Denise Chisholm: Sector watch – Aug 13, 2026

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<b>Subtitles are AI Generated</b>

 

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Hello, and welcome to Fidelity Connects. I'm Pamela Ritchie.

 

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Fresh CPI data shows inflation remains pretty stubborn at

 

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3.4%, that's a headline number, with price pressure still running

 

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ahead of wage growth.

 

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Now, while inflation continues to grab headlines the defining feature of

 

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this cycle perhaps isn't the volatility itself,

 

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it's the relentless duration of the volatility.

 

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Our next guest says that this has been one of the most persistent stretches of

 

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market turbulence on record, even as stocks continue to climb.

 

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Is volatility a warning sign or an opportunity?

 

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Why does this cycle feel so uncomfortable, ultimately?

 

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What does history say about returns after periods just like this?

 

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Joining us here today for another edition of Sector Watch is Denise Chisholm.

 

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She is Director of Quantitative Market Strategy.

 

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Hi, Denise. Great to see you. How are you?

 

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Hi, Pamela. I'm very well. It's great to be back.

 

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Great to have you here. We feel like it's been a long time.

 

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I think you, hopefully, had a nice holiday in there somewhere.

 

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I did have a nice vacation.

 

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Oh, good, good.

 

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Lots of eco-data coming out this week, and last week,

 

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but we'd love you to put in perspective for us ahead of Jackson Hole, ahead of

 

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lots of discussions around what the Fed's next move will do.

 

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Let's just go to sort of the inflation piece of it.

 

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PPI as well as CPI on a headline basis looks high

 

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but the core is actually kind of what you said it would be, which is okay.

 

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Yeah, moderating and less pass-through than most, I

 

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think, investors thought. I mean, inflation is always an everywhere

 

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problem for the consumer. No consumer wants to pay higher prices.

 

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As it relates to sort of the math around inflation, the math around

 

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what the Fed does with it is a much different story.

 

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That is, to your point, the core.

 

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We have the CPI data, we had the PPI data released this morning,

 

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portions of both go into the PCE deflator which is the

 

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Federal Reserve's preferred method of calculating prices

 

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that is actually going to change from a

 

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methodology perspective as well.

 

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When you sort of put it all together, now all of a sudden the estimates are

 

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something like .2 for the PCE deflater, which as a run rate

 

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basis on the core it's about 2 1/2.

 

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That's certainly above target  but you wouldn't say it's

 

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necessarily egregious either, and certainly decelerating.

 

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Again, back to did higher oil prices cause more of

 

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a pas-through, so far we're not seeing any evidence of

 

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that. Again, if you say, okay, well, we are sort of thinking about a target of

 

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2, well all of a sudden it depends on how you measure inflation.

 

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If we think about the CPI, which we always talk about the core, let's take

 

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shelter out of it for right now because it's running above what rents

 

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are running so that you know the current shelter inflation is much lower than

 

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it's being calculated right now.

 

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Let's just take all other prices.

 

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The core CPI ex-shelter is running below 2%

 

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which is, look, I think this is a different way to calculate prices.

 

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Now, the Federal Reserve has preferred the PCE deflator, ironically, that has

 

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usually run below the CPI, not above it.

 

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There are some measures that for the Fed, not for the

 

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consumer, but for the Fed are bumping around target, which I

 

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think is a very different narrative from what people are talking about.

 

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I really want to ask you about the changes for the PCE in just a second.

 

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First of all, this discussion of, you said a

 

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second ago, it feels like for the consumer

 

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that inflation is always bad all the time.

 

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And it is, it's a very frustrating thing.

 

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Your recent note talks about sort of sentiment and what feels bad,

 

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and volatility and what that does sort of to the psyche of those trying to

 

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invest.

 

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At the same time there's an ability to sort of see a resilience

 

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within the volatility. Take us there, take us to sort of it feels bad

 

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but.

 

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Yes. I mean, it feels bad but there might be a silver lining to

 

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the feeling bad part.

