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The Base Case is Wrong | Paul Eitelman on AI, Reacceleration and the Pause No One Sees
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Commercial Narrator
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Paul (Chief Investment Strategist at Russell Investments)
You're about to make a trade. Which u do you listen to?
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Commercial Narrator
Is it get optioning those options.
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Co-host or Interviewer
Or.
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Paul (Chief Investment Strategist at Russell Investments)
Let'S do a little research? Learn more@finra.org TradeSmart we're shifting from a period of headwinds, most notably trade policy and immigration restrictions, towards an environment that is showing more policy tailwinds into the year ahead. As we kind of move into the sweet spot of some of the stimulus effects from the One Big Beautiful Bill act, we're seeing some very favorable financial conditions, et cetera, that lead us to think that the growth environment is shifting from resilience to potentially even reacceleration. For most of 2023 and 2024, a lot of the activity and a lot of the earnings growth in particular was driven by those Magnificent Seven hyperscaler superstar US Technology companies. I say we're seeing that start to change already, and our expectation is that's likely to continue to change where fundamentals are broadening. Given our outlook is for stronger growth, not weaker growth.
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Co-host or Interviewer
I think it's quite likely that we're right on the cusp of a protracted.
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Paul (Chief Investment Strategist at Russell Investments)
Fed pause here where we may have.
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Co-host or Interviewer
Even already seen the last rate cut for the Federal Reserve in this cycle.
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Host or Interviewer
Paul, thanks so much for joining us. And welcome to Excess Returns.
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Paul (Chief Investment Strategist at Russell Investments)
Yeah, pleasure to be here.
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Host or Interviewer
You are the global Chief Investment Strategist at Russell Investments, where you help shape the investment allocation and portfolio strategy that's responsible for managing and advising on hundreds of billions of dollars, if not more. And one of the things that you and your team are responsible for are putting out pieces of research, thought leadership pieces, pieces on the market that you disseminate to market participants and those that do business with Russell Investments. And recently you put out your 2026 outlook titled the Great Inflection Point, where you made the case for accelerating AI adoption, renewed US Economic momentum, the potential for market leadership to broaden out next year beyond the Magnificent Seven. And so what we thought we'd do today, which would be really interesting and I think fun conversation, is kind of work through each of the themes that you highlighted and then try to think about, you know, what this actually means for investors, what's happening underneath the surface, and how investors might want to think about positioning as they head into next year. And so it's going to be fun, I think, in depth conversation about all these things. And for people that want to actually get the report, they can go to Russell Investments underneath the Insights tab and then search in there. But you can also just, you know, Google the great inflection point, Russell Investments, and I'll bring you right to that, right to that report. So, so anyways, the first thing I wanted to do, and I think this is a great way to just sort of frame up how you guys think about investing, is talk about your, your, your CVS framework, which is cycle value and sentiment framework. And you know, take a minute to explain sort of how that, I guess captures the way that you think about, you know, developing investment strategies and what you're advising clients on.
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Paul (Chief Investment Strategist at Russell Investments)
Yeah, I guess for us it starts with a philosophy that financial markets are pretty efficient, but not perfectly efficient. And I think what we've seen a lot of episodes of over the last couple of decades is during moments of crisis, financial markets can overshoot fundamentals, particularly when investors become panicked about economic prospects. So for us, that cycle valuation sentiment process is important for two reasons. It gives us structure to help avoid making those same behavioral mistakes that some other investors are exposed to. And then second, we can kind of lean in and take advantage of those.
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Co-host or Interviewer
Dislocations when we're seeing them in real time.
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Paul (Chief Investment Strategist at Russell Investments)
So to kind of go through each of those three building blocks, the cycle is just, roughly speaking, the fundamentals that we're seeing that matter for asset classes. So think about things like economic growth, earnings growth, what the Fed's doing with interest rate policy. So a lot of attention into those real term, real time dynamics around the business cycle. Valuations are the price that you have to pay for those fundamentals, which really does matter, particularly as investors stretch out their time horizon over the medium to longer term. And then sentiment's really a workhorse for us. And there's two pieces for it. One is leaning into momentum strategies, which do work under normal circumstances. But I think the really interesting feature around that idea of behavioral finance and trying to exploit overshoots in markets is we on a daily basis measure market psychology and look for moments of panic. And when we get those big bouts.
