JACK JANASIEWICZ: Hi. I'm Jack Janasiewicz.

BRIAN HESS: And I'm Brian Hess. This is Tactical Take.

JACK JANASIEWICZ: And before we get started here, I just think it's worth pointing out that Brian Hess has been added to the Portfolio Management Team on the Model Program. So happy to have you on.

BRIAN HESS: Thanks, Jack. Happy to be here.

Well, Jack, we're at the midway mark for the year. And the first half definitely delivered some surprises. I think one of the most noteworthy surprises has been the US dollar weakness. For the past decade, more than a decade, we've had pretty consistent US dollar strength. But at the beginning of 2025 has marked a major departure from that. I'm looking at a ranking here of currency returns through early July. And we've got the euro up 13%, the Swiss Franc up 14%. Even something like the Taiwan dollar, which is normally a low-volatility currency, is up 12%.

So I was thinking about, what are the potential drivers of this? I have three ideas in mind. And I'm curious to get your thoughts on where the real reason lies. So one possible explanation, I think, could be that the currency markets are pricing in a much weaker outlook for the US economy than maybe the stock market is as it approaches its old all-time highs.

So we've seen a big divergence between, let's say, the euro-US dollar exchange rate and where interest rate differentials between the US and  Europe would suggest the currency should be. We're at 1.17-ish on the euro. If you look at the relationship between the Euro and interest rate differentials the past five years, it would point to something like down to 105 or 106. So, maybe the currency market is pricing in big rate cuts. Another issue could be a rise in risk premium around the currency, maybe thanks to executive branch interference with monetary policy. We’ve heard President Trump repeatedly calling for rate cuts, threatening to maybe pick a new Fed chairman in the fall, as opposed to when chairman Powell’s term ends. So, I think that might be making people a little skiddish. And then the last explanation, which has been getting talked about more lately, has been this idea of de-dollarization with foreign investors may be turning sour on US assets to an extent and selling some of their fixed income and equity holdings within the US, possibly because of the tariffs on Liberation Day, possibly because of the more combative US foreign policy. So, I am curious if you think any of these three explanations have merit, and which you would lean to for the explanation.

JACK JANASIEWICZ: Yeah, and the answers would be yes, yes and yes.

BRIAN HESS: OK

 JACK JANASIEWICZ: I think all the points you hit on are certainly impacting the dollar in some fashion or form – it’s just a question of which one is maybe the bigger drivers versus the other ones. And there’s certainly a lot to unpack here, you know I think one, the comment, your first one on the interest rate differential, I think you can probably make the case that, and again, interest rates will be a function of growth outlook, we’re certainly seeing that. And I think the difference this time around is that we've always seen US growth really performing at a premium relative to the rest of the world. And I think, this time, it's a little bit different, in the sense that we're actually seeing the US catching down, so to speak. So if you look at the growth projections from 2025 to where we are basically expected by the end of 2026, we've seen a market downshift in that growth outlook. And so I think that growth downshift is basically trimming that gap, if you will, between US and the rest of the world growth expectations.

BRIAN HESS: Some of the US exceptionalism maybe is coming out of the market.

JACK JANASIEWICZ: Exactly. And so when we say "catching down," it's more so that the expectations for US growth being far above what everybody else has, moving back probably closer to trend, brings that differential closer together. And I think that is what we're seeing, at least maybe the early part of this year, that catching down trade, with growth prospects maybe being trim now going forward.

Now, the highlight there is also just to look at the Europe backdrop, for example. We are seeing a little bit of an uptick in growth expectations. But it's not a huge boon to the outlook there. So that's one key differentiator, I think, that's worth talking to. The second one you had mentioned, the concern about maybe the interference from the White House with monetary policy through the comments that we're hearing with regard to the chair Fed, the shadow Fed, that sort of thing.

And obviously, that's never a good thing. When you have potentially two different outlooks for monetary policy going forward, that's just going to cloud and confuse the market. And that obviously is going to damage credibility longer term.

BRIAN HESS: I think it's human nature to maybe create some intransigence by the Fed and make them less willing and eager to cut rates than they otherwise might be just to show their independence.

JACK JANASIEWICZ: And so I think that confidence might be putting a little bit of pressure on the dollar. And another thing to think about, too, is just the amount of money that's been really going into US assets in general, because if you think about what's been a big driver over the last couple of years, it's been the tech trade, the AI trade. And really, who's been at the heart of that? It's been US tech.

