Macro investing insights

JACK JANASIEWICZ: All right. Hi, I'm Jack Janasiewicz, lead portfolio strategist and portfolio manager for the strategist models here at Natixis Investment Managers.

BRIAN HESS: And I'm Brian Hess, investment strategist. Welcome to Tactical Take. Jack, one of the hallmarks of this year has been the unwinding of the Trump trades. We've seen interest rates falling, the dollar weakening, and US stocks actually underperforming international for a change.

So I'm wondering, why is this happening? What do you think is going on? And are we looking for a repeat of 2017 when a lot of those Trump trades that were popular in Q4 of '16 reversed, or is something else likely to play out? What are your thoughts?

JACK JANASIEWICZ: There's certainly a lot of undercurrents going on here, Brian.

BRIAN HESS: No doubt. No doubt.

JACK JANASIEWICZ: So some of these answers will be a little bit tricky, but I think you've got a little bit of a confluence of events here that are leading to an unwind of some of these positions. right? And I think, one, just the uncertainty that we've continued to have from the constant barrage of geopolitical headlines. That's complicating things in here.

And so, specifically with the Trump trades, you keep hearing about, well, tariffs are on. Tariffs are off. You're hearing about this rate, this level, this good, so on and so forth. And then they get pulled back.

That uncertainty, I think, is finally starting to manifest in sentiment, right? You see it across the board, whether it's business sentiment or consumer sentiment. And I think you're starting to finally see that sort of reflect itself in some slowing economic data.

So when you combine that political uncertainty with a slowing backdrop, that I think is giving a little bit of concern in terms of how much do you want to be in some of these risk-on trades? And so as a result, you're starting to see some of that come off a bit in here.

BRIAN HESS: Yeah, I guess it's just a less obvious direction, one way, which would be stronger growth and potentially higher inflation risks and US exceptionalism. The waters are getting muddied. And so we're seeing a reversal.

OK, the other thing, I guess, more recently that has hit markets has been a beta unwind where US large cap growth, which had been the big performer, makes up a large proportion of headline indices, have under-performed pretty dramatically. And so we've seen that factor under-perform. Do you think that's part of the Trump trade unwind, or is it a separate issue?

JACK JANASIEWICZ: You know, it could be a little bit of both. But I think maybe we could start back and kind of point some fingers at the DeepSeek news.

BRIAN HESS: Right.

JACK JANASIEWICZ: Because all of a sudden, you're looking at a potential challenger for that US exceptionalism, which I think really narrows down to the tech trade. And so maybe the giants that we're seeing here on the US tech front are now being challenged by someone overseas, in this case, DeepSeek, who was able to do a lot of what we're seeing from our companies doing at a cheaper price, so to speak, and maybe even potentially better. So I think that began to call into question sort of this AI trade.

But you combine that with the backdrop we just sort of outlined, and it's not surprising some of the wind is coming out of the sails. And then you get a little bit of profit taking. And then, obviously, a lot of the momentum players-- CTAs ][Commodity Trading Advisors], hedge funds, those sort of guys-- are all lumped into the same trades. They get a little bit of selling there.

And then you see the unwind slowly start to unravel into something bigger. So certainly, a beta trade unwind that could also lump in a little bit on the momentum side. But I think that's what we're seeing right now, is that—

BRIAN HESS: So probably more DeepSeek related and more AI related than necessarily Trump tariff policy uncertainty.

JACK JANASIEWICZ: Yeah, I think partly, but I also think it certainly isn't helping either at the margin. So you put all these things together, and you certainly can see why you might be getting a little bit concerned and taking some chips off the table in here.

BRIAN HESS: And you're probably getting a de-grossing across the board, given the higher volatility.

JACK JANASIEWICZ: Absolutely. Exactly.

BRIAN HESS: So you're gonna sell the winners in that scenario.

JACK JANASIEWICZ: Yep.

BRIAN HESS: Now, we've not only seen the Trump trade reverse and the momentum trade fade, but we've seen Jack Janasiewicz turn cautious. You put out a note last week entitled just that, "Turning Cautious." You highlighted the elevated political uncertainty, the weak consumer confidence, and probably business confidence, too, that might be faltering a little bit. And you've highlighted the risk of a growth slowdown.

