End of Free Trade Era Should Not Spook Long-Term Investors | Kara Murphy
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The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. Thank you. Just close the f***ing door.

Very pleased today to be speaking to Kara Murphy, Chief Investment Officer of Kestra Investment Management. Kara, welcome to Monetary Matters. Thanks, Jack. It's great to be here. Kara, how are you thinking about the markets right now? The incredibly volatile policy uncertainty, how has that affected your investment outlook over the past month or two? It means that we're thinking an awful lot about it, right? We've had these massive moves on a day-to-day basis.

And so I think when you have a very fast moving market like we have, it is even more challenging to see through what's right in front of you. But I think that's what's so important for us, particularly in a wealth management context, right? We have investors who are thinking about retirement, which might be 10, 20 years off, and we need to help them think about those long-term cycles and whatever else it might be. And you can't get drawn into the latest tariff headlines.

What we're trying to do is like navigate, make sure that we're taking advantage of opportunities, aware of risks, but then also thinking through what could be a very short-term issue. - So you have a long perspective, that is really important. And how do you think that, does this matter for the long-term? Like you could say, President Trump is trying to reorder the global trade world. That is probably sounds like a long-term thing and gonna have an impact.

Or is it just a few headlines that are going to cause some wild market swings, but for people who have a 10, 20, 30, 40 year investment horizon, it doesn't really matter. I think it's somewhere in between. And that's why the market has found a bottom. That's why we've seen the rally. So we started off the year talking about two particular risks. One was high valuations in the market and high levels of concentration in mega cap growth stocks.

So that doesn't mean that the market's going to turn down, but it does mean that the market is very vulnerable to negative news.

And then the other risk that we highlighted was high level policy uncertainty. Like whether you voted for Trump or not, his campaign was all about introducing a huge amount of change into policy. So you combine that concentration of high valuations with uncertainty, and that's essentially what we've seen play out over the last couple of months. Tariffs come to the forefront, massive change, right? Like undoing 100 years of history and the markets, oh crap, and just takes a massive leg down.

But then I would argue that the administration blinked. Oh yeah, we had these tariffs, but pause for 90 days. So that's a tell, right? That's telling us that the administration is only willing to take so much pain in order to implement these types of changes. So is this a huge change? Yes.

And we've been telling people like this is the end of the era of free trade. Let's not be mistaken. We're not going back to 2016 when it was free trade and globalization at all costs, because not only has Trump and the Republican Party taken Trump's out of the bag, if you will,

Biden implemented his own tariffs and now our trading partners are going to start to do that. So even if we went back to this kind of zero tariff world in the US, our trading partners are going to be like, oh, yeah, OK, we could start to use this more aggressively, too.

And I think the American population has started to take a more critical eye to globalization. What are some of the downsides of what has happened? Now, we can argue about how you actually correct for those. I don't think tariffs are a great way to correct for some of the imbalances that globalization has created. But like the sort of range of outcomes is slowly starting to narrow. It's not nearly as narrow as I'd like it to be to feel really confident going forward. But I think as time plays out, hopefully we like narrow that range more and

more. And it really is incredible that Kara that as you record the S&P 500 is higher now than the closing day of Liberation Day, several hours after which President Trump rolled out these extremely high tariffs that caused the market to crash, I believe over 10%. But we're now above those levels. So is the market saying, hey, everything's okay, don't worry. Yes, the market is telling us this. Now, I'm a little more critical than that. I'm not sure that we're back to where we were before those tariffs were announced.

because all we have to do is roll forward two more months and the pause is off and then we could potentially just be back there again. So I think we still need to be very cautious. But I'd point out one other thing, which I think is very important. The market has been pretty discerning in terms of where it has sold assets and where they've held in.

And I've called 2025 the year of the diversified portfolio. For so many years, particularly 23 and 24, diversification didn't matter. You had to own the Mag 7 and that was it.

But this year we have bonds in positive territory. You have IFA that's up, I don't know what, 7, 8% so far this year. Value is up. Staples are hanging in. So it's all these other parts of the portfolio that have lagged that are actually doing pretty well. It's the mag seven where we've seen a huge amount of volatility. So that's a good sign in my mind and that the market is re-rating different parts. It's not just wholesale selling everything.

And that actually makes it easier for somebody like us who are building portfolios to think about how do you get different exposures to create a smoother ride, if you will, going forward. And it was the Magnificent Seven stocks that started to falter a little bit, even before tariffs, I think in roughly late January, early February. How are you thinking about those stocks, Cara? And also,

Do you expect their remarkable earnings performance to continue? You have to think about the MAG7 just because they become such an incredible part, not just the S&P, but in terms of like where we think about economic growth going forward. And so I'll share this perspective. I started in the business 25 years ago at the peak of the tech bubble.

And it was like almost to the day that the NASDAQ peaked. And like those first couple months, I was just watching red all day, every day coming down. But that point where we started, the internet had been introduced. It since then has completely changed the way that we drive, we make reservations, we order food, we look for information, we communicate. All these things have been completely revolutionized with the internet. So it was a true technological change.

a lot of the companies that were associated with that technological change are either no longer around or no longer like the darlings that they used to be.