 

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I think that that is what is unique around this cycle.

 

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Now, we should talk about how I'm defining volatility, and it's really as your

 

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average customer thinks about volatility.

 

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It's the standard deviation of your monthly returns in any given quarter,

 

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meaning that if you looked at your statement of equities and bonds that

 

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you own, you looked at it once a month and you thought over the last quarter,

 

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geez, how many times did my balance in that change, that's

 

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what I'm capturing. What you'll see is over the last quarter we spiked

 

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to top quartile, top decile, top 2% levels.

 

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This is what I am talking about in terms of

 

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the whipsaw of the markets.

 

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Now, the interesting part is we've been higher, and we've averaged higher

 

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for longer, but this is the unique part of this cycle.

 

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If you look at over the past three years how often we've re-spiked

 

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to this top decile level, it's longer than any other cycle.

 

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It feels like it too.

 

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Right. That is exactly why it feels like it.

 

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I mean, from a duration perspective it is unprecedented, but from a

 

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magnitude perspective it's not, so it feels very different just in terms

 

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of the sustained duration.

 

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This is much like we talked about in terms of the labor market.

 

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It's been much worse, obviously, with people being laid off

 

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but the duration of the lack of expansion has never been this long

 

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ex four recessions. There's a lot of uniqueness in terms of the duration of

 

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this cycle which I think is exhausting.

 

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What you see in the math is that the bigger the volatility,

 

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the higher the odds that the market goes up over the next 12 months, and

 

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the higher the average returns that the market posts.

 

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It's almost like that is the trade-off.

 

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You can't get the higher returns without the volatility.

 

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Okay, why not?

 

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They go hand in hand. I always say

 

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the only one who gets hurt on the roller coaster are the jumpers.

 

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The trade-off for the 8% returns that you get for

 

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equities, year-over-year like 10% on a total return basis,

 

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you don't get those returns for free.

 

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You get them by riding through the up 20 and down 20.

 

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If you got 8% returns for no risk, boy, wouldn't we all take that.

 

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Now let's scale it.

 

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Let's say, okay, it's a very volatile market but the market has gone up a lot,

 

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right, let's call it 15 or 16, let's say, double the average.

 

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What do you have to put up with for double the average returns?

 

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Double the vol. That is the trade-off that you make as an

 

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investor in equities.

 

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So just sitting through with your seat belt on through the volatility and

 

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ultimately holding on and it will go higher because enough people sell out and

 

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come back in and sell out and come back in.

 

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That's part of what it is, exactly what people do, that

 

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sale in terms of that volatility does provide fodder and increased demand

 

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for the market to actually go higher.

 

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If your objective is total return, and not everybody's

 

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objective is total return, if your objective is total return, for me, when I

 

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look at these volatility measures, I say sit through it because that is

 

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sort of giving an affirming signal of positive total

 

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return in the future. If your objective is no downside,

 

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or limited downside, or better risk-adjusted returns, then that is

 

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why we have, I think, the solution space.

 

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We hear about solutions more and more, I think that this

 

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is one of the reasons why we are hearing about solutions, because

 

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volatility has remained persistently elevated.

 

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For those investors that cannot sustain

 

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that volatility, or do not want to sustain that volatility, there's

 

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a whole bunch of different quantitative constructs that you can actually

 

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use to make that trade-off. I'll take lower total return for

 

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less volatility. That's solutions.

 

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It always depends on what your objective is.

 

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For me, I sit in equity research, my objective is total return, but

 

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that's why, for me, volatility is actually a positive signal, not a negative

 

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one.

 

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Right, because it gives you opportunities along the bumpy road, it ultimately

 

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gives moments.

 

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Take us back to the PCE. We'll go into the discussion of the

 

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Fed, what Kevin Warsh has to face, lots of discussion that, okay,

 

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there's been a few take a deep breath, maybe things are okay because

 

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of economic data that's come out right now that maybe points to a less

 

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inflationary situation where the Fed has an opportunity to

 

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hold, probably not cut, things are still baked in, but there seems to be

 

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a sigh of relief on some level there.