So why don't you walk us through what was the catalyst for that note? We've been optimistic on US stocks and the US economy pretty consistently for the past two years. So this marked a decent shift for us or a noticeable shift, I should say. Let's get into it.

JACK JANASIEWICZ: Yeah, and if you go back to two of the trades that we really were talking about at the start of the year, it was the idea that maybe the market was a little bit too hawkish on the inflation backdrop and a little bit too sanguine on the growth backdrop. And we said, you know, maybe we're on the other side of that. Inflation might come down a lot more than people are expecting. And that growth backdrop probably slows a little bit more than people are pricing. We've been warning about that for quite some time.

BRIAN HESS: That's true. That's not new.

JACK JANASIEWICZ: Yeah, and we're starting to finally see some of that. And I think the combination of front-running some tariffs saw a little bit of a bump in some of the economic data. But when you start to read through some of the survey data, you're seeing the same stuff pop up. And it's that we are concerned about the uncertainty. We're concerned about the potential for tariffs and immigration and so on and so forth. And so as a result, you're already starting to see, I think, a little bit of that bump fading because of the front-running is already beginning to fade.

And the bigger one for us, and this really came out in that GDP report, was the idea that, I mean, it's something, again, we've been highlighting, consumption has been running at a level that's been above disposable income, and that just can't persist. You can argue that, yeah, there's a savings buffer there that you can draw down on. Maybe you have some other things that are buried in there, like the stock market wealth effect, that kind of stuff.

But the point being is the idea that you're spending more than your disposable income or the money that you're taking in, that can't persist like it has. And it started to close. And that's a function of, I think, a labor market that's starting to slow as well.

So at the margin, we're seeing consumption come off the boil. And I think that is part of the key for us turning a little bit more cautious in here with the consumer being 70% of the economy. You're starting to see a slowing in the labor market. You're starting to see some slowing in consumption. I think you should expect to see a slowing in the economic growth numbers here. And that probably gets reflected in the stock market with a little bit of a repricing in rates and as well as a repricing in the equity market as well. And that's kind of what we're starting to see in here.

BRIAN HESS: Do you think the back and forth on tariffs-- and this week's been a big example of that-- has the potential to further weaken the labor market? We've already seen a slowdown in job creation. We've seen decelerating wages. Do you think corporations are maybe just going to be like, let's hold off on expansion plans for now? And this could be like an additional source of labor market weakness, which you've highlighted as being so important to underpin consumption.

JACK JANASIEWICZ: 100%. I mean, if you can't figure out what the policies are going to look like going forward, are you going to want to make a multi-billion dollar investment on some Capex factory somewhere where you're going to hire 10, 20,000 people? That uncertainty, I think, just makes things very, very challenging to plan ahead. And as a result, you're seeing pulling back, a retrenchment, not only just on the consumer side, but on the business side.

BRIAN HESS: Yeah.

JACK JANASIEWICZ: 100%.

BRIAN HESS: It makes sense. And I think the challenge for the markets is that we have pretty aggressive earnings growth expectations built into the price. And we're trading at a fairly elevated multiple on those expectations. So—

JACK JANASIEWICZ: Not a lot of cushion for misses here.

BRIAN HESS: There is not. There is not. And—

JACK JANASIEWICZ: I think the other thing to think about too, is if you kind of look at what happened at the end of earnings season, as you got towards maybe the last two weeks, the earnings expectations, or I should say the actual numbers coming out relative to expectations, kind of were underwhelming. And I think, if you look at the stock market or the stock performance coming off of an earnings release, that number has been fading as the beats have been coming in there.

So as we like to say, the reaction to the news is more important to the news itself. And the last week or two in earnings season, you just weren't seeing the beats being rewarded with good stock price moments. So you're starting to wonder here, what's the market starting to look at relative to that forward expectation here?

BRIAN HESS: And maybe it just highlights how lofty expectations have become.

JACK JANASIEWICZ: Exactly. Yep.

BRIAN HESS: Now on the back of the "Turning Cautious" note, we did make some adjustments to our model portfolios. And we've gotten underweight equities now for the first time since 2020. So that marks a noticeable shift.

And I guess my first question is, are you looking for the risk of a big bear market, a prolonged bear market, something like 2022 or even worse? Or are you viewing this as likely setting up for a typical correction where we want to buy that dip?