So let's then fast forward to AI. AI, I believe, will completely change the way that my kids show up to work. They will interact with AI on a regular basis. They'll be hugely more productive by today's standards. But will the companies that are driving that today be the ones that drive it when they enter the workforce in 10 plus years? I don't know. And so with that, we have these extraordinary valuations, a lot of really strong hopes, and they're well-founded from a fundamental economic perspective.

but they won't last around forever. So then to get to your question in terms of earnings, all we have to do is look at analyst forecasts going forward. Two years ago, you had the MAG7 earnings were growing about 60% year over year, and the rest of the S&P was about flat, flat to negative.

If you look forward to the fourth quarter of this year, I think Mag 7 are expected to grow about 20% and everybody else is expected to grow about 17. So those numbers will come down simply because of tariffs. But think about that differential from 60% versus zero to 20 versus 17. So yes, still very enviable growth, really great. But do they warrant that huge valuation differential? We think the valuation differentials eventually are going to narrow.

And roughly, how are you assessing the valuation differential now? Because there was a time in 2022, Meta famously was trading at about nine or 10 times earnings. I think Google now, not too expensive in terms of price to earnings ratio. And then also, what about those companies that grow? Like your tobacco companies, your steel companies, are they ever going to be 15% to 20% compounders? How do you justify that?

them having the same multiple as a company that can grow quite quickly. And I know there's a lot of diversification, I guess, a dispersion there. Like Apple is not a huge grower over the past few years. I often use 2022 to remind people of the potential volatility in these names. In, in 23 and 24, everybody wanted to just have their portfolio in the mag seven. But meanwhile, in 2022, those names were down 50%. Right? So what we see is that the market will quickly re rate the value that we're putting on those names.

And I think in general, these are hotbeds of innovation. And I think we can expect over time extensive growth there, but it will be volatile and won't necessarily go in a straight line. Some of these other names, like you mentioned, let's call them like old economy. We used to use that term a lot back in 2000, but you're like steel, other types of staples. Those have never really grown all that fast. It's just a question of how much does the market want a more reliable grower versus

a faster, potentially more volatile grower. And in the face of like tariffs and other types of volatility, the market is saying, whoop, I want that reliable grower. I'm okay with it being slower. And then let's also remember you threw out some numbers like 15%, 9%. The US GDP tends to grow about 3% over the long term.

Long-term corporate earnings growth is about 9%. So just by owning the S&P, you're already getting multiples of what you can get just by being part of the general economy. Again, we have to like re-rate our expectations. 9% is a great rate, compounded overtime every year. So we shouldn't be disappointed that we're not going to get that 60% growth. 9% is actually really good and you can grow wealth reliably with that.

When you look company by company, starting with the biggest market cap company, probably NVIDIA or Microsoft now, how are you assessing how tariffs actually implement them? Because, okay, we could say tariffs are going to radically change the U.S. economy. But if people are invested in the S&P 500 and it's a basket of stocks, what percentage of those stocks actually are impacted?

For example, Microsoft recently reported, I think pretty much they're entirely a services business and their cloud revenue is very high. And the tariff rate on China could be 145%. It could be 245%. I'm not sure if that impacts the cloud business of Microsoft, which is a service business. And then I guess also just to introduce some stats, I think, yeah, roughly, I guess 20% of the US economy is goods and tariffs only impact goods. They don't impact services as well. So tariffs are actually impacting the fundamentals of the company. What do you think?

I think it's incredibly difficult when you're looking at a company by company basis. And this is where you get into often very binary decisions, right? For a while, the iPhone was exempted. And so we're like, oh, okay, Apple's off to the races. But what if it's not tomorrow? What if that sort of gets reversed? So I think you have, so what we know is that particularly the tech companies are more heavily affected by tariffs.

Auto is another like big industry that's very affected by tariffs. And depending on where you are in that supply chain or where you are in the news cycle can have a huge impact on what your earnings are going forward.

And again, what we've seen is that when large companies experience too much pain in a very public way, the administration will respond and will create a loophole or put it off or whatever it might be. So we should never assume that whatever that sort of worst case scenario is that we've modeled out is going to be the worst case going forward. Again, it's somewhere in between.

But this is where like diversification is your friend, because I'm a little uncomfortable pinning my hopes on what the tariff policy is going to be three months from now or six months from now. I'm more comfortable thinking about what are the general exposures in the economy that I want to have? And those are maybe I want to be underweight tech because that area as a whole is more heavily impacted. So let's think about things that are less impacted. And so again, like we have the ability to move around. We don't have to make a call on Apple or Google or whatever it might be.

And tell us about that exposure to tech. You say tech is going to be more exposed to tariffs. Apple is very exposed, even though you said you don't want to talk about individual companies. And we think of Google as a tech company, but I think it is actually a communication services business. So it's a little bit arbitrary. Tell us about how tech is impacted by tariffs in particular.

So semis is a really good example where virtually no semis are manufactured in the US. And so this is also a good example of where if you think about from a pure economic perspective, working in an ivory tower, economists don't care where a good is made for the most part, right? Like we want comparative advantage. Taiwan can do it better than us. So let's let the Taiwanese do it. We'll just bring it across our borders.

But from a national security perspective, semiconductors power a huge amount of our economy. We probably should build that here, but we also have to recognize it's going to cost more money. So how do we do that? How do we create an environment where we incent companies to be able to build that manufacturing capability here?

And so that's where I'm not always convinced that tariffs are the best way to be able to encourage that type of an investment. And I'll mention one other thing, which is I've said a lot about the actual level of tariffs is actually less important than getting to a place of certainty.