 

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The PCE, as you mentioned, being the favoured version of

 

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the measure of inflation for the Fed, why and how is

 

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it changing? These are quite recent changes.

 

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I was just looking at it, it was just June they were changing these.

 

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Yes, so it is recent.

 

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I calculated price baskets for a living before I came to Fidelity at a

 

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small cost of living firm.

 

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It is incredibly complicated to actually calculate prices that relate

 

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to the consumer. No consumer feels like the CPI represents the

 

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increasing cost that they're absorbing on a year-to-year basis, but we've got

 

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to take a shot at it.

 

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I think that what is important is that the methodology always

 

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evolves to the extent that there is either better

 

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data or more robust data or it's becoming too influential

 

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for the PCE deflator.

 

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I think data point number one that investors need to recognize is we have a

 

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very odd calculation this cycle, meaning that

 

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most of the time the CPI, which has the bigger housing component

 

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but generally other components as well, runs hotter or above the

 

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PCE deflator, which is what the Federal Reserve uses, by about 50 basis

 

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points. You are seeing the flip of that this time.

 

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Partly it's because housing, because it's been deflating a little bit faster,

 

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but partly there are two other areas that have run substantially

 

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hotter in the PCE deflater versus the CPI.

 

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One is portfolio management fees and the other is software.

 

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Let's talk about portfolio management fees in the sense that it's a little

 

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interesting. What is likely to happen next month is that

 

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the PCE will print something around .2% on a month-on-month

 

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basis, which leads you to around 2.4 as a run rate.

 

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Half of that .2 is actually going to be driven by portfolio fees

 

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which are linked to the equity market.

 

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Half. I mean, it's a narrow band, right, so, again, highlights the fact

 

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that there wasn't a lot of pass-through If half is coming from portfolio

 

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management fees that is a direct function of how much the equity market

 

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went up. There is a recalibration of

 

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this portfolio management fee calculation that won't be a throughput just from

 

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equity markets because that's not exactly the way you pay fees from a

 

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portfolio management perspective.

 

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The other area is interesting in that it's a redenomination of what

 

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people will call AI inflation, which is specifically the software

 

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basket which punches a higher rate in the PCE deflator

 

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than it does in the CPI but they pull the price data from the CPI.

 

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The problem with that is that the price data they pull is a very narrow

 

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sample, they're broadening the sample.

 

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These two things together in terms of the change in methodology might actually

 

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reduce the PCE deflater over any given year on a year-on-year basis

 

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from .2 to .4 percent.

 

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That's quite a lot.

 

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Let's just say that I just did the math and the underlying run rate of

 

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core PCE deflator is at .2.

 

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That's where we are right now so that's 2.4.

 

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Let's say the methodology changes, take off

 

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.2 to .4. Now all of a sudden the core PCE deflater is running right around,

 

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let's call it 2, 2.1, 2.2, and the core CPI,

 

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again, ex shelter is now below 2.

 

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You've got a couple different ways to calculate a price basket that says

 

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you're not really too far off your target, are you?

 

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That's really interesting. That will change ultimately what the Fed

 

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needs to do. As you say, it doesn't necessarily change how the consumer feels

 

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and what they're ultimately paying and whether they have the wages to do that.

 

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Take us to the wage story because sometimes if you just don't have high

 

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enough wages to keep up with inflation you spend less and that sort of fixes

 

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the inflation, not always because it depends where it's coming from.

 

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Take us there to the wage story that is below

 

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inflation.

 

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There's two pieces to how the consumer feels.

 

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There's the underlying inflation like how much more am I paying for prices,

 

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and then there's, again, we talked about sort of the overall CPI

 

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which you absorb all of it. But then there's just this underlying CPI

 

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that some things don't get passed through or they just bump around over

 

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time. Generally speaking, the underlying inflation still doesn't feel

 

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like something that the US consumer would want to absorb.