And so it's not surprising that money continues to find its way into US equity markets, putting upward pressure on the dollar. To a lesser extent, you're probably seeing, from a relative value perspective, rates being a little bit more elevated in the US. So you have a higher carry backdrop there. Again, money piling into the US fixed income market as well.

And all of a sudden, you step back and look at portfolios. They're probably overweight US assets right now. And so I think you could also make the case that you're seeing a little bit of money just maybe rebalancing, if you will, so a little bit of– take a little bit of chips off the table in US, reallocate elsewhere. Same thing with the bond market.

But again, I wouldn't confuse that as people basically moving away from dollar assets for good, so to speak. I think it's just a natural reaction for a short-term move here, where, take a little bit of chips off the table and repatriate some of that, rebalance.

And I guess the last piece worth highlighting is, when we look at the flow data that's come out, and this is really from the TIC data, the Treasury International Capital flows data that comes out, we finally are getting the April numbers that are out. You're not really seeing the type of flows that you would have expected to see if people are basically saying, I'm done with the US. I don't want to own US assets. We're just not seeing that.

And I think the bigger move that's being reflected in the dollar right now is simply– I think you had probably people that were not hedging over the last couple of years. Short ends of the curve, and the US was relatively elevated. So that makes the hedging costs for a non-US investor expensive. So they may have been taking some positions in US assets unhedged. And now they're simply hedging.

BRIAN HESS: Rethinking that willingness –

JACK JANASIEWICZ: Yeah, exactly.

BRIAN HESS: –to take on the currency risk.

JACK JANASIEWICZ: Exactly.

BRIAN HESS: So not necessarily selling the underlying bonds or the underlying stocks, but just neutralizing the– that next component, which will push euro-USD higher if it's a European investor.

JACK JANASIEWICZ: And this is something that we've been highlighting for a while, if you read our commentary and follow what we've been talking about. We've been really highlighting since Liberation Day that European equities, from a local currency perspective, a local return basis, has actually been underperforming US equities.

And again, if you expected to see people repatriating all that money back, you wanted to basically move away from US assets, not only should you see the Euro appreciate as you're moving your money back to Europe, for example, but you should also see the underlying equity markets outperforming. And you're not seeing that. So I think there's a lot of evidence here that points to the idea that simply, investors are just hedging as opposed to liquidating outright positions in here.

BRIAN HESS: And so, from that standpoint, maybe this is more of a one-time thing or a one-off, as opposed to a secular change, where we're expecting just a persistent downtrend in the dollar.

JACK JANASIEWICZ: Sure.

BRIAN HESS: At least for now.

JACK JANASIEWICZ: It could be. And maybe in the worst-case scenario from that perspective, it's just a long, slow bleed as people slowly maybe just move marginal shifts here and there away from US assets. But again, to see a prolonged and sharp move down here, I think that's a little bit aggressive.

BRIAN HESS: And we've come a long way in a short period of time for the dollar. It's 12% off its highs from early January, which is a big move for something like a liquid currency like the dollar.

JACK JANASIEWICZ: Yeah.

BRIAN HESS: And we're positioned to fade the currency strength outside the US in our models, where we have– probably our biggest difference relative to the benchmark right now is an underweight to international developed, which consists of a lot of the currencies that make up DXY. So the Euro is a big one. Yen's in there as well.

So we are willing to, for the time being, at least, fade this. And we wouldn't be surprised if we get a pullback from 1.17 on the Euro or a rally from 0.96 on the dollar, given that the currency markets priced in a lot of weak cyclical dynamics here in the US. And you can imagine, if we were to get an upside growth surprise– I mean, we're still calling for a slowdown. But a lot of that slowdown seems to be reflected in currency markets, whereas, if we were to get a reacceleration, that could result in a rapid unwinding of some of the moves we've seen so far.

JACK JANASIEWICZ: Yeah, absolutely. And maybe one other thing worth noting is, if you go and look at Treasury auctions, and that's been the new thing that we're hearing a lot in the market, and just looking at, for example, the most recent 10-year auctions, 30-year auctions, when you get the results, you can see who the buyers are, because you have to register for auctions so the Treasury knows who's buying the bonds from them.