JACK JANASIEWICZ: Yeah, it's probably more of the latter. And I think that's also something really worth highlighting here in that we certainly are turning cautious. We certainly expect things to slow, but as we've been saying for a while, you're slowing from a pretty elevated base. So there is a cushion for us to ease into.

The risk here, though, and the market's always love to overshoot, whether it be overshooting to the too bullish or to bearish side. We do get a slowing in some of the economic data. And all of a sudden the market starts to extrapolate that into something worse.

So the one thing I would say that could exacerbate that sort of over-extrapolation on the on the bearish side would simply be the shift in the narrative that we've heard from the Fed over the last couple of months, in that it used to have a bias towards the risk being on the labor side of the mandate. And that more recently has shifted, I think, back to the inflation side because of the perception that inflation has been sticky.

BRIAN HESS: And they marked that down as part of the summary of economic projections every quarter.

JACK JANASIEWICZ: Exactly.

BRIAN HESS: They say, we're more worried about this. We're more worried about that. And there was a crossover temporarily where it was growth concerns trumping inflation concerns. And then it reversed back towards the end of last year.

JACK JANASIEWICZ: And that sets the stage, though, because I think before there was more impetus to maybe actually be proactive and cut rates if we were seeing the labor side of the market slowing. Now that the inflation side is really the bigger focus in here, I think you're going to be seeing the Fed becoming more reactionary as too proactive. So the idea that we get some slowing economic data, we get a little bit of a correction in equities. And I think in the past, a lot of people were expecting, well, the Fed will come in and cut rates. So we'll have a floor on the market.

That might be the case, but it might be a little bit delayed where you do get the correction. And you still need to see that inflation number come a little bit softer before the Fed is willing to actually come in and start to cut rates in here. So a little bit of a nuanced disconnect between what we typically have been looking for relative to what we're at today. And it's really that inflation risk that I think changes that backdrop a little bit.

BRIAN HESS: So the strike on the Fed put has been lowered.

JACK JANASIEWICZ: Exactly. A good way to put it.

BRIAN HESS: And the Trump put, we're not sure if it's being written right now or not.

JACK JANASIEWICZ: Dude, that's a very good question. Two great points. Yes.

BRIAN HESS: OK. So you hit on the Fed a little bit there. But anything else you'd be looking for specifically to tell you, OK, maybe now it's time to become constructive again, or add risk back into the portfolios?

JACK JANASIEWICZ: Yeah. And again, I think some of this is just a question of positioning in the marketplace, right? We had a level of maybe buyer strike, if you will, on the retail side where flows into US equities for the first and second week of February were basically nonexistent. You had marginal outflows, marginal inflows. The last week here as we were talking about the last week of February, you had a little bit of an influx of money coming back in.

And we also pay attention to a lot of things like the CTA market and the hedge funds. Where are they looking at from a leveraged perspective? And they've certainly taken it down a little bit, but I don't think we've had a washout, so to speak.

So I think when we look at positioning, we would like to see a little bit more cleaner positioning, if you would, if we do get that pullback in the marketplace. And that would sort of be something that we're looking at in terms of saying, OK, now I think it's probably worth coming back in here and starting to reestablish some positions.

BRIAN HESS: So ideally, we'd see a change in tone from the Fed, maybe some willingness to provide accommodation coupled with cleaner positioning backdrop or even some bearishness showing up within positioning.

JACK JANASIEWICZ: Yeah, and it's going to be interesting. I mean, we've got payrolls coming up because I mean, we're recording this before the payroll number coming out. And then you'll have the Fed meeting. Will we get maybe a little bit of a dovish tilt coming from Powell out of that meeting?

That'll be, I think, a key here. Because if he sort of plays it close to the vest, I don't think that's going to give the market some warm and fuzzy feelings in here. And so that could obviously add some volatility and some downside risk.

BRIAN HESS: Yeah, this will be an interesting Fed meeting because a lot has happened since they've gone on hold.

JACK JANASIEWICZ: Absolutely. And I believe we get an SCP.

BRIAN HESS: It's March—

JACK JANASIEWICZ: Yep.

BRIAN HESS: --so yes, we will. OK, we've talked a lot about the US. Let's transition to Europe, where it has been an interesting week. And so on Friday, we had the meeting between President Trump and President Zelenskyy in the Oval Office. Did not go particularly well. And I think it was a wake-up call to Europe that they probably need to step up and provide more for their own defenses.