 

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Let's just say I made the argument that the underlying run rate of inflation is

 

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actually getting close to target.

 

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Well, that's 2%. What it highlights is that maybe inflation

 

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for the US consumer is not the bigger portion of the problem.

 

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It's that wages aren't growing faster.

 

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I do think that that's a narrative that I have not heard

 

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enough people talk about.

 

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When you look at the unemployment rate, and certainly

 

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former chairs like Janet Yellen said this is my preferred measure of the labour

 

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market, you see a tight labor market.

 

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The problem is that definition of tight is not showing

 

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up in wages at all.

 

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Wage growth on a nominal basis is still decelerating, and it's

 

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still decelerating across every spectrum of income from

 

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the top decile to the bottom decile, to average hourly earnings,

 

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to the ECI, no matter how you want to calculate it wage growth is

 

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still decelerating, so much to a point that that's where we're

 

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at these threadbare margins of what inflation really eats

 

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into this. Again, I think that when we think of the problems,

 

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yes, affordability is a problem, yes, inflation is a problem, but when

 

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you really do the math it's wage growth that is the bigger driver

 

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that I think needs to inflect.

 

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When people think that, oh, the labour, we can't lose any more labour supply,

 

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I would argue that we need to lose labour supply in a real basis to

 

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finally turn wage growth and the job market overall so that

 

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the US consumer can see positive real income growth that can sustain the cycle.

 

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I do think a lot of leading indicators point exactly in that direction but

 

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I think it's important to unpack what the problem is, not necessarily inflation

 

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but where wage growth is relative to that underlying inflation.

 

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I guess one of the follow-up questions from that is how would we expect

 

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that in light of the fact that ... and it's just the narrative, it doesn't

 

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necessarily mean it's true, but the narrative is that AOI will come

 

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in to make things more efficient and that often means that less people will

 

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work and so that will crunch into the whole story of wages,

 

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basically.

 

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Is it realistic, I guess?

 

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Well, remember, most technological advancements leads to more jobs, not less

 

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jobs. When jobs inflect wages usually do too, meaning when corporate America

 

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has to hire more workers, which we have not seen yet, but you would argue that

 

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we're seeing a lot of the leading indicators saying that we will, that usually

 

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goes hand in hand with wage growth.

 

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I would argue that the opposite is what we've seen historically, technological

 

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advancement usually lead to better hiring, better GDP growth and

 

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better wage growth. I think it's actually all lining up from a historical

 

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perspective.

 

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I kind of feel like you need an ability to shout that from the rooftops because

 

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that is not how people are thinking that things are going to go,

 

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even if there are various leading indicators showing that that is where

 

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it should go and ultimately will go.

 

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People don't think that.

 

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No, definitely not. But it's interesting, the NFIB survey, the small business

 

16:30.189 --> 16:34.293

survey, I always point to all the surveys that I look at, that actually

 

16:34.293 --> 16:38.597

had a really severe inflection in terms of hiring intentions.

 

16:38.597 --> 16:42.668

It's been back and forth but even higher oil prices, and sort of

 

16:42.668 --> 16:45.404

higher then lower then higher again, have not dissuaded.

 

16:45.404 --> 16:49.375

You're starting to see a final inflection of even small businesses

 

16:49.375 --> 16:52.945

saying they would like to hire more individuals.

 

16:52.945 --> 16:57.049

To that extent how much of that comes from a lower rate

 

16:57.049 --> 16:59.318

environment than it was before?

 

16:59.318 --> 17:03.155

I mean, it doesn't mean that there isn't more work to do on that front but it's

 

17:03.155 --> 17:07.326

galvanized, and you often will say a ball in motion will stay in motion,

 

17:07.326 --> 17:09.995

the ability for smaller companies to borrow.

 

17:09.995 --> 17:12.398

There's lots of reasons to borrow, meaning AI.

 

17:12.398 --> 17:15.567

You see that cycle sort of continuing.

 

17:15.567 --> 17:17.936

Yes, especially from a credit perspective.