And the big buyers are going to be foreigners and basically investment funds in the United States. That makes up roughly about 80% of the bidders in the auctions. And when you look at those takedowns, they really haven't been changing. And if you look at pre-April 1 versus post-April 1 auction data, those have been pretty consistent. So again, if you thought that people were pulling away and no longer purchasing US assets, one of the places it would show up would be in those auction results. And we're just not seeing that there.

BRIAN HESS: That's a good point. OK, so we'll keep an eye on these types of longer-term dynamics. But for now, feeling like currencies have gone a long way in a short period of time, and we don't mind fading it a little bit.

JACK JANASIEWICZ: Exactly, yeah.

BRIAN HESS: Another issue that is all related to these topics has to do with the tariffs. And the 90-day freeze is set to come to an end, to expire, in a little less than a week. So I'm curious what you think is priced into US risk assets in terms of a tariff outcome. I've heard people say, this is the absolute best-case scenario that we have reflected in the stocks, at 6200 for the S&P 500. Other people are saying, well, there's still some risk premium there. How do you see it?

JACK JANASIEWICZ: Again, I think, from your perspective in that comment, July is certainly going to be a busy month, because you've got the payroll data coming up soon. We're kicking in the second quarter earnings season. So this could be quite a pivotal month for the market going forward.

But from the perspective of the market, I think the market's still operating under the premise that you're going to hear a lot of bluff. And at the end of the day, there's going to be a deal cut at the end of all of this. And that's how we've been operating for quite some time, it seems. So is there a risk in here that once we get past that deadline, that maybe we have some one-offs that get a little bit more of a punitive tariff going forward? Possibly. Is that enough to maybe throw the market off and see a proper correction here? Maybe, maybe not.

But I think the big takeaway that I have might be more so that I don't think you're going to see a huge impact across the board. It could probably be much more idiosyncratic. And when I look at the numbers right now, and we see this because Treasury publishes this data, the run rate right now on tariff collections is sitting at around $350 billion if you look at the last 30 days and annualize that.

What do we spend on personal consumption expenditures over the last year? It's been close to $22 trillion. So if you take $350 billion, and you assume that's somewhat of a consumption tax, so to speak, how much of that is– what percentage of total spending last year is that number? It's like 1.5%. And so the impact– again, maybe we're overthinking things.

The other thing to think about– maybe the exporter's going to absorb some of that cost. Maybe the importer is. Maybe the intermediaries between there are going to absorb it. Or maybe it gets passed on to the consumer at the end. Or maybe it's shared by everybody. And so there's just a lot of things that are at play in here. And I think the bigger point there is simply, maybe we're overthinking just how adverse these tariff impacts could be to consumption. And maybe it's not quite as bad.

And yeah, we're still not seeing it in the inflation data yet. And so people could argue, well, just, it's a matter of time. And again, I'll point to the comments just came out of Amazon last week. They came out and basically said, we're not seeing higher prices coming through yet. But they're still–

BRIAN HESS: Everybody's kind of waiting with bated breath for this to happen.

JACK JANASIEWICZ: Yeah, we are. We've already gone two, three months of tariffs. And we're not still seeing the price–

BRIAN HESS: We're not seeing shortages. We're not really seeing the price increases.

JACK JANASIEWICZ: Exactly. So maybe we're overthinking the impacts here.

BRIAN HESS: So given that, how much is the tariff issue even driving your thinking towards near-term market dynamics? Is it just like a small part of it now, and cyclical factors are weighing much more heavily?

JACK JANASIEWICZ: Yeah. And we've talked about this quite a bit in our internal meetings. We're still in the camp that you're probably going to see slowing growth. And our concern has always been that the market might be conflating the tariff concerns with growth concerns. Or when you do peel back the layers, it's not necessarily the tariff impact. It's just the labor market slowing. And as a result, that might start to filter its way through to consumption, which ultimately leads to slower growth.

And that still sits at the top of our list right now, that it's really the labor market that's slowly slowing. Might we see that accelerate a little bit more so in the coming months? And that's the key. That's why I think the payroll number coming up is going to be a big one for us to pay attention to.

BRIAN HESS: Yeah. We got the ADP number this morning. And this is not a great predictor. So I'm reluctant to cite it. But it was negative. And we haven't had a negative one in a long time. And there have not been many negative prints over the past 5, 10 years. So that's noteworthy. And we'll see what happens with the official data, which I think comes out tomorrow.