Because the American economy is incredibly innovative, right? And we can start to substitute goods. We can build manufacturing capability here. It'll take some time. Semis is a great example. It would take years to be able to build out that capability. But other things we might be able to do more quickly. But until we know what the policy is, companies are not going to begin building that factory.

So we have to get to that place where companies have enough confidence that they're willing to put hundreds of millions of dollars on the line to build that additional capacity and take advantage of whatever the new regime is going to be. And tell us what level of certainty or uncertainty you think we're at right now, because I could make the case just for the sake of argument.

that actually, as we record this now in early May, there's actually more uncertainty than when President Trump rolled out the Liberation Day tariffs, because he had a 90-day exemption. So those reciprocal tariffs are currently at a 10% level, but the reciprocal tariffs will go into effect in early July, because the 90-day exemption. We have a very high 145% tariff rate on China, which even President Trump himself says is very likely to go down. And then we have sectoral tariffs that are

going to be implemented at some date. So it seems if you ask me, is there any way this could be more uncertain? Careful what you wish for, because it can always be more uncertain. But I would argue that we're a little bit more certain than we were on Liberation Day.

And again, the reason is because I think the administration blanked. The administration said, okay, market's down 10% in a couple of days. That's not okay. We're going to respond and help make things easier. But it's like modest, right? So if you think about this is like the range of potential outcomes, we're here, right? We've just taken off the tails. We know that we're not going back to wherever tariffs were when Trump first took office, but we know we're not going back. We're not going back to that like super punitive position

tariff rate. Now, interestingly too, tariffs today in aggregate, and I'm sure you've seen these numbers, tariffs today in aggregate are actually at the same level that they were before the pause was put on, right? It's just higher on China and lower on everybody else.

And you can argue about whether or not that's easier to manage around. But the fact is, like the economy in aggregate is in the same place that we were. So why is the market rallying? I think the market's rallying because the tails have just come in a little bit. But think about you're a CEO who's trying to decide whether to start building a factory that will take a year to build and a year to staff up.

Are you ready to put that capital to work? I don't think so. You're going to need to have a really sure outlook to be able to say, okay, we're going to break ground. How are you thinking about international stocks? For a while, they were drastically outperforming the US market in Europe and in China. What are you thinking there?

It's been so interesting because we talked earlier about the S&P 500 being the only game in town for so long. Non-US markets were huge lags to US markets in general. And as a result, we've had this tremendous growth of US markets relative to non-US markets. So use MSCI Acqui index, US is now like two thirds of that index versus 50% not that long ago.

So similar to the MAG7 taking up a larger proportion of the S&P 500, we have the US that is a massive proportion of global indexes.

In addition to that, you have valuations that are way lower outside the US versus the US. You could make an argument that those are warranted because earnings growth is slower outside the US. So you started off the year with this type of imbalance. And what's been interesting is that when we talk to end clients, explaining why they own stocks outside the US has gotten harder every year that the S&P 500 has outperformed everybody else.

But what's interesting also is that this year, as clients are talking about their concerns, I'm worried about tariffs, I'm worried about the dollar, I'm worried about us being antagonistic to our allies and adversaries. All these, they talk about their worries,

But they're also asking me why they own non-U.S. stocks. That's what you want to, if you have all these worries, that's what you want to own. And so it's that power of diversification. I know it sounds so trite, but being able to have access to these other economies that are maybe less subject to the binary outcomes that the Trump administration has, I think can be really helpful. Now, that's not to say that the global economy in general is not going to be impacted by these policies. They will, but they're a little less impacted than, say, the U.S.,

And it feels like this administration wants a weaker dollar. They're never going to say that, but that weaker dollar, again, means that non-U.S. assets look more attractive. So putting it all together, we think it's still important to have exposure, quality exposure outside the U.S.

And do you believe in predictable or at least repeatable cycles and periods of outperformance of Europe versus the US? Like you said, you joined the business at the dot-com bubble. So I imagine for the first seven or eight years of your career, you saw European markets absolutely crush the US stock market. And I imagine over that time period, there developed a series of narratives about why that happened.

was happening and why it may continue. And then since 2009, until now, the US markets have outperformed. And now we have our own set of narratives about we have a higher return on equity, and maybe Americans work more or something like that. Do you think that now is going to be the time of European outperformance?

So I think to answer your first question, do these things run in cycles repeatedly? Yes. Can we predict when they're going to turn? No. It feels like things are changing, right? And so today I am more anxious to have exposure outside the U.S. than, let's say, a year ago when the U.S. economy was clearly outperforming the rest of the world.

And valuation, I mentioned non-U.S. valuations are very low compared to U.S. And in fact, they're at extremes relative to historical levels. But valuation alone is never a reason for the market to turn. But again, it does make the market more susceptible to negative news. And so right here we have U.S. versus non-U.S. U.S. is in this

hugely uncertain policy environment. And so that creates ripe conditions for other economies to actually outperform or at least perform better than on a relative basis to the U.S. and what they have in the past. Like I think you could have made an argument for owning non-U.S. a year ago and you would have been wrong for a while. But that's why you have to think about these things over broad and broader cycles. And like you want exposure to these names before you know what the actual catalyst is going to be.

Tell us about the valuation gap. Are European and Asian markets, are they cheap relative to their own histories or are they cheap only relative to the current US market? And then also, just how expensive is the US stock market and how predictive, if at all, is that of short and long-term performance?