 

17:17.936 --> 17:22.474

When you think about the good credits that our small businesses now,

 

17:22.474 --> 17:26.845

we've sort of lacked a lot of what was funded by

 

17:26.845 --> 17:31.417

... maybe you would say absurdly low interest rates that shouldn't necessarily

 

17:31.417 --> 17:33.986

exist from an economic perspective.

 

17:33.986 --> 17:38.557

I think all of that is one of the reasons why it's taken such a long duration

 

17:38.557 --> 17:43.128

of a cycle ... of the stagnation in terms of growth, the

 

17:43.128 --> 17:47.633

small businesses today are much more able to withstand,

 

17:47.633 --> 17:51.770

I think, the economic cost of capital than prior firms if

 

17:51.770 --> 17:55.808

interest rates do go up. I do think that small businesses,

 

17:55.808 --> 18:00.245

medium businesses, and certainly big businesses, are in a much better position,

 

18:00.245 --> 18:03.949

even from a debt perspective, from a delinquency perspective, from a borrowing

 

18:03.949 --> 18:07.886

perspective, from an interest rate perspective, and as is the banking system,

 

18:07.886 --> 18:11.056

is in a much better situation to be able to lend to them.

 

18:11.056 --> 18:15.127

There's a lot of sort of juice within the economy in that

 

18:15.127 --> 18:19.431

particular way. One question I've been wanting to ask you is, why

 

18:19.431 --> 18:23.669

do you think Kevin Warsh is getting a bit of a rough go, actually,

 

18:23.669 --> 18:26.538

in coverage at this point?

 

18:26.538 --> 18:29.575

I don't think it has specifically to do with interest rates.

 

18:29.575 --> 18:34.079

I mean, that's obviously a big part of it but there seems to be a

 

18:34.079 --> 18:40.419

reception that, I don't know, seems a bit cool.

 

18:40.419 --> 18:44.389

I read note after note that said he really did such a poor job during the press

 

18:44.389 --> 18:47.025

conference. I actually listened to the press conference.

 

18:47.025 --> 18:51.196

I didn't quite come away with the same conclusions, which is obviously not

 

18:51.196 --> 18:54.032

a shock that I came away with different conclusions [crosstalk].

 

18:54.032 --> 18:59.371

I didn't come away ... maybe it's a shock that you didn't but I thought he

 

18:59.371 --> 19:02.975

had gravitas and sounded like he wanted to change things and was a leader.

 

19:02.975 --> 19:07.079

Who knows, that was not how he was received by markets,

 

19:07.079 --> 19:07.679

it seems.

 

19:07.679 --> 19:11.850

It definitely wasn't how he's received. Maybe if we go back to, you know,

 

19:11.850 --> 19:16.088

let's put aside Denise Chisholm's opinion about how he did

 

19:16.088 --> 19:20.125

and think through what usually happens in the year following

 

19:20.125 --> 19:24.296

a new Fed chair, you do usually see more bond market volatility,

 

19:24.296 --> 19:27.132

about 30 to 50% more bond market volatility.

 

19:27.132 --> 19:30.302

It's not particularly meaningful to the equity market, which is why I don't

 

19:30.302 --> 19:32.771

talk about it a lot when I look historically.

 

19:32.771 --> 19:36.775

If you have heard the narrative like the market tends to test new

 

19:36.775 --> 19:39.111

Fed chairs because they're changing something, right?

 

19:39.111 --> 19:43.515

It might be a change. You usually do see more market volatility

 

19:43.515 --> 19:46.251

so maybe it's just the newness.

 

19:46.251 --> 19:50.389

In some ways, we are seeing a different regime from a communication style,

 

19:50.389 --> 19:51.723

for sure.

 

19:51.723 --> 19:54.893

Now the question is, when I look back in the data you say, okay, well let's

 

19:54.893 --> 19:58.830

just evaluate this. The Fed used to give us a lot of data and now they're not

 

19:58.830 --> 20:02.067

going to give us a lot of data with the dot plot and all of that.