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Co-host or Interviewer
Of risk aversion, what we tend to find is that forward returns in markets tend to be much stronger than normal. And we can kind of take advantage of that insight to our advantage in our portfolio strategies.
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Host or Interviewer
Yeah, I love that. Those are all very important levers that, you know, at different Points in time, different points in the cycle are going to matter, maybe more or less. But having the overlap too, where they all kind of meet can kind of really inform, I think, the way that you're thinking about sort of the risk and return opportunities in the market among different asset classes. So try to sort of relate that to this report. The, the great inflection point that you put out for 2026 outlook and sort of what changed in your view in those things. And I think we're going to talk about some of those in detail. But if you could just at a high level, what sort of makes you confident that the RE acceleration into next year is, you know, likely to continue?
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Paul (Chief Investment Strategist at Russell Investments)
Yeah, I mean, if you look back to April of 2025, investors were grappling with some really big questions, some very significant policy change from the US Administration. We had an equity market that was down peak to trough almost 20%. So we were seeing some signs of pretty extreme risk aversion, a lot of concerns amongst economists around the possibility of an economic recession. But we haven't had that. And I think the business cycle has been very resilient to those policy changes. And not only has it shown resilience, but as we're kind of thinking about the catalyst into 2026, it looks to us like we're shifting from a period of headwinds, most notably trade policy and immigration restrictions, towards an environment that is showing more policy tailwinds into the year ahead. As we kind of move into the sweet spot of some of the stimulus effects from the one big beautiful Bill act, we're seeing some very favorable financial conditions, et cetera, that lead us to think that the growth environment is shifting from resilience to potentially even RE acceleration.
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Co-host or Interviewer
And more strength as we move into the new year.
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Host or Interviewer
One of the big themes that you highlighted was this accelerating AI adoption and talking about how, you know, there's likely to be some more positive returns on these investments being made into AI. But before we get into some of the stuff on that, I just wanted to ask you, like, how do you look at artificial intelligence and what we're seeing in AI, you know, relative to other transformational technologies in history, that is the Internet, I. E. Railroads, maybe telecom, like, how do you kind of where do you stand on where AI is relative to some of these other breakthrough technologies in the past?
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Paul (Chief Investment Strategist at Russell Investments)
Yeah, I mean, it's early to say exactly where all the chips are going to fall on this major technological wave that we're going through right now, but I'd say it's probably closest in terms of parallels to the Industrial Revolution. And if you kind of think back to that in the most simplistic terms, the Industrial Revolution disrupted human muscles in favor of machines. And that really transformed the industrial sector globally. What we're seeing with AI, at least in terms of the potential of what it can deliver, is the ability to disrupt the human mind and meaningfully impact and supercharge the services sector, which is a major part of not only the US but most of the other developed market economies today. And so it has a lot of potential that's quite consequential for investors to.
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Co-host or Interviewer
Think about over the next several years here.
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Host or Interviewer
One of the major questions in the market right now is, you know, are we going to see a positive return on the hundreds of billions, eventually trillions of dollars that are being spent on this AI build out, whether it's data centers, whether it's the investment into some of these companies, companies that are, you know, leading AI. And that's even you can even go the Mag 7 to some extent because a lot of those, you know, major growth companies are also investing heavily in their own businesses in AI. And I thought you had a really interesting chart in here that shows that some of these AI investments are starting, you know, on the margins to actually pay off. So can you just kind of talk about what you're seeing and what you're looking at and why this is important?
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Paul (Chief Investment Strategist at Russell Investments)
Yeah, well, I mean, we're seeing adoption rates for generative artificial intelligence start to pick up in the real world now. So in terms of AI use at work, the numbers are increasing. They're up to around 40% today in the US and increasing with each new survey that comes out. And so I think we're starting to get some data now around how successful those generative AI deployments are in the real world. It's not something, unfortunately, that you can go to a financial statement to pull up and get exactly how much these technology deployments are helping the bottom line. But there are a number of surveys from the hyperscalers themselves, consulting agencies, et cetera, that are trying to measure this concept of return on investment from AI as it's getting kind of put to use in the real world. And the numbers are a little bit mixed across which survey you look at, but I think the mosaic here is one where there are actually now some real tangible benefits, where companies seem like they're being able to deliver more in terms of output, in terms of goods and services with the same input in terms of workers and capital, and they're seeing some real benefits to their bottom lines through efficiency gains and productivity growth. And my sense is we're in the pretty early innings of this sort of tailwind cycle, potentially building going forward over.