Yeah. So the widest valuation differential between Europe and the U.S. and Japan and the U.S. is on a relative basis. So when we compare those names to the U.S. Now, a counter argument would be that if you compare the growth rates of U.S. stocks versus non-U.S. stocks, it accounts for that valuation differential.

Fine. But what if US earnings growth is going to be slower and non-US earnings growth is going to be a little bit higher? Then that valuation differential looks really wide. How predictive is a valuation of performance? On a near-term basis, valuation is a terrible timing indicator.

And like dotcom bubble is a great example where for seven years we had really high valuations. And similarly, we've had high valuations for a number of years. And I'm trying to think, I think we peaked out this year at 21 times S&P forward earnings. We're now running at about 19. I don't know, maybe after today's market will be higher. But these are really high levels and they are not predictive on, let's say, a one year basis. They're pretty good at predicting returns over a five year basis, but

So again, if you have that longer time horizon and can sit through underperformance, then you're going to benefit. And I'll give like one other example within US markets. And we looked at this comparing S&P 500 market cap weight performance versus S&P 500 equal weight on a five-year forward basis. Okay, so how well did those two perform relative to each other?

And then we compared concentration levels in the market. So how much did the largest 10 names in the S&P 500 make up in market cap relative to the S&P 500? What we found is that there is a correlation. So the more concentrated the S&P is, the more likely the equal weighted S&P 500 is to outperform, right? So think about that, but it's on a five-year basis. And so what that means is that when big names are bigger,

Small names do better on a five-year forward basis. And that's a correlation that has held true since 1960. Now, interestingly, the level of concentration in the S&P 500 at the beginning of this year is the highest it's been since 1960.

So if you have a five-year forward basis, own smaller names. You don't necessarily have to go all the way down to small cap. We can talk about there. There's a lot of challenges. But simply owning like smaller names within the S&P 500 is going to give you that edge on a three to five-year forward basis. So are you a believer in the small cap premium or the smaller cap premium?

So we've been doing work on this and poor small caps, but we still left behind and grew up in the business early on when that small cap like Fama French were like at the forefront of thinking and financial research. And it was taken for granted that small caps over time would outperform as long as you were willing to take the volatility. And then you have a period like the last 10 to 15 years where they have lagged miserably. At the same time, you have level of names in the Russell 2000, for instance,

almost half of the 2,000 names in the Russell 2000 lose money.

And that has just increased, right, year over year over the last 25 years. So there's something fundamentally that's happening in some of those smaller indexes. There's an argument to be made that the good names have gone to private equity and it's the less good names that are actually publicly traded, which is the converse of what you would have expected a couple of decades ago. But then throw on top the kind of cyclical challenges that small cap have. They're more reliant on debt.

more floating rate debt and rates have not really come down and they're less diversified. So thinking about, and I heard some stats this morning talking about how smaller companies are more likely to have all of their manufacturing in China. So they have much less ability to diversify their supply chains into some other countries. So you throw all that together and it's hard to be a small cap today. So will those names eventually attract a premium again?

There's some environment where those names start to work again, but because of all of those sort of near-term headwinds, we're much more comfortable going in the smaller large cap and into the mid cap space. We think those are names that are actually much better positioned going forward and have much more attractive valuations.

I never thought about that, that the small cap companies that are really good get bought up by private equity. Another reason is that if small cap companies are really good, they become a mid cap company, a large cap company. So you like basically companies in the S&P 500 that are not the MAG-7, are not super concentrated. When you look at those companies by sector, where do they tend to be concentrated or what other characteristics would you say that they have?

Especially in this type of an environment, you want something with a more reliable earnings stream. And that often then gets you to those somewhat slower growers, which over the last couple of years have been like, oh, aren't you cute? Let me go buy my AI name. And you think about, again, in times of trouble and uncertainty, people are going to gravitate towards those things that they have to continue buying. Consumer staples, which has had a pretty nice run here. But we're always going to buy toothpaste, I hope.

You can buy a cheaper brand, but you're still going to buy it. You're still going to buy like toothpaste, I mean, cars and all these other things that are going to be that you have to get through your normal day. Consumer discretionary is an area that has done incredibly well last couple of years, particularly coming out of COVID where we had a lot of extra change jingling around in our pockets. So that ended up being more discretionary purchases going forward. I think consumers are probably going to pull back and see less there.

There's also really interesting opportunities. And I don't know if this is the right time yet, but as you think about shifting your exposure to areas that have been left behind in the market, things like materials and energy. Energy companies in general over the last couple of decades have gotten much better at deploying capital. They've been very cautious in sort of building out additional capacity

Now we have oil that's at new lows relative to where it was two years ago. And so they don't have that tailwind, but should oil prices start to increase, those names could see some really interesting opportunity. And then same with materials. Materials is like a couple percent market cap of the S&P 500. It hasn't always been that way. People used to care about actual stuff. And materials names are one way to get exposure to that.

And Kara, how are you thinking about the fixed income world, both as a diversifier as well as the absolute level of yield? The 10 year above 4% is higher than it's been in a long time. Yeah. So here too, like the conversation with our clients has shifted so much. You think back to 2022, you had bear market and equities and you had fixed income down. That's a double whammy that we haven't had. I think the last time we had it was in the 70s. Maybe it was 67.

And clients were like, but you told me that I own bonds in order to be a safe haven when stocks go down. That didn't work. Get me out. But if you think about where fixed income was at the beginning of 2022 and at the end, we started 2022 with among the lowest rates that we had ever seen. I think the ag was at like 2%. And then we proceeded to have the sharpest and largest Fed rate increase that we had really ever seen in history.