 

20:02.067 --> 20:04.937

They're not going to tell us ... they're not going to spoon feed us.

 

20:04.937 --> 20:09.308

Well, we went back to a situation, that was before 2016,

 

20:09.308 --> 20:11.310

where it was exactly that strategy.

 

20:11.310 --> 20:14.846

So we can actually analyze and say, okay, was that communication strategy

 

20:14.846 --> 20:18.917

,again, not some model but considering all of

 

20:18.917 --> 20:23.388

the things going on in the economy would I rather that were the alternative?

 

20:23.388 --> 20:27.326

What you can see in the data from a volatility perspective is it actually was

 

20:27.326 --> 20:30.829

correlating to more volatility, not less volatility.

 

20:30.829 --> 20:34.866

The communication strategy, I'm not necessarily sure

 

20:34.866 --> 20:39.004

was as beneficial as the market narrative is

 

20:39.004 --> 20:43.041

around it. I would say that the reason for that

 

20:43.041 --> 20:47.846

is because when you look back in history it was not particularly accurate.

 

20:47.846 --> 20:51.984

Just because the Federal Reserve told you what they were going to

 

20:51.984 --> 20:55.320

do does not mean that they did it.

 

20:55.320 --> 20:59.324

If we recall, right, we're not going to raise 75 basis points, and

 

20:59.324 --> 21:03.295

then they raised 75 basis points three times.

 

21:03.295 --> 21:07.165

I think that I struggle with the communication strategy changing, which is a

 

21:07.165 --> 21:10.235

lot of what the Federal Reserve is getting beat up for right now.

 

21:10.235 --> 21:13.772

I don't see it as being predictive.

 

21:13.772 --> 21:17.376

When I look at the data from that perspective I see it is more noise than

 

21:17.376 --> 21:21.446

signal. To the extent that there is less noise in the market I

 

21:21.446 --> 21:23.181

actually think of as a good thing.

 

21:23.181 --> 21:27.219

I don't think the communications change is necessarily negative

 

21:27.219 --> 21:31.523

for the market. Again, if you could say what do we see in market history, you

 

21:31.523 --> 21:34.826

just see more bond market volatility when the Fed chair is new.

 

21:34.826 --> 21:38.897

Okay, so in that sense it's sort of in line with other changes

 

21:38.897 --> 21:42.734

at the Fed and how that works its way through.

 

21:42.734 --> 21:47.339

Interesting. In your mind does he need to convey something, communicate

 

21:47.339 --> 21:51.476

something at Jackson Hole that he hasn't done thus far, do you think, or

 

21:51.476 --> 21:56.214

he can just carry on with who he is and what he's doing?

 

21:56.214 --> 22:00.285

I think he might double down on the not communication strategy and not

 

22:00.285 --> 22:04.222

potentially overreach and let the market

 

22:04.222 --> 22:06.458

determine what the market wants to determine.

 

22:06.458 --> 22:10.195

I think that a lot of what the Federal Reserve is facing, and him as a chair,

 

22:10.195 --> 22:14.166

he laid out a strategy which is we're going to have these five committees, I'm

 

22:14.166 --> 22:16.568

going to ... what I would call is that's a data driven approach.

 

22:16.568 --> 22:18.904

I like that kind of thing ...

 

22:18.904 --> 22:22.007

we'll have these five committees, they'll come evaluate all of these five

 

22:22.007 --> 22:25.477

areas, they'll come back to me with data and then we'll make some decisions.

 

22:25.477 --> 22:29.448

I would say it's a little too early for anything that he's going to

 

22:29.448 --> 22:33.652

come with in terms of the communication being robust.

 

22:33.652 --> 22:35.721

The one thing that he has said over and over ...

 

22:35.721 --> 22:38.590

because there is the debate about, well, which price measure are you looking

 

22:38.590 --> 22:40.525

at? Are you looking at the PCE deflator?