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Co-host or Interviewer
The next couple of years.
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Host or Interviewer
Yeah, and I think that's one of the points you made in this sort of J curve example, which kind of just talk to that. What does a J curve actually indicate with these new types of technologies? Like, how would you interpret that? And where are we maybe on the J curve here?
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Co-host or Interviewer
Yeah.
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Paul (Chief Investment Strategist at Russell Investments)
So J curve is a concept that economists tend to like as we're thinking about new technologies. And basically what that shape captures is in the earliest innings of a new technology, there's a lot of challenges. Companies have to invest and deploy those systems into their work streams. They have to figure out where they can find real advantages. Workers have to learn how to use the new technology through trading, getting real world work experience. And so you tend to have some growing pains where in the early innings, you often find no real productivity benefits, sometimes even headwinds onto corporate performance. But as that technology progresses and deepens and companies and workers become more familiar with it, the tailwinds build over time. And so my sense, kind of harkening back to that conversation we were just having on roi, seeing some green shoots on roi, now it feels like we're starting to move up that J curve in a more positive direction now with some, you know, incremental tailwinds into 2026 and those very likely building into 2027.
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Co-host or Interviewer
As companies kind of deploy this more.
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Paul (Chief Investment Strategist at Russell Investments)
And more effectively in the productivity and.
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Co-host or Interviewer
Profitability gains build over time.
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Host or Interviewer
How do you. I'm curious, you know, the Mag 7 has kind of gone from like asset light, high profitability to plowing, you know, billions and billions into these AI investments. So they've become, you know, much more intensive with their deployment of capital. Does that, how do you think about that? Because I mean the Mag 7 has been, you know, these large technology stocks for the last few 15 years have been one of the major drivers of the returns in the broader market, specifically large cap indices that are market cap weighted. So you know, how do you view this heavy investment and does it change in your mind the profile of these companies?
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Paul (Chief Investment Strategist at Russell Investments)
To some extent it is changing their profile over time. I mean the hyperscalers have had enormous successful businesses with very little physical capital deployed. Record free, free free cash flow margins that's been supporting the aggregate market is starting to change. I mean the capex figures for the hyperscalers alone today are now in the hundreds of billions of dollars in the aggregate. I don't think we're seeing too much leverage in the system yet but it is at the company level starting to shape dynamics where in a couple of instances free cash flow margins are significantly depressed. We've seen a couple of the hyperscale come to public and private debt markets to help sustain their capex and that's really raising some serious questions amongst investors. I think from my perspective we're not seeing major vulnerabilities on that front yet usually around these leverage cycles. But it's going to be a really key issue around how much profitability they can generate going forward. What I would say, obviously we don't know where this will land but it looks to be a very competitive space where a number of the hyperscalers are competing with one another around even the large language models. Really competitive. The leaderboards seem to be changing almost every single month in terms of who's at the top of the stack with.
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Co-host or Interviewer
The most effective model here. And that's going to be interesting to watch how it evolves going forward if a company can kind of emerge to.
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Paul (Chief Investment Strategist at Russell Investments)
The top or if it remains hyper competitive, in which case normally you'd think.
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Co-host or Interviewer
About pricing being a challenge and profitability being a challenge around all of these investments. So it's really going to be a key issue over the next several years here now.
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Host or Interviewer
And just one Last1 on AI what do you think the possible risks downsides are here? I mean one, some people prognosticate that it's going to wipe out.
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Co-host or Interviewer
A lot.
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Host or Interviewer
Of white collar jobs. Another issue is the demand of energy and how that affects energy prices in this country. I mean you just had Bernie Sanders come out today. This isn't necessarily Totally along these lines. But, you know, he's basically making a push for a maturing, you know, stopping the building of, putting a halt on, stopping the building of these data centers for whatever reason that is. So, and I'm just curious, like, when you think about some of the possible other downsides maybe to society, that's the right way to put it. Like, how do you think about that?