So we recently had an election in Germany, got the outcome. They need to form a coalition. But even before that coalition is fully formed, they've taken steps in this direction to try to provide more defense for their economy.

We have seen an effort to amend the constitution so that defense spending beyond a certain level will be exempt from the debt brake. And that debt brake has been something that has really held back Germany's ability to provide fiscal stimulus for a decade now. So this is a big deal.

They've also proposed creating a 500 billion euro infrastructure fund to support European growth, German growth, and become competitive or more competitive again. So I think the question here, after that long intro, is, do you see last Friday's events as maybe a watershed moment for Europe and an opportunity for them to get out of the stagnation that they've largely suffered since the global financial crisis?

We've had negative rates. We've had very low inflation, aside from the COVID spike. We've had weak nominal GDP growth. Could Europe be turning a corner, because that has major implications for what we do, asset allocation, and thinking about our US exposure versus that of the rest of the world?

JACK JANASIEWICZ: And you've hit on a bunch of salient points there that are very important. And I think, a, the risk in here is simply execution on this. There are some potential hurdles that could come up. One of them being the German courts could challenge this and basically overturn them, say that they're not constitutionally legal.

But I think from everything that I've been reading about that, most people are saying that that's probably not going to happen.

BRIAN HESS: Right.

JACK JANASIEWICZ: So to the point here is there's certainly a lot of, I think, upside risk in here, because, as you put it, watershed moment. A pivot in Europe from Germany where they're no longer really focusing on austerity, but now, they're actually going to look at potentially fiscal stimulus, that's a huge game-changer. And it could be precedent setting, not just for Germany, but I would assume the rest of Europe might follow suit.

And if I think about the typical path that we've seen out of Europe, and it's always been these fiscal targets that they want to continue to sort of make sure they manage to, that means a lot of countries are still running a fiscal deficit that can easily be expanded. So there is room for further fiscal spending—

BRIAN HESS: Fiscal space—

JACK JANASIEWICZ: --across the board. Exactly.

BRIAN HESS: --is what they call it. They have fiscal space. They can deliver the stimulus.

JACK JANASIEWICZ: And then look at countries, someone like France, who's been sort of under pressure because they've already breached a lot of those limits. Maybe now there's less pressure for them to come back and have to move back to being fiscally austere, but they just sort of stay status quo.

So the point there is that's not a tightening. It's not a loosening, but it's not a tightening. So you add up all these things, and all of a sudden now this could be, to your point, again, a watershed moment here. And you know, again, it's not just on the defense spending. Because I think my concern on the defense spending side is simply the money multiplier that comes from defense spending is still somewhat limited. I'd rather see investment in infrastructure because then you get the multiplier effect that—

BRIAN HESS: Actually creates domestic jobs.

JACK JANASIEWICZ: Yeah, exactly. And then it falls into productivity. You get productivity gains from that.

BRIAN HESS: Then there's that the payoff down the road.

JACK JANASIEWICZ: So, but I think all of this is at least moving in the right direction. And to your point, you're getting away from that secular stagnation, that sort of deflationary malaise that they've been in. And, again, you're already seeing it in Germany. Yields are up 35, 40 basis point. The curve's steepening. These are actually good signs for growth prospects out of there.

So the question, I think, is just longer term, can they execute on this? That's a big one because you're talking about, what, 27, 28 countries that are going to have to sort of get on board altogether. And there's going to have some differences here, but it's moving in the right direction.

BRIAN HESS: I think Germany at least can execute on its domestic plan.

JACK JANASIEWICZ: Exactly, yes.

BRIAN HESS: So it can push through the defense spending. It can do the infrastructure spending. And as the typical engine, or at least one of the two engines of growth in Europe, France being the other one, that should have a nice trickle down effect for the other countries on the continent. So I think that's a good thing.

But yes, you're right. If the entire eurozone wants to move in that concerted direction, it will take the core—

JACK JANASIEWICZ: I think maybe I jumped the gun there. I was probably thinking a little bit more along the lines of EU issuance as opposed to specific—

BRIAN HESS: Funding it.

JACK JANASIEWICZ: Yeah, specific country issuance. And again, that's another big step in here, that if you're going to potentially burden share on the defense spending side of the equation, which I think could be a huge positive, that opens the door for potentially even more shared burden on green initiatives, for example. So there's a lot of things here that are precedent setting, and they all could be for the better if you're looking at trying to increase the growth backdrop longer term.