 

22:40.525 --> 22:44.563

Are you looking at the CPI? He has said we're looking at the PCE deflater.

 

22:44.563 --> 22:48.567

As it relates to that it would not surprise me

 

22:48.567 --> 22:52.838

if we go back to something less like a target in terms of a coin estimate

 

22:52.838 --> 22:56.074

and more like a range of the data.

 

22:56.074 --> 23:00.379

Again, as a quant and as a data person, as somebody who developed price

 

23:00.379 --> 23:05.117

baskets, I think that that's probably a better way to look at it

 

23:05.117 --> 23:09.421

because think that there's varied calculations and no one calculation is right

 

23:09.421 --> 23:11.923

so no one point estimate is right.

 

23:11.923 --> 23:16.061

If you went back to a low communication strategy with more of a range with more

 

23:16.061 --> 23:20.031

robust data that was a little bit changeable, I actually think is a good

 

23:20.031 --> 23:23.435

thing in the long run but I think the market's going to have to get used to

 

23:23.435 --> 23:24.236

something like that.

 

23:24.236 --> 23:26.638

Right, right, change is hard.

 

23:26.638 --> 23:29.941

Change is hard, can be difficult.

 

23:29.941 --> 23:33.345

Definitely a discussion. We haven't gone into the sectors that ultimately are

 

23:33.345 --> 23:36.381

benefiting from everything from rates, perhaps some of the fact ...

 

23:36.381 --> 23:41.019

we've actually been talking a lot about factors on this show recently.

 

23:41.019 --> 23:45.223

We look to you for actually the sector side of things and where

 

23:45.223 --> 23:49.194

you see this moment being from here on through

 

23:49.194 --> 23:52.697

to the end of the year, your top three and bottom three.

 

23:52.697 --> 23:54.366

Yeah, and sometimes very little change.

 

23:54.366 --> 23:58.970

So technology, and I'm actually penning a note this week on technology,

 

23:58.970 --> 24:02.574

I just think is still leadership.

 

24:02.574 --> 24:06.211

There's a lot of narrative around economic broadening, somewhat market

 

24:06.211 --> 24:10.749

broadening. We've seen the AI trade and semiconductors underperform quite

 

24:10.749 --> 24:14.820

punchily, or substantially over the course of the last couple

 

24:14.820 --> 24:18.423

weeks. I still think that is an opportunity, partly because of valuation

 

24:18.423 --> 24:22.427

measures, where they are, and partly because I think that this

 

24:22.427 --> 24:24.863

just does not look like 2000.

 

24:24.863 --> 24:29.468

This looks like a much more sustainable, durable cycle to me that

 

24:29.468 --> 24:31.436

is technology leadership.

 

24:31.436 --> 24:35.474

I think the risk-reward behind technology, especially after the correction,

 

24:35.474 --> 24:37.943

is really good.

 

24:37.943 --> 24:41.680

Let's shift it, if we want to be super tactical, let's shift it to that's my

 

24:41.680 --> 24:45.717

number one sector. Right after that I think would be 1A and 1B,

 

24:45.717 --> 24:49.788

which is materials where we talked about steel being a real

 

24:49.788 --> 24:54.226

good opportunity, copper is sort of in line with that, and then industrials

 

24:54.226 --> 24:58.330

as the 1B. I do think that we are now in this regime

 

24:58.330 --> 25:02.400

of above 50 on ISM and rising, which tends to

 

25:02.400 --> 25:06.571

be the area where you want to overweight industrials versus anything like

 

25:06.571 --> 25:10.775

the consumer. I still think that there's good risk-reward in housing

 

25:10.775 --> 25:14.479

and housing related stocks, which certainly has not been the case.

 

25:14.479 --> 25:18.350

I do think that the downside is, I would call fairly limited.

 

25:18.350 --> 25:22.721

So top one, two, three would be technology, materials,

 

25:22.721 --> 25:26.758

industrials, and then the housing sections of consumer discretionary.

