depend on heavily theoretical, mildly empirical concepts, often conflicting and open to variable usage and emphasis, that are flexibly applied to fresh situations that, while perhaps rhyming with the past, are unique to the present and which likely will lead to futures mostly or even markedly different than scenarios seen in the past. That is, the universe loves to throw curve balls, keep us waiting, deliver surprises and prove us wrong.

Some thoughts on the dramatic downfall of FTX.

Seems reasonable to expect that corporate earnings are likely to fall on account of inflation-induced weaker profitability and a slowdown in revenue growth. The growth-stall is likely to stem in part from the Federal Reserve’s efforts to tame that margin-crushing inflation, as the Fed directly intends to provoke a slowdown in macroeconomic activity, perhaps even a U.S. recession, in order to alleviate upward pressures on prices. Data have supported those expectations, but perhaps not as dramatically as many folks might have thought…or hoped. Several aspects of this gap are worth noting: * The pace of change in perspective matches what we continue to see as the pace of change in fundamentals: slowing inflation against a backdrop of a slowing economy and somewhat eased employment pressures* Executives are keen to guide investors into an evolving reality, the near- and medium-term future characteristics of which are unknown even to them* That policy makers, executives and investors alike are slowly steering into fresh realities provides comfort that intensely adverse reactions of all sorts might be limited 202211 SAM CommentaryDownload Listen to this month's Notes from the CIO podcast: Falling, Not Plunging Driven by commentary provided by corporate executives and likely filtered through each analyst’s individual lens on corporate America, earnings expectations for companies within the S&P 500 Index have dropped rather steadily since the middle of this year. These trends surely reflect ruminations on the potential impacts of more restrictive monetary policy, which might slow top-line growth, set against persistent inflation, which could pressure profit margins, along with the evolution of the war in Ukraine and myriad other considerations. For the current calendar year, estimates are just about where they were at the beginning of 2022, though the rainbow-like route those estimates took include a growing deceleration since July. Even so, the pace of decline in optimism has remained rather steadyish in tempo. As importantly, the annual growth figures for the next few years remain positive, at least for now. Divergence Underneath The story isn’t the same for all sectors, though. The Energy and Materials sectors express two different outlooks for prices: energy prices may remain high, while prices for many other raw materials may continue to fall through next year. And oncoming macroeconomic weakness can be seen in the divergence in expected fortunes of the cyclical Consumer Discretionary group relative to the generally more stable Consumer Staples group. With the exceptions of Energy and Utilities, expectations for which remain higher now than in the summer, earnings forecasts at the sector level are flat at best from summertime views, with dramatic declines far more common. Could be Worse So earnings expectations in the aggregate hide contradictory trends underneath. Even with that understanding, many commentators still seem rather confident that the data—maybe all the data—are a ruse. That corporate execs might be telling half-truths in order to let investors down lightly as sales and margins deteriorate more quickly than their outlooks suggest. Or even worse (and more cynically), not divulging their dire circumstances for fear of scuttled year-end bonuses.

Many trends suggest progress has been made against inflation, which remains historically elevated across most of the globe. And though mixed in their estimates for how quickly and to what level inflation will fall, survey- and market-based measures for future inflation reflect expectations for a return to more comfortable levels of price change. While we might agree and continue to believe that global efforts to ease upward price pressures ultimately will prove successful, many challenges remain: * Foremost is the war in Ukraine, inflationary reverberations of which persist around the globe* Supply-related pressures outside of energy continue to wane, though more slowly than perhaps desired* Volatile energy markets likely will present ongoing macroeconomic challenges in addition to inflation, with Europe likely particularly stressed* Higher interest rates may slow regional economies to such an extent that they fall into recession* Various fiscal measures meant to offset inflation may well limit the near-term effectiveness of monetary policy 202210 SAM CommentaryDownload Listen to this month's Notes from the CIO podcast: Breaking Away The U.S. Treasury sells Treasury inflation-protected securities, or TIPS, which offer buyers protection against inflation by adjusting the principal of the bond by the change in the U.S. Consumer Price Index over the life of the bond. Each semiannual coupon is based on that revised principal, and owners receive the higher of the original or the adjusted face value of the bond at maturity. Inflation is generally positive, meaning the principal generally adjusts upward, so TIPS buyers generally accept a lower yield on TIPS, versus a “nominal” bond of similar maturity. Theory suggests that potential buyers will choose the inflation-protected bond only up to the point at which the expected return from TIPS exceed the nominal Treasury yield by an amount sufficient to account for their individual expectations of future inflation and the fact that future inflation is uncertain (i.e., at least their expectations for inflation, probably plus a little bit of a cushion). The difference in those two yields for a given maturity (e.g., 2-year nominal minus 2-year TIPS) is the inflation rate at which the TIPS buyer would breakeven owning either type of bond. That is, inflation “breakeven” rates are indicative of the rate of inflation that would have to be realized over the life of the inflation-protected bond—again, when they consider that future inflation is uncertain (we’ll explain this more in a moment)—for the buyer to be indifferent between having considered the purchase of a normal (“nominal”) Treasury bond or a TIPS. After a surge coming out of the depths of the COVID-19 market crisis, expectations for future inflation continued to rise along with rampant actual inflation. However, as the pace of growth in inflation slowed and then turned flat to negative, investors began to expect prices to grow less quickly in the future. With breakevens now in the mid- to low-2-percent range—well below peak, though still elevated relative to the decade prior to the recent surge—it would seem investors in the aggregate presently surmise that monetary policy ultimately will prove successful. There are some meaningful caveats to that otherwise favorable take, though. First, theory suggests that among the reasons inflation breakevens ...