JACK JANASIEWICZ: Yep.

BRIAN HESS: OK. And that's a good, actually, lead-in, your discussion about the slowing in the economy, to the next thing I'd like to bring up, which is our recent model trade, where we move some money into tech stocks by purchasing XLK, so out of, basically, the S&P 500, into tech. We're leaning more into large-cap growth. What's the thesis on this new position?

JACK JANASIEWICZ: Yeah. And it comes down to, really, the earnings backdrop. And I know there was a lot of questioning at the beginning of the year. Is the AI trade over with? And when we continue to look for data points, especially from the hyperscalers, it certainly doesn't appear that that's the case. Again, look at the most recent numbers coming from Microsoft, with the cloud spend, still pretty aggressive. Oracle, out of nowhere, right? Basically a company that may have been considered like something my dad or my grandfather would be investing in–

BRIAN HESS: A dinosaur, right?

JACK JANASIEWICZ: Yeah, exactly. All of a sudden, they're front and center in the AI trade here. So I think plenty of evidence that, no, the AI trade is not done. It probably morphs and shifts. But I think there's still plenty of legs behind this. And so, when you think about, where is the growth coming from? From the market's perspective, at a sector basis, we really see it coming from communication services tech and then, to a lesser extent, financials.

Two of those three, tech and communication services, reside in the growth complex, so hence why we are favoring, really, an overweight to growth. And we still think tech is going to be the leadership component of that growth. So I think this is one way to try to maybe take a posture where you're somewhat defensive, because the growth numbers there are still decent enough, but you also have potential upside, with more of that growth story from the AI potentially broadening out. And you're still going to be able to have exposure to that. So this fits in a lot of buckets for us in terms of how we think about portfolio management.

BRIAN HESS: Well, it's nice when one idea can play multiple roles in the portfolio.

JACK JANASIEWICZ: Exactly. Correct. Yeah, yeah.

BRIAN HESS: You have a good bottom-up reason for it. But also, it fits with our cyclical dynamics, where maybe we're late cycle. We're worried about a slowdown. And this will be a more defensive way to position.

JACK JANASIEWICZ: Yep.

BRIAN HESS: All right. And are we still willing– let's say there is a bit of a growth scare, we get some weak data, we're hitting resistance in the S&P 500 at the old all-time highs. If we pull back 5%, 7%, something like that, are we still willing to be buying US stock market weakness?

JACK JANASIEWICZ: Yeah. And I think that's somewhat of our base case scenario, where we probably get some slowing, and you get a little bit of a proper correction in the equity markets. And as we've been saying for some time now, we're more apt to be looking to add risk as opposed to cut risk in here.

And a couple things also to think about– when we start to think about a slowing labor market, and if that ends up spilling into a proper correction in equities, the easy solution to that is for the Fed to finally start basically moving to a more dovish outlook.

BRIAN HESS: And they'll have some data that allows them to do that as well.

JACK JANASIEWICZ: Exactly.

BRIAN HESS: It'll be like, OK, well, we have this intangible inflation risk related to the tariffs. But now we're looking at some actual real deterioration in the labor market that we probably need to address for that side of the mandate. So I think it'll make it easier for them to have cover, given the White House interference, and cut rates in a credible way.

JACK JANASIEWICZ: So I think that balance of risk shifts. And that makes the market– it probably puts a floor underneath the market going forward here. So that's why we're more leaning into trying to buy any sort of weakness over the next month or two, rather than cutting risk in here.

And the other one I would also highlight, too– the corporate earnings backdrop is still in pretty good shape. I was just looking at the numbers yesterday, the expectations for second quarter, 3.8% growth, which is not great compared to where we've been from a quarterly perspective. We've also seen pretty substantial downward revisions. And that's normal. That's usually what happens. We call it the fishhook effect. We're trending probably slightly below average in terms of that.

But the point here is that as we move into earnings season, which is the second week of July, the bar's set pretty low. And I don't think things are terrible. So maybe we start to get more beats there. So again, when you think about where support could come from with regard to any sort of a short-term correction, you could get it from, like we just went through, potential rate cuts. And then the second one is, maybe earnings actually come in better than expected, and that puts a floor on the market as well.

