Michael Zeuner: 00:08
Hi everyone. This is Michael Zeuner, one of the managing partners at WE Family Offices. Thanks for listening to the wealth enterprise briefing. We’re going to continue our discussion today with Sam Sudame, our global head of macro, about the global geopolitical situation and what’s happening in the capital markets. And Sam, as we sit here recording, there has been some easing of tensions. There’s discussion about a possible truce. There’s movement on the Straits of Hormuz, and at least today, the markets are roaring. Both the equity markets are up significantly, and the fixed income markets are up as interest rates drop significantly. Now what I want to talk about is not so much what’s happening today, but I want to take a little bit of a step back. And you know, one of the interesting things that I’ve observed in meetings that that I’ve been having with families over the last week or so is that as we go through their portfolio performance, particularly through March 31 with some estimates for through the middle of April, by and large, families are generally a little surprised to the to the good that their portfolios have held up, and that despite the geopolitical Sturm and Drang and the war and the significant damage that’s been done and some of the politics around it, their portfolios have pretty much sailed through, no pun intended, the the period. And you know, with one caveat being that the as long as the portfolios were diversified, as long as by diversified, I don’t mean just between equities and fixed income, but I mean Within equities, different capitalization styles across equities, having exposure to infrastructure and energy assets across asset classes, having exposure to real assets being infrastructure real assets, natural resources, commodities, gold, all the things that we’ve been talking about for quite some time now. So as long as there was that diversification, the portfolios generally sailed through. And then, of course, in the last two weeks, we’ve had a massive rally in global equity markets. As the tensions have eased, I think it was a historical rally by all intents and purposes. So anyway, let’s let’s get underneath and look at some of the reasons why the portfolios, if they were diversified, sailed through. What does that tell us about successful investing over the long term, and how does it inform what we look at from day to day to know whether we should be worrying about these massive geopolitical events or not in the context of short to medium term portfolio thinking. So thanks for joining us again, Sam. And let me throw it to you and get your perspective on the last couple
of weeks
Sam Sudame: 02:55
So in our previous podcast from a few weeks ago, we talked about a bimodal outcome related to the Iran conflict. So markets could rise if the conflict ended soon, without much damage to energy infrastructure, or markets could fall a lot if the conflict worsened, energy infrastructure was hit, causing longer term damage. And what has changed since that last podcast is a temporary ceasefire has begun, and negotiations and the conflict has started. So what has happened? You know, the stock market is a very emotional creature, particularly in the short run. So in our previous two podcasts, that emotional pendulum had swung towards fear based on the uncertainty of the conflict and a potential stagflationary shock. So markets, we were down a lot during both of those podcasts. Now, over the past two weeks, that emotional pendulum has swung in the opposite direction, and the stock market is now optimistic about the conflict ending, and that has led to a powerful rally. And really to see which direction the market might move from here, we do need to look at economic and market data.
Michael Zeuner: 04:21
Okay, when you talk about that pendulum swinging right to one side or the other, I guess the really important question is, what’s the center of mass, right? How do you think about that pendulum, sort of hanging straight down, right and and how do you avoid the vicissitudes of you know, the swings to fear or the swings to over exuberance, and what do you look at in the economy to get underneath that as signals that it’s okay to hold tight and stay invested and stay diversified or not?