So then we exited the year with a Barclays Ag at about a 5% yield.

Think about that's a huge jump and that becomes your cushion. That becomes the reliable income that you can earn over the next few years. So thinking about to where we are today, we have the Fed who started to cut rates a little bit, but probably going to be slower than what the market had been expecting. So that gives you a little bit more cushion on the short end of the curve. But then you go out to the long end of the curve. You mentioned the 10 year treasury and there we've had a huge amount of volatility up and down.

And then I'll throw on top, like the other sort of challenge for fixed income markets today is on the credit side. We've talked about tariffs, uncertainty. If we start to see companies that run into some real trouble, that will be reflected in high yield markets.

As we enter the year, high yield spreads were among the lowest that we had ever seen. Now, I hear a lot of commentators saying, "Oh, high yield spreads have blown out." Increased, but they're still really low compared to history. So the question there is you have a nice nominal yield in something like a high yield, but you don't necessarily have a lot of cushion there, right? Because spreads are still fairly tight relative to history. So where do you go?

The Fed will probably cut a little bit more on the short end, so you don't have a huge amount of cushion there. And the long run, the long end, again, we're probably going to continue to see some more volatility as long as we have this policy uncertainty. So that means the belly of the curve is a little bit more comfortable place to be. And then we would be underweight some of those high yield names and more into the corporate credit. And we actually think if you compare the financial health

of US companies versus the US federal government, US companies look much better. Leverage levels are quite low, whereas federal government is off the charts. And again, I get that they run by different rules, but as we think about relative under and overweights, high grade corporate feels like a much more comfortable place to be than either government or high yield.

So you're not comfortable taking huge amounts of credit risk. You like being in the very high quality investment grade market. What, if anything, or I guess, how are you thinking about private credit? And are any of your clients who are advisors, have any of them been approached by the private credit firms to increase their allocations? Because back in the day, i.e. two years ago,

Private credit was something that only institutional investors, so the endowments, the large insurance companies, high net worth individuals only were getting involved in. And they had higher yields and they could

perform well and the people doing it were very smart. Their performance has been extremely good. Now this asset class is one of the hottest asset classes and the money that's flowed into this has been tremendous. But for the private alternative asset managers, it's not enough. They need to raise more money. And so they are going through the wealth channel, the RIA 401k type money. So they are going into your world.

How have you seen this and what are your thoughts on it? Yeah. And it's interesting because you had Danny Moses on recently who was talking about this very topic and he and I used to run around in the same circles years ago when we were both bank analysts. And so I often think in a similar way to him and in a very simplistic way, anytime you see growth,

in a risky asset class, we'd be worried a certain number of years forward. And it doesn't necessarily mean that it's going to happen. But for instance, like any time a bank starts growing CNI loans significantly, they're going to have a credit event three years later. And as you pointed out, like private credit has seen the wealth world as the next frontier. And we've had a lot of sort of technology tools and other things that have allowed individual investors to get access to these types of asset classes.

And so like my own personal view is that you can grow wealth really reliably in liquid markets. You don't have to go into private markets. That said, some people really want access. So we want to do it in a thoughtful way, make sure that it's diversified, it's small relative to other positions. So there is a way that you can do it very thoughtfully.

Now, from more a systemic perspective, does private credit make me worried? Yes, because there's been so much growth over the last couple of years. And I think within like private credit is really a huge bucket. It's very different types of strategies.

Some with leverage, some with really low quality. There's a lot of like creative stuff in some of them. No, not all, right? But that's where the due diligence on the individual strategies is so important. And then also thinking about their ability to regroup during times of stress. And some are going to have more flexibility to be able to do that than others. We've been talking to our advisors. My team doesn't do research on individual private credit strategies.

But we do counsel folks like think about this and make sure that you're attributing the appropriate risk level to these types of strategies. And I'll give one example. So like a lot of times, if you think about you have a 60-40 client who has a certain level of risk in a public portfolio, you're going to have 40 percent of that portfolio in fixed income and will be diversified and all that good stuff.

You want to have private credit. So let's say you attribute 10% of private credit, 30% to your liquid public fixed income portfolio. But that private credit actually might look a lot more like high yield, which actually has more equity characteristics.

That might push you into higher risk bucket or a higher risk profile than what your client is comfortable with. Right. So those are the types of things, the knock on impacts to the overall client portfolio that we need to be able to think about as we're potentially heading into a period of stress. And remember that because these are private, it's going to come with a lag. We're going to see that happen in the public market first, and then it's going to show up in the private.

So you have a somewhat cautious view, but to push you even further, Kara, what is the reason that an individual investor or retail investor, so to speak, would have a benefit from having an access to this product? In other words, what can private credit do that a high yield bond can't do other than not be traded so that it doesn't look like? And then there are business development companies that are publicly traded that I imagine your clients can buy. And some of these products have performed actually incredibly well over the, you know,

you know past decade or so but exactly what does a client gain by owning a loan that can't be traded or is rarely traded as opposed to a somewhat similar loan or maybe a less risky loan that's in a high yield wrapper so you're asking the wrong person probably because i think a high yield exposure is just fine even though i want to be underweight there i would generally rather have the public access

But so folks who are in that space would talk about one of the advantages is exactly the fact that it's private. Right. So often when we have credit events in public markets, we see the market come down and then people have a tendency to sell. Right. Oh, my gosh, get me out. And then the market rebounds. And that's exactly what we've seen over the last couple of months.