BRIAN HESS: And as you mentioned, bond markets are reacting. I saw a Bloomberg notification this morning. And I didn't fact-check this one, but I believe it said that German yields have risen the most since the Berlin wall fell today.

JACK JANASIEWICZ: That's probably right. I wouldn't be shocked if that's true.

BRIAN HESS: We're having a 20 some basis point increase in the 10-year German yield.

JACK JANASIEWICZ: Yeah.

BRIAN HESS: And the funny thing is, over the past couple of weeks, US treasury yields are down sharply. So you've had German yields rising and UK yields rising, while US yields have fallen. My question to you is, do you think that this global rate increasing backdrop-- and by the way, how about Japan where we've seen a stair step move higher in both 10 and 30-year rates-- do you think that has the potential to lift US treasuries, too, which are rallying? The treasuries are rallying in price, bond yields falling on the risk aversion that we've endured for the past two weeks.

But could that put a floor under treasury yields or even pull them higher? Or will the us slowdown be enough to cap them around current levels? We're seeing the 10-year US treasury in the low 4% range, which has been near the bottom end of the range we've been highlighting on this podcast. Saying like, maybe 4 to 4.5 is the is the range. What do you think about treasuries ahead of a jobs report, ahead of an important Fed meeting? Just kind of curious.

JACK JANASIEWICZ: Just a real quick comment on the Japanese JGB backdrop. What I thought was interesting is what's really, I think, hurting the equity market there right now relative to performance is that inflation is actually probably too high, too sticky.

BRIAN HESS: Right.

JACK JANASIEWICZ: And as a result, the market's actually pricing in the idea that we've got to push rates higher in here. And that's actually making nominal wages look less attractive on a real perspective. And so the real growth that we're seeing on the wage front there is not quite as much as you'd like. So perversely, they got they wanted. They just need even more so on the wage front. So that's one of the things holding back. And that's partly why I think you've seen the yen move as much as it has, too.

But to answer your question, I think what it does for rates is maybe just makes them even more range-bound in here. So the idea where maybe we thought that the 10-year yield could get inside of 4% on that growth slowdown, growth scare, if you will, maybe that puts a floor under it. And so maybe it's not 375. Maybe 4 is the bottom line here, just because the relative valuations between US and Europe and that potential-- I guess, that dis-inflationary impulse that's been sort of exported. Maybe that even goes away. So that's a that's a game-changer too for longer term inflation expectations.

You know, we'll see how that starts to evolve. But probably puts a floor under rates in here in terms of how low some of these rates would go around the world. And maybe more importantly, you get a little bit of curve steepening in some of the global economies because you have a little bit of a better growth backdrop globally, as opposed to just here in the US.

BRIAN HESS: That makes sense. Yeah, and we have a lot of countries issuing a lot of debt. So there's competition for those funds. And to the extent that Europe is offering a higher yield, it just makes the US need to be competitive and might push yields up a little bit.

JACK JANASIEWICZ: And I think the other one that's interesting is if I look at the euro pushing up close to 107. I was looking this morning at the trade-weighted euro. It's probably recouped maybe 40% of the recent downtrend that we've seen over the last 12 months. So you're seeing some big moves in terms of the knock-on effects of those higher rates in Europe, and one of them being a stronger euro relative to the dollar here.

BRIAN HESS: Which has a tendency to lift all currencies. I mean, the euro is known as the anti-dollar.

JACK JANASIEWICZ: Yeah.

BRIAN HESS: So when you have euro USD moving higher, it just takes the pressure off pretty much every other currency out there. So that does have--

JACK JANASIEWICZ: Good for the global growth backdrop. Again, another feather in the cap.

BRIAN HESS: It is. Which is why it's such an interesting moment since you have, like you said, so many different undercurrents and things pulling in this direction and things pulling in that direction. But it seems like the center of gravity, which had been squarely located in the US at the end of last year is starting to maybe move eastward. And we're getting just a little bit more optimism about the international picture.

JACK JANASIEWICZ: Which we haven't had in quite some time.

BRIAN HESS: That's true. All right, Jack, great conversation. Let's leave it there this month. Thank you.

JACK JANASIEWICZ: Sounds good. Thanks, Brian.