BRIAN HESS: So I've been describing our– at least our US equity view as looking for a range for now, but with a bit of an upward bias.

JACK JANASIEWICZ: Absolutely. 100%.

BRIAN HESS: Is that fair?

JACK JANASIEWICZ: Yep.

BRIAN HESS: OK. Now, you mentioned the other day when we were chatting, you were asking– because I've been out on the road a lot. In June, I did a few conferences. And you were asking what I was hearing from clients. And so I have one thing I'll bring up today that has come up a few times. And that's stock market valuation.

When I describe our investing process at conferences or with clients, I talk about how it's a combination of the cycle, where we are in the business cycle, and then valuation is an element as well. It's not a timing tool. But if something's rich, we have to be mindful when sizing. If something's cheap, we're inclined to buy it, maybe even if the cyclical timing isn't perfect.

Now, right now, I hear from a lot of clients who look at the Cape ratio. They look at the Buffett indicator. And they'll highlight how these metrics have a strong track record of forward return projections on a longer-term horizon, 5 to 10 years. And today, those metrics would suggest, at best, mid-single-digit returns. Do you put any credence in the notion of these long-term valuation metrics? Or how does that factor into your thinking?

JACK JANASIEWICZ: Yeah. Again, I think you really hit it spot on. It's not necessarily a timing tool. And I think, when you really look at the predictive power of forward PE multiples, for example, you're really almost going out 8 to 10 years. And so, from that perspective, looking at, really, more of the tactical allocations that we're talking about here, probably aren't quite as impactful there. But it's certainly something to take note of, because again, from a longer-term perspective, it can have, at the margin, some of our structural tilts in the portfolio, right? The longer-term views.

BRIAN HESS: One related conversation I've had is thinking about how stocks might fare compared with bonds over the next three to five years. So given the level of starting valuation for stocks, coupled with– let's say on the long bond, the 30-year bond, which has been unloved recently. We've got about a 4.8% yield. So you're almost certainly– you're going to make that. And then the question is, where will rates be three to five years from now?

I think it's going to be competitive. And if you look back at the five years we've been running models, and you think about the different risk sleeves– so we have conservative, moderate, aggressive, with increasing equity exposure– the returns have been very divergent. Stocks have done quite well. Bonds have done not much. And so the aggressive models have massively outperformed.

I wouldn't be surprised if, three to five years from now, we're looking at our returns, it's much more clustered, where the conservative model has not underperformed, or could possibly, depending on the timing, even perform in line with the aggressive model, but deliver a much better risk-adjusted return with lower volatility. So I think that's something that investors are grappling with, is, what's the role for fixed income, given the valuation for equities and the fact that we have a pretty good yield that cushions us from a rise in interest rates at this point?

JACK JANASIEWICZ: Yeah. And maybe you could make the argument that the 40 and the 60/40 might actually be back in vogue here, because in the past, it's really been a marginal equity risk offset. But it really hasn't had much of an impact on your total return components, just because the yields have been so low. And now you're getting a yield.

So for a contribution to the total portfolio here, you're finally getting the contribution to total return, which is something we haven't had. And I think we've had a little bit of issues more recently with just that equity risk offset. But that's largely a function of, why are equities selling off? Well, it's because bond yields are going higher. Why are bond yields going higher? Well, it's because of the inflation prospects.

If we can say the inflation backdrop is behind us, and it's more supportive, then I think that correlation, that negative correlation that we've all appreciated over the years, comes back into vogue again. So now you're getting both the equity risk offset with the negative correlation coming back into play, as well as, hey, I'm actually earning a yield as well, which helps some of the total return on that side. So maybe the old 60/40 is back.

BRIAN HESS: Hmm. You make a strong case for our moderate models–

JACK JANASIEWICZ: There you go.

BRIAN HESS: –which are basically 60/40 portfolios. And if we do end up in an environment where there's more two-way risk, so one that does deliver more of a mid-single-digit experience for equities, I think an active model set like ours is uniquely positioned to hopefully take advantage of that. So–

JACK JANASIEWICZ: Yeah, spot on.

BRIAN HESS: –should be exciting.

JACK JANASIEWICZ: Good.

BRIAN HESS: All right, Jack. Let's leave it there for this month. Great chatting.

JACK JANASIEWICZ: Awesome. All right. Thanks, Brian.