So if you're tied up, you can't have that panic moment where you sell, you're forced to have a long-term time horizon. And that's actually really powerful. And so I'm not knocking that. That is something that can be really helpful in forcing clients to think about the long-term and not be really reactive. But I think the other argument for private credit, number one, I think what a lot of times clients are attracted to is simply higher yields.

I would be asking, how are you getting to that higher yield? And are you aware of the higher level of risk that you're taking on in order to get that yield? But private credit, like you can get access to different areas of the market that don't necessarily trade publicly. And so that would be, you might be able to get a more diversified sort of credit portfolio that way. But also if you're simply looking for a higher level of yield, you can get that in private structures. Thank you. And just how ardently is the private credit world

coming to your clients, wealth managers, and are the wealth managers, are they biting? Can you give us a sense of that ecosystem now? Ultimately, it's going to be in response to what clients want, right? If clients are asking for these types of structures, then wealth managers such as ourselves are going to be able to find access to it. And then it's our collective job to make sure that advisors are doing it in a very thoughtful, risk-aware way.

And so I think what we're seeing right now is that clients are asking for it. Not tons, right? Not everybody, but there are particularly as you get into higher wealth levels, there are people who are interested in having some of these private structures. And as you said, a lot of these names have had really good performance. Now it's also been in favorable market conditions.

But so we're seeing people who want to be able to have access to it, but we need to make sure that they're properly educated. You can't sell whenever you want to, even when you're really panicked and you might not know what the marks are for a while and it might behave a little bit differently. But even with all of that education, then you want to make sure that you get slices of the pie that are small enough that makes sense for an individual client portfolio. But this is going to continue, right? It's because people want it.

And I think also alternative asset managers have been very creative in thinking about how do we create better liquidity vehicles? How do we create more diversified solutions for individual clients? So it's really, it's come a long way and you can do a lot of things today that you couldn't like even five years ago.

Yeah, but I did see that you said folks who are have the higher wealth levels are looking for it more. I did see that I won't name the firm, but they had a product that a minimum investment is $1,000. So, you know, $1,000 lot into private credit, it's it seems like it's, you know, they're going for everyone, right?

That's really low. And this is what I tell advisors that we work with. So like on paper, that seems cool, right? You can get thousand dollar exposure to this private credit and you get to talk to your client about this cool exposure that they have. But number one, like how much is that small level going to really impact their ultimate return? Probably not very much. How much time are you going to spend educating your client about how that vehicle is going to perform?

Then you have all the paperwork to fill out, right? Just because it's small lots doesn't mean that you don't still have all this complication. And then what are you going to have to do to continue to update the client in different market cycles about how that's performing? So I think from an advisor's perspective, you need to be very mindful of all of that other stuff.

Around it, that's going to take up a lot of your time and potentially create a negative client experience. And you got to make sure that it's worth it. And I'll share one more thing. So what, one of our like key tenants in building portfolios is a bias towards simplicity. And so it doesn't mean that we'll never introduce complexity, but it means that we have to have a very high level of conviction that complexity is actually going to benefit the client.

And the financial services world has so many really smart people. That's why I love being part of it, right? I get to talk to people like you and it's fascinating. But we also have a tendency to complexify things when it's not needed. And I think that $1,000 minimum on a fixed income product is a good example, or it sounds really neat. But can you solve for the same need with a client in a simple ETF? And the answer is probably yes.

And by the way, it's financial words filled with lots of smart people, but it's actually the opposite. That's why I'm really happy to speak to people. So if there is a negative market event,

I think you and I have a rough sense of what that looks like. The low quality companies will sell off a lot. The high quality companies will sell off a lot as well. And then even though people are nervous, it is time for people to back up the truck and buy them. But when it comes to private credit, what does a negative outlook outcome look? Because I think it's fair to say that this industry private credit was

150th of the size the last time there was a huge credit crisis, 2008 and 2009. And now it is much, much bigger. So what do you think this could look like? You said earlier, you're worried. I want to, can you flesh out that a little bit more? It's very challenging to answer that because there's so much differentiation within these various private credit strategies. And I don't want to paint everything with this really broad brush. I don't think that there's huge malfeasance in this space, but I suspect that there is

credit risk that's hidden and that clients are not fully aware of. And so for instance, like anything that has leverage on it magnifies moves up and down. And as you said, like there are some private credit strategies that have done really well. Is it because they simply had a lot of leverage on and then things turn negative and all of that comes down again? And then we also, I've also seen strategies, for instance, that lend to subprime consumers in the UK,

Is the end client really aware of what of the fundamental drivers that are going to determine the outcome of that strategy? Let's say the UK has an economic event and particularly in subprime consumers and US credit markets are OK, but that particular strategy comes down. So it's the unknown piece that I think creates a negative client experience. Most clients can take downside if they understand the circumstances under which it happens.

And that's why stocks, like we have a lot of clients who are like, yeah, bear market, I get it long-term because they've been through this multiple times and they've heard it and they understand it. They see it on the evening news. Whereas some of this private credit, it's very complicated. It's in these like little smaller corners of the world. And so they're not going to understand what's driving those returns.