 

25:26.758 --> 25:28.460

Financials are a positive risk-reward too.

 

25:28.460 --> 25:31.396

I don't want to leave them off but they're not in my top three.

 

25:31.396 --> 25:35.500

Bottom three, I would still say energy is the most negative risk-reward.

 

25:35.500 --> 25:39.604

I am very reluctant to chase that here for a number of reasons.

 

25:39.604 --> 25:44.042

I do think that there's more supply and more excess capacity than

 

25:44.042 --> 25:46.011

investors are really understanding.

 

25:46.011 --> 25:50.081

There are ways over the long haul in terms of duration to

 

25:50.081 --> 25:53.919

figure out an alternative path versus the Straits.

 

25:53.919 --> 25:57.923

I think the market's figuring that out and I think that we've seen it happen...

 

25:57.923 --> 26:00.525

And it might be expensive to figure that out. I'm asking you, will it be

 

26:00.525 --> 26:03.428

expensive? I mean, they might have to put some money into that.

 

26:03.428 --> 26:06.364

Yes, it's going to be expensive, absolutely.

 

26:06.364 --> 26:10.702

I think that that's one of the reasons why oil prices are 80 and not 40.

 

26:10.702 --> 26:13.772

I think that that might even be already in there.

 

26:13.772 --> 26:15.740

I think it might already be in the stocks.

 

26:15.740 --> 26:19.711

When the stocks worked they were already at 20 times earnings, which was above

 

26:19.711 --> 26:23.448

the market multiple. They're a little bit cheaper now but we've seen the sort

 

26:23.448 --> 26:27.419

of upside cap. I think that from a risk-reward perspective energy

 

26:27.419 --> 26:29.854

is just pretty negative to me.

 

26:29.854 --> 26:34.392

Then I'll take the most defensive sectors of utilities and consumer staples.

 

26:34.392 --> 26:38.597

I think the biggest thing about this cycle is going to be its duration

 

26:38.597 --> 26:42.367

and durability. Given that, I think you want to overweight economically

 

26:42.367 --> 26:46.104

sensitive sectors and underweight the most classically defensive sectors like

 

26:46.137 --> 26:48.139

consumer staples and utilities.

 

26:48.139 --> 26:51.109

Fascinating, that is so fascinating. And it comes right back to your note,

 

26:51.109 --> 26:55.180

which is on the duration actually of volatility but the duration ultimately of

 

26:55.180 --> 26:57.849

what's underlying and what's working well.

 

26:57.849 --> 27:01.853

Just bring us back quickly to what the Fed probably needs to

 

27:01.853 --> 27:05.290

do one way or the other. I mean, hikes are being priced in but we got a small

 

27:05.290 --> 27:08.059

discussion of a cut this week because maybe things are okay.

 

27:08.059 --> 27:09.728

What do you think?

 

27:09.728 --> 27:11.463

Well, it always depends on where they are.

 

27:11.463 --> 27:15.467

Again, you'd be having a different discussion of hike or cut

 

27:15.467 --> 27:17.636

if they were at 2 or if they were at 5 1/2.

 

27:17.636 --> 27:21.840

and a half. I do think you have to struggle with what neutral is

 

27:21.840 --> 27:23.541

and what R-star is.

 

27:23.541 --> 27:27.479

I would argue that you don't have a reason to cut,

 

27:27.479 --> 27:29.581

or a need to cut.

 

27:29.581 --> 27:33.485

I don't think that you have a need or a reason to hike right now.

 

27:33.485 --> 27:37.756

I would say that probably base case until they get a whole lot more data is

 

27:37.756 --> 27:39.257

to stay on hold.

 

27:39.257 --> 27:43.194

Denise Chisholm, we are always grateful for what you add to our overall

 

27:43.194 --> 27:47.132

knowledge and we continue to be very grateful for

 

27:47.132 --> 27:49.834

that week after week. Thanks for joining us.

 

27:49.834 --> 27:52.237

Always great to be here.

 

27:52.237 --> 27:54.305

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