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Paul (Chief Investment Strategist at Russell Investments)
Yeah, I think energy demand is one key risk. We have a pretty inefficient electrical grid in the United States. And so when these data centers pop up into regional economies, it does seem to be really pressuring systems. We're seeing, at least in isolated cases already some upticks in electricity prices and that could have some real consequences for consumers. So I think that's one challenge both in terms of how quickly the technology.
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Co-host or Interviewer
Can scale, but then also some blowbacks.
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Paul (Chief Investment Strategist at Russell Investments)
Onto the economy to think about from a consumer perspective. Another risk that we're monitoring kind of ties into the conversation we were having around this big capex cycle is as we project these numbers going forward. Again, probably not an issue today, but if you look out to the end of this decade, our estimate is that these very large companies could need to issue almost a trillion dollars into public and private capital markets. And that's a lot for markets to absorb. So far it's been okay that a lot of these deals, if anything, have been oversubscribed, but that's a lot of capital that markets are going to need.
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Co-host or Interviewer
To put into this one sort of.
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Paul (Chief Investment Strategist at Russell Investments)
New technology to sustain it.
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Co-host or Interviewer
And I think the pricing around that is another important risk to have in mind.
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Paul (Chief Investment Strategist at Russell Investments)
The labor market's an interesting one, at least so far. We are seeing some AI impacts, but our own work and I think the academic studies in this space suggest the.
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Co-host or Interviewer
Impacts for now are pretty modest, where.
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Paul (Chief Investment Strategist at Russell Investments)
It'S only really showing up in the.
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Co-host or Interviewer
Most exposed jobs, whether that be software engineering or customer service in those spaces. There's been a little bit of a.
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Paul (Chief Investment Strategist at Russell Investments)
Hiccup in labor demand where companies are scaling back on how much they're hiring in terms of early career workers. We're not seeing as much in the way of sort of AI driven layoffs here. I know there's stories about that and.
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Co-host or Interviewer
Anecdotes and companies are talking about that.
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Paul (Chief Investment Strategist at Russell Investments)
Story, but probably weaker evidence of those.
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Co-host or Interviewer
Sort of more damaging or disruptive effects.
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Paul (Chief Investment Strategist at Russell Investments)
But it could ultimately become a bigger issue over time and we'll have to kind of keep tabs on it. Ultimately, those labor markets will come down to the breadth of jobs that AI can impact. And provide real productivity gains for and just how big from a magnitude perspective those benefits are for each of us as workers. And if the gains are profound on both of those dimensions, this could be.
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Co-host or Interviewer
Enormously disruptive to the labor market over the next couple of years and potentially.
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Paul (Chief Investment Strategist at Russell Investments)
Cause a downdraft in employment before we.
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Co-host or Interviewer
Reach some kind of new equilibrium.
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Paul (Chief Investment Strategist at Russell Investments)
We're not seeing that yet, but I.
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Co-host or Interviewer
Think it is one of those medium.
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Paul (Chief Investment Strategist at Russell Investments)
Term risks to have.
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Co-host or Interviewer
To your point, it seems like if you know anybody who has kids that are just graduating college, or if you know anybody themselves who are just graduating college, it seems like that's where the biggest impact is right now, like it's making it. Maybe companies are looking at that new hiring as the first area that maybe AI will supplant to some degree.
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Paul (Chief Investment Strategist at Russell Investments)
Yeah, I think that's right. That seems to be the first area right now. And then over the horizon is sort of what's next. I'm a dad of a three year.
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Co-host or Interviewer
Old and a six year old and it's, you know, it's a little scary just how transformative this could potentially be for the labor market over the medium term.
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Yeah, I even wonder if my kids like will go to college by the time, you know, if you have a three year old and six year old, I mean, who knows what it's going to look like by then. Could be a completely different world. Just before we switch to the economy. I just want to ask you one more. In AI, how have you like, have you seen a lot of personal benefits whether in your own life or in your work At Russell, in terms of using AI, we always like to ask guests, like how they use it personally.
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Paul (Chief Investment Strategist at Russell Investments)
Yeah, I mean I have my own learning curve. I'd say for the first three to six months I was watching late night YouTube videos and as a dad of two kids, I was often falling asleep.
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Co-host or Interviewer
To Those late night YouTube videos as.