Thank you. And what about private equity? As somewhat cautious as you and I have somewhat sounded on private credit, I think the fact is that for a lot of private credit to take a loss, private equity has to be completely bageled because private credit is senior in the structure. Private equity, like private credit, has on a back test done extremely well over the past multiple decades. Is there also a pining among retail investors for private equity? And is private equity industry happy to supply that?

I think you see a lot of the same dynamics where people are seeing, like hearing about these other types of investment vehicles and they want access to it. And I think private equity, it's a really exciting place to be in. There's been a huge amount of growth. And as you said, the returns on a lot of those names look really positive over the last 10 years or so.

So why wouldn't you want to have a part of that? Again, broad brush, but my sense is that the sort of dispersion in types of strategies in private equity is a bit less than in private credit. So in private credit, you can get these like very niche little strategies that are in smaller, it's kind of like quarters of credit, whereas private equity tends to be more diversified and a little bit more similar from strategy to strategy.

And so what that means is that, again, like people have a more forecastable experience in terms of how private equity will behave in different circumstances. And I also think people have a higher expectation for longer time horizons in private equity. We know that's like a five-ish year cycle, right? Where money comes in and money comes out and that cycle might be shorter or longer, but it's not going to be tomorrow. So again, like thinking about it from a client's perspective, I think there are somewhat better expectations for what that experience can be like.

What about the financial sector and talk about the publicly traded stocks? You talked about materials, you talked about the energy sector, the financial sector. So I didn't know this. It's great that you used to be a bank analyst. So financial sector, roughly, it's got three types of companies, bank stocks, it's got insurance companies, and then it's got the alternative asset managers that we just have spoken about. And then also a lot of payment type businesses as well. But what's your rough sense of or outlook, I should say, of the payments of the financials world? Yeah, and it's interesting.

So coming into this year, it was a popular call to be long financials because one of the clear kind of objectives of the new administration was the lower regulation. Banks have been, banks and insurance companies have been like the whipping boys for government regulators since the global financial crisis. It was deserved, right? Coming out of the financial crisis, but regulation probably pushed way beyond what was necessary, even in reaction to global financial crisis.

So the idea was, okay, regulations start to come down, capital requirements come down, banks can start lending again, yield curve normalization rate. So there were a lot of sort of fundamental things to be excited about in the financial sector. But we haven't really seen those play out quite yet. So we haven't quite seen the impact of some of those

lowered capital requirements and lower regulation, I think they will still come. And then you haven't seen this normalization of the yield curve. Instead, you've just seen this role volatility and then throw uncertainty on top of it. And there's now concern about credit quality and like CNI loans and consumers and whatnot. So I think some of the optimism that we came into this year with in terms of financials has faded a little bit.

And we need to get back again, that certainty needs to be a little bit better in order for these names to really take off. Now, in the meantime, you have some of these trading companies that are taking advantage of volatility, right? They're making hay while the sun don't shine and they can juice earnings. But the market is typically not really given much of a multiple to those types of earnings.

So I think what we really need to see is a steeper yield curve, more stability in where yields are, and then less concerned about credit quality. And that's not like too far off. But right now, we're a high level of uncertainty to prevent that from playing out. Carol, what do you think about gold? This has been an interesting topic of conversation among our team and our investors. So from a strategic perspective, we don't think gold is a good strategic asset class.

If you look at different asset classes back over the past 200 years, gold has a terrible track record for building wealth over time. Now, that doesn't mean that it doesn't have periods of outperformance, which we're clearly in right now. Gold has been just on a tear for the last couple of years. But even then, we see a lot of portfolios and people might have, let's say, like a 2% exposure to gold.

Even with the outperformance of gold, that really hasn't impacted the overall portfolio that much. It makes you feel better when they go to sleep at night. And I always give the example of my father-in-law who escaped Eastern Germany in the aftermath of World War II. And so gold was really important to him. He had a couple of gold coins in his pocket and that helped set him up on a new life. When each of my kids was born, he presented us with two gold coins. We were able to look at it, touch it, and then he took it back and it went in his safe.

And that helped him sleep easy at night. He felt like our kids were taken care of with those couple of gold coins. And that's great. And it worked for him. But as a way of like building wealth reliably over time, I just don't think gold is a really great place to be. So that's like from a strategic perspective.

Then we also did work looking at how well gold performs in different types of environments. Gold is often used as an inflation hedge. Okay, so we looked at it in different high inflation periods. We're like, it's not like super consistent and outperforming in those periods. In periods of high geopolitical risk, how do you measure that? So it was a little difficult to test.

The one biggest driver of gold prices, what we found is central bank buying around the world. And yes, we've had individual investors who have been jumping onto the gold game, but really over the last two years, that rally in gold has been driven by smaller central banks around the world that are building up their reserves.

So then the question is, how much more buying by central banks is there going to be going forward? And I think that's a harder call to make. So we're sitting gold out, partly because of the strategic view and partly because we don't necessarily feel like we can predict those circumstances under which it'll drive it. And then partly because like, how much of it do we have to own for it to really make a difference in portfolios? And I realize that like our view is quite different than a lot of other strategists who are out there. That is a fair point. I will say, does the fact, let's say the

Central Bank of Singapore is buying gold, that makes me more bullish on gold than if Tom Jones from Jersey is buying it because Tom Jones could sell it the next day. Whereas probably the Central Bank of Singapore is probably a bigger buyer than Tom Jones. Yeah, I get it. But the question is how much more buying is going to happen over the next couple of years? And that's where I just don't feel like I have an edge in predicting that. Maybe other people do, but they have to do a lot of buying still. And at what point are they full up?

