Sarah let's start with you because it was so much activity in equities this week. What happened.
Even there was three key drivers for the market this week. First was the retail wreckage which shocked investors on Wednesday
because we saw demand destruction. Consumers are not willing to pay anything for goods anymore. And secondarily we finally did
see that shift in spending from goods to services. But it came with a healthy dose of inventory building up on the good side.
This is not good for retailers. Business model. Second is manufacturing data after a great payroll number in April. Strong
industrial production numbers yesterday. The Philly Fed Manufacturing Index significantly misses numbers. There's cracks
in the economy but it's not all doom and gloom. Investor sentiment is very negative. Markets are down almost into bear
market territory. Valuations are starting to look attractive and down stock markets and some demand destruction. Could you give
the Fed the ammunition it needs to finally take its foot off the gas and turn that surge of interest rate hikes. But we don't
expect that till at least later this year after they see some more data. So Bob Sarah says maybe the Fed can take its foot off
the gas on interest rate hikes. What did we see in the bond market. Because we had seen that really dramatic ramp up in the
yield on the 10 year and then it sort of plateaued the last couple of weeks. Well David unlike the equity market the bond
market actually found solid footing this week. And it all started when Fed expectations of rate hikes settled at around
two and three quarters percent at year end. I know that's 2 percent from where we are now but earlier this month it was at 3
percent and the concern was that it was headed north to three and a half or higher. Once Fed rate hike expectations settled
down the Treasury market settled down. You said we're at 280. Last week we were at 320. And again the concern was that we were
headed to 350. It feels as though the market is getting very comfortable with the narrative that the path to a 3 percent Fed
funds rate will be enough for now to slow down growth and inflationary pressures or at least get the Fed to pause. Now
look I'll admit it wasn't a perfect bond market. Corporate credit still had a tough week. Thanks very much. Equity market
and Sarah it was the lousy earnings that Sarah talked about and we had high yield yielding now 8 percent. It started the month
at 7 percent. But overall good week for the bond market. If Fed rate hike expectations and the 10 year yield settle around where
they are that will ultimately create support for corporate credit and that should spill over into other asset classes. Bob
what are we seeing in the underlying economy as it were. When you look at those retail sales numbers from Target and from
Wal-Mart and things some people are saying this is different from just a rate hike concern. There's a concern about the
strength of the consumer that basically they are not buying as much. They can't buy as much. Well we're looking at it from a
credit perspective. And what we're seeing is exactly what companies said they would see this year that they were seeing
higher input costs. They were going to pass some of that along. They were going to absorb some of that in their margins. We're
seeing that the top line at a lot of these retailers was actually still very strong. It was up there. And I think the
other thing that's gets lost in all of this is perhaps the is shifting its spending patterns. It's shifting away from the
retail and it's doing more in travel and leisure. I agree with Bob on the bond market. I think it is leading the
way when it and equities were starting to catch up today. We did close in much better territory where we were. We could see a
bear market rally and we did see short covering this week. But with the retailers unless constructive because that inventory
build it goes on their balance sheet is going to be an issue. I think consumers are saying we're not going to pay anything for
it for crap for goods going forward. There's any winners and losers in the retail sector. For example Costco. This is a
winner though going forward. They have a more resilient business model lower price points and they have that subscription
business which gives them stability. They can raise prices there to overcome inflation. And raising prices is going to be key for
companies in order to preserve their margins going forward. Look I think for sure Sara that higher energy prices higher gas at
the pump higher food prices are eating into consumer budgets. But we still have to look at very low unemployment. We've got
wage gains going up at the fastest rate in decades. It feels after a little consolidation in here that perhaps the consumer
will return to spending more broadly. Well what does that cut the other way. As I said my above. Because if it's really going
up that fast the Fed may need to go further in rate hikes. Well I think certainly that was the narrative last month that there
was no high that the Fed could reach. That would be high enough. It feels like we're seeing some pause in the housing. There's
enough evidence that things might slow down with higher rates and perhaps the liquidity withdrawal. That 3 percent is a good
target for now. So one of the concerns of an evaluation is when it comes to equity as it's been.
Some would say fully valued. I guess that's the polite way to put it. Is that out of the market now.
Not completely out of the market. Equities are mostly pricing in a soft landing and somewhat pricing in a mild recession. And if
we were to hit a deeper recession hard landing we've not priced that in yet. We could see equities go down another 10 percent.
In that scenario that is not our base case though. Valuations are about between the five and 10 year average at this point. So
this is where you need to start looking for quality companies with strong balance sheets that are trading on sale. Another
area we like actually are growth stocks which are very unpopular right now but they are significantly declining. There's a lot of
great companies in there for example even in the famed sector Microsoft. They have a 1 percent dividend yield. Dividend
growers tend to outperform in higher rate environments. Huge total addressable market. Strong enterprise brands demand strong
cloud demand. We're looking for opportunities in companies such as those given
the declines year to date. Bob Sara raised that recession. How do you see the likelihood of a recession. I think most
people I've talked to over the next 12 months. But you go out 24 months it's different. I think when you look at the next 12
months in the U.S. you still have to get through the summer where there's a lot of pent up demand for travel and leisure.
And unemployment is still very low and wages are going up. I think when you start to get out 18 to 24 months then you're
looking a lot of things. You're looking at where rates will be the cumulative impact of rate hikes. We think they'll be about 3
percent. You're looking at the bite that inflation will have taken out of the economy. You'll have another year year and a
half of higher inflation than the consumer would like to see. You'll have a strong dollar. You're you're also going to see the
liquidity withdrawal from the Fed. So two years out our probability of recession goes up to fifty
five percent. It's still possible for the Fed to engineer a soft landing.
But frankly it looks very aspirational when you figure they have to battle the highest rate of inflation in 40 years and drain
away the greatest amount of liquidity we've seen in the history of Earth. Yet we're still more optimistic. We're between a soft
landing and perhaps at worst a mild recession. The demand destruction that we're already seeing cracks in the housing
market. Those two get it plus that 20 percent or so decline in the stock market. Would you think that that could be one of the
reasons in a few months from now the Fed has said they're data dependent. They could start to lower that the number of rate
hikes that they're doing and help us avoid that worst case scenario of a recession. So David there you have it two years
out a lot of people are saying it's a coin toss. Someone in the equity side sees the optimism. Bond guy sees the pessimism. Yeah
but my question basically Bob is if in fact the Fed decides it's really getting troublesome. So I want to back off on the rate
hikes where with inflation I mean is there a danger here of getting off the antibiotics a little too early. We don't know
the infection gone well. I think we don't want to acknowledge that Chair Powell already told us that if it comes down to
growth or inflation their battle is against inflation even if it means avoiding a recession is unavoidable. So Sara if Bob's
right what does that say. The equities. I think you know for equities it definitely leads to more
downside in a recession environment they they've not priced that in. But that's also why we're looking for those companies that
are less dependent on economic growth. That does lead us to growth stocks. They have some of the worst returns year to date.
And then also fundamentally strong sectors. Energy is a sector we still like because of the fundamentals. Tight supply demand
should remain reasonably strong and producers are being very disciplined. And then finally dividend growers if you look at
history companies that have strong balance sheets cash flow can continue to grow their dividends. They'll give you that
portfolio protection within equities and should perform quite well while the Fed raises hikes and be defensive during a
recession.