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Paul (Chief Investment Strategist at Russell Investments)
I was trying to get smart on the technology. But today, here in late 2025, I'm using generative AI every single day at work. And I'd probably say the biggest level up for me is as a researcher getting smart on whatever issue I'm really facing and trying to disentangle from a financial market perspective or a question I'm getting from clients. AI allows you almost instantaneously to generate a really sophisticated literature review of what some of the smartest academics or professionals are saying on a topic. That was a task that as a researcher would typically take an analyst a day or more to execute before. And I found AI to be really excellent at that sort of early stage of research. We're not using it as an output just yet and making sort of final investment decisions on it, but to really speed up that research process has been really effective for me. So that's been the biggest win.
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Co-host or Interviewer
So, as we shift to the economy, I want to talk about your theme of RE acceleration here. And before we get into. You have a brief chart, which we'll put in the podcast, that looks at each of the individual factors that's impacting the economy right now. But before we get into that, can you just talk at an overall high level how you're thinking about the economy and what the case is for this re acceleration as we head into 2026?
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Paul (Chief Investment Strategist at Russell Investments)
Yeah, I think the highest level in terms of the case for reacceleration is sort of mix shift around US policy dynamics, where 2025 was all about significant policy change. Some of that involving headwinds with steep new tariffs, immigration restrictions. But as we move into 2026, not only have we experienced some of those headwinds and the US economy has been resilient to those, but the mix shift is turning more positive where we're seeing more tailwinds and support for growth from fiscal stimulus, from loose financial conditions, et cetera. And so when we do the math, that's shaping up towards an environment where.
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Co-host or Interviewer
We see growth likely to accelerate into 2026, which is, I think, important and positive from a fundamental perspective.
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The first thing you have in the chart, which is on a down arrow, is tariffs. And tariffs have been really interesting because it seems like what economists thought the impact of tariffs were going to be has been very different than the actual impact. So either maybe they're not as big a deal as we thought, or maybe that impact has lagged and we're going to see it like over time. So how are you thinking in general about tariffs and their impact as we head into 2026?
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Paul (Chief Investment Strategist at Russell Investments)
Yeah, I think this was probably top of mind for economists when they were thinking about recession risk back in April of 2025. But it seems like the issue's been absorbed very well by the US private sector so far. We've seen some of that get absorbed by the corporate sector in terms of incremental hits to corporate earnings. Even with that hit, corporate earnings have been really robust.
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Co-host or Interviewer
So companies have kind of managed through.
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Paul (Chief Investment Strategist at Russell Investments)
This, through a lot of dynamism and clever pricing practices. Consumers as well. I mean, we've had some inflation, particularly amongst goods prices from tariffs. That's been a bit of a hit to household real incomes in terms of moderating that driver of spending. But consumers continue to kind of engage with the economy here. And so we've had those headwinds, but we've managed through it. And I think looking forward, those tariff rates have now plateaued at a high level for a couple of months. So that trade policy has started to settle down. And as we're looking out over the year ahead, we're still viewing trade policy as a headwind, but it's a fading headwind for the outlook that we're estimating to be at around a half a percentage point to growth at its peak around, call it May of 2025, when there was the big threats against China.
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Co-host or Interviewer
For example, that tariff drag onto growth was closer to a percentage point. So still a headwind, but a fading headwind onto the outlook is sort of our take here.
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And how about immigration? That's one I kind of missed coming into the year. I didn't really think through it that much. But if you think about it as a labor supply as a function of what's going on with immigration, then you could argue that's a headwind as well as we head into 2026. So how are you thinking about that?
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Paul (Chief Investment Strategist at Russell Investments)
Yeah, in its simplest form, economists often decompose growth into how many people you.
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Co-host or Interviewer
Have and how productive those people are. And so I think naturally through that lens, when you have a world of immigration restrictions, meaning some detentions, some deportations of individuals out of the United States, a reduction in immigration inflows through visa restrictions, that's been a drag onto the working age population growth for the United States.
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Paul (Chief Investment Strategist at Russell Investments)
And so it's a headwind, we think, a manageable one. We're calculating it to be around 3.
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Co-host or Interviewer
10 of a headwind to growth, but.
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Paul (Chief Investment Strategist at Russell Investments)
It is there sort of top of.
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Co-host or Interviewer
Mind causing some disruptions onto both aggregate demand, but also some pretty specific disruptions into the labor market recently as well.