Yes. And the point is those two gold coins your dad gave you, they're still the same two gold coins. Whereas if you had invested in a company, you would have lots of earnings. Right. I should actually do that calculation to look. So my son was born in 08, right? That would have been a great time actually to buy the S&P 500. So we should calculate that over time. Kara, you've done a nice little tour of the entire markets. I guess one thing we haven't talked about is the Federal Reserve. They're scheduled to meet next week in May.

How do you think the Federal Reserve is preparing for tariffs? Because tariffs, on the one hand, they could increase prices, but on the other hand, they could cause a recession. And if they increase prices, the Federal Reserve should be hawkish and keep rates high. If they're going to cause a recession, the Federal Reserve should be dovish and lower rates. How do they manage that conflict?

Yeah. And so in the 25 years that I've been in this business, stagflation is always like the boogeyman lurking around the corner. And it's been brought up as a risk, like many times over these different cycles and just hasn't materialized. That said, this time it does feel like a

like a little bit more possible than some of these other times when it's been lurking. And the reason why it's always there is because it's incredibly difficult for monetary policymakers to manage. And we always have this specter of the 1970s and how horrible that experience was. And I don't think we're headed for something like that, but I think that highlights how our traditional monetary tools are really not built for that type of an environment.

So then think about what the Federal Reserve is faced with today. They have to be able to do the same exercise I was talking about we're doing when we think about portfolios, which is be able to look through some of the immediate impact into the longer term impacts. And we also have to remember that the economy can take on a life of its own. We can model things out on paper, but then how it actually works in real practice can take a lot of different twists and turns. So for instance,

Let's say with this 10% tariffs, let's say that leads to a 2% overall increase in CPI. On paper, that should be relatively one time. And then eventually we'll come down as we find new sources of these products, as we're able to substitute cheaper things. In that type of an environment, the Fed really shouldn't react. They should just talk about being vigilant, but let it play out and then come back down again.

But when those price levels go up, you don't know if that starts to trigger some other inflationary responses that then will be harder for the Fed to react to. And then, as you said, at the same time, this will depress economic activity. If it's going to be a one time thing and then markets pick up and then we actually see more manufacturing activity in the US, the economy will bounce back above. So I also think that the Fed is typically very cautious to not simply offset what they would view as a policy mistake.

The market is telling us that tariffs are a policy mistake, at least the tariffs as they were initially outlined. The Fed doesn't want to be seen as like the cavalry that rushes in and says, OK, no, we're going to make it all right. They have to let that policy play out and then be reactive to it. So all of this is to say they have a very difficult job ahead of them. My sense is that Powell is going to be more cautious and giving this more time to actually see play out before they actually start reacting to it.

And then let's not forget too, there's this whole political conversation happening about the independence of the Fed, which means that Powell needs to act even more independently to prove to the market that he's not responding to politics. Cara, my final question for you is, what do you think is the most common or most dangerous mistake that investors make? Oh, selling.

Easy. And we have data to show that this is what investors do all the time. Market sells off, they sell and they feel better in the moment. And then the market rallies and they've missed out. And I always say, if there's one thing to remember, just stay invested in the market. You can move around where you are in the market, but stay invested. Don't head for the hills.

That's a great point. And I think that people who sell, even if they're right over the short term, they could be wrong over the long term. So I will say I did have a lot of very cautious strategists in the beginning of this year, and then the market went down and you could say, oh, they were right. But they only were right if people had sold and then they got back in. If you don't get back in, yeah. Right. And as you said, the market in a couple of weeks is back to where it was when tariffs were first announced. Yes.

And I will tell you, I had two people calling me at the bottom of the market who wanted to get in and that's it. Nobody else wanted to buy. Yes. It really was. I think I was bearish. So many people were bearish. You did see the Bank of America fund manager survey showing that people were so bearish. And I said, oh, this is the time to fade that. This is the time to ignore that. But it wasn't. Yes. What do you roughly, how do you gauge sentiment right now?

Sentiment feels a little bit better. This is where I always joke, I grew up as a fundamental analyst, but every fundamental analyst is like a closet technician in some way or another, right? And so I think sentiment is very helpful to identify those turning points. And your point about like when the market bottoms, I think that was a great example of where technicals were helpful in determining that sentiment was extremely oversold and that the market was right for a bounce on any positive news.

Now it feels we're headed in the other direction where people are off to the races like, "Yay, I don't have to worry about tariffs." So I'm a little concerned on the other side here and that people are a little bit too optimistic, a little bit too looking through these near-term challenges.

Kara, before we go, tell us quickly, what does Kestra do and your role there? Kestra Holdings is a wealth management company where we support independent advisors. We also own independent advisory businesses. And at Kestra Investment Management, we support, oh, and we also have a trust company and an insurance division. And the investment division supports 1,700 advisors around the country in being able to stay on top of markets, build portfolios, serve their clients well.

Nice. And where can people find out you? Are you on, are you in LinkedIn and as well as the Kestra website? Yeah. LinkedIn is the best place to find me money with Murphy or just Kara Murphy. So we post all of our commentary there or at Kestra. I am.com. Thank you, Kara, for coming on. Thank you everyone for watching reminder to subscribe to our YouTube channel, monetary matters, and also leave a rating and review for us on Apple podcasts, Spotify, or whatever other pop podcast platform you use until next time.

Thank you. Just close this f***ing door.