Sam Sudame: 04:56
So remember, the markets will finally settle down into. Some kind of equilibrium when they stop becoming too afraid and too optimistic after positioning settles out. And how that happens is they start looking at the underlying fundamentals. So right now, what we’re seeing is that the primary drivers of economic growth are holding up. So while gas prices are up, the recent tax refunds related to the Oba actually covers it. Consumers, particularly in the top 20% are still spending gas prices are not a high part of their income, and we saw that with the most recent retail sales number, which were actually higher than they were the month before. And very importantly, it’s the job market. So right now, the jobs market is stable, and we’re not seeing any signs of higher layoffs. In fact, in the March jobs report, the economy generated 178,000 job much more than the February loss of 133,000 and the unemployment rate went down. So income is up, the jobs are stable. People continue to spend, and importantly, businesses continue to invest. So we another important number we look at our core, durable, good orders. Those were up nicely in general, which was the previous report that we had. The Pm is, are still an expansion. And I think what is very important, you know, right again, we’ve been gripped by emotions over these last few weeks. But looking forward, what is very important is that the economic cylinder of AI capex is picking up. That is what makes me very optimistic. So last year, capex spending by hyper scalers was the hero that kept the US economy from going into recession after the tariffs were initiated in 2025 hyper scaler investment was 762 billion this year. They think it’s going to step up to 944 billion. So it it’ll be even larger than it was last year. And this is important because, you know, these are for six companies, these hyperscalers, but when we look at the much broader picture, for instance, utilities, utilities are expected to invest $1.5 trillion in capex over the next five years. So there is a lot of investment in the pipeline to keep the economy moving forward.
Michael Zeuner: 07:44
So Sam, that all makes is very clear and makes sense. The one thing you haven’t mentioned, which I’m curious about, is one of the things we saw during the last six weeks was that, given the hit to energy infrastructure globally, the threat of higher inflation really raised its head that may still be with us for some period of time, and therefore interest rates really rose, particularly in the US. The consensus before the war was that they would fall, but interest rates rose in the in the face of the fear of an inflationary or stagflationary environment. And I think in addition, there’s been a continuous underlying theme with rates, about the US fiscal situation, and was it sustainable? And so you have all these pressure in the public bond market, at least that rates have gone up. Do you have any concerns that what’s happening in the public bond markets could put a damper, or more than a damper, could really put a chink in the positive fundamentals that you’re seeing on all those other metrics.
Sam Sudame: 08:53
So over the last four weeks, when the conflict emerged, interest rates jumped significantly. They were up more than 40 basis points on the fears of higher inflation. So we started the year with oil at $65 a barrel, and then it jumped to $113 a barrel in early April because of the fear of energy shortfall that would lead to inflation rising so but what we’re seeing right now is oil has now fallen down to $82 a barrel when we look at oil futures, which is very important to see what could happen to inflation going forward, oil futures are now pricing in $69 a barrel at the end of June, at 68 at the end of December. So the market thinks the conflict is nearing an end and will be short lived If this occurs, the stagflationary impact is less than what we expected a few weeks ago at our previous podcast and. Has that will allow rates to start coming down.
Michael Zeuner: 10:03
So so what you see then is not as significant a threat coming from higher rates as a result of inflation and whatever the Federal Reserve does or does not decide to do, that’s a topic for another podcast. I think we saw some real changes from at least the Treasury Secretary over the past few days in terms of pressure that he was putting on the Federal Reserve, but no longer, in any case, no matter what the Fed does or does not decide to do, the public bond market certainly seem to be easing up on their fear of inflation driven by the spike in energy prices, so we’ll have to watch that space. But to me, that all sounds like fairly good fundamentals, both rates and global capital market and macro economic conditions. And while it’s too soon to make any big bet on any particular outcome, diversified portfolios should continue to see the benefit of improving conditions. Does that make sense to you?
Sam Sudame: 11:05
Bonds are looking fairly attractive now. Yields went up since the beginning of the year. It’s likely that if inflation has is not going to go up, those yields are quite attractive, and there’s room for the yields to now start coming down, giving a gain to bond investors,
Michael Zeuner: 11:25
While at the same time, being careful for bond investors, we’ve been talking about this a lot to stay under control or short to intermediate in terms of their interest rate exposure as measured by duration, because things could Turn around on a dime, as we have seen consistently over the last 12 to 18 months, on many topics, not just the geopolitical situation in the Middle East. Okay, Sam, I think we’ll leave it at that. Thank you very much, and look forward to talking again soon.
Sam Sudame: 11:56
All right, thank you. Michael,
Disclosure: 11:59
The Wealth Enterprise Briefing is for informational and educational purposes only and does not consider the specific investment objectives, financial situation, or particular needs of any listener. The information in the briefing is not a recommendation of any security and should not be relied upon as investment legal or tax advice.