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Third one you had is uncertainty. And it's funny, like if I look back at myself throughout the podcast, I've probably found myself saying we have an above average level of uncertainty pretty much all the time. So clearly I have to be wrong about that because we can't always have that. But I do kind of feel like we have an above average level of uncertainty right now. So how do you think about that then, when you carry it to an economic outlook, though, the impact of uncertainty on the economy?
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Paul (Chief Investment Strategist at Russell Investments)
Yeah, the Federal Reserve bank of New York actually had a academic debate on this topic recently.
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Co-host or Interviewer
It was really around this idea of.
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Paul (Chief Investment Strategist at Russell Investments)
Trade policy uncertainty how consequential it is.
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Co-host or Interviewer
Is it still high or not?
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Paul (Chief Investment Strategist at Russell Investments)
And so there's a lot going on. I would say this theme of uncertainty was pretty extreme. Back in April and May of 2025.
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Co-host or Interviewer
We had radical policy change. The biggest increase in tariffs since the.
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Paul (Chief Investment Strategist at Russell Investments)
1930S, I think it was pretty natural to expect. And we see some evidence for it.
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Co-host or Interviewer
That consumers and businesses held off on important decisions for a couple of months due to all that uncertainty and policy change.
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Paul (Chief Investment Strategist at Russell Investments)
But because the economy's been resilient, it seems like that picture has started to change.
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Co-host or Interviewer
Trade policy has settled down a little bit. The administration has pushed towards some deals.
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Paul (Chief Investment Strategist at Russell Investments)
If you look at alternative measures of.
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Co-host or Interviewer
Policy uncertainty or uncertainty in financial markets like the vix, the volatility index, that's back down to pretty normal levels. There's a similar measure in credit markets called the excess bond premium that's at historically low levels.
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Paul (Chief Investment Strategist at Russell Investments)
And if I put myself in the shoes of.
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Co-host or Interviewer
A sort of corporate CEO.
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Paul (Chief Investment Strategist at Russell Investments)
In a world in which my bottom.
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Co-host or Interviewer
Line'S pretty strong, my stock price might.
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Paul (Chief Investment Strategist at Russell Investments)
Be at an all time high here right now. I think that stability likely offers some.
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Co-host or Interviewer
Confidence that maybe we've kind of progressed through the worst of this and that that headwind, if you will, onto important decision making might be alleviating going forward.
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Paul (Chief Investment Strategist at Russell Investments)
So we still have it as a headwind, but it's now really quite small.
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Co-host or Interviewer
And really even questionable if it's really operable still at this stage.
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So I think we're moving to the ones that are moving in the positive direction now. And one of them, and this is an interesting one because people define this in many different ways. But one of the things I think all of us are seeing now is financial conditions are maybe moving in a more positive direction. So how do you think about defining financial conditions and then what do you think about them going forward?
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Paul (Chief Investment Strategist at Russell Investments)
Yeah, so financial conditions in my mind are a blend of different asset prices that matter for household net worth and.
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Co-host or Interviewer
How people make decisions. So within that composite, we're looking at things like equity prices, we're looking at home prices.
- [28:17]
Paul (Chief Investment Strategist at Russell Investments)
We're also looking at asset prices that matter for corporate decision making. So credit spreads are an important determinant of financing costs for the corporate sector. Mortgage rates in terms of the real estate market, and when you kind of build all of them up into a composite, I guess what we're seeing right now is markets have gone almost in a straight line up and to the right from those lows in April of 2025. It's been a really V shaped recovery. Equity prices are close to all time highs. Home prices, obviously it's a local by local market in terms of some regions being weaker, others being stronger. But at the national level, home prices are still close to all time highs. And so through this financial conditions lens, it's a pretty supportive picture here where household net worth is near record levels and say particularly for higher income households that are most exposed to these very.
- [29:15]
Co-host or Interviewer
Large gains that we've seen in equity markets here over the last couple of months, that's very likely to be a tailwind onto consumer spending. And we're seeing that in some of the really detailed bank data on credit card spending that the higher income consumer is really holding up here and helping to support consumption growth.
- [29:35]
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- [30:06]
Paul (Chief Investment Strategist at Russell Investments)
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Paul (Chief Investment Strategist at Russell Investments)
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- [30:27]
Paul (Chief Investment Strategist at Russell Investments)
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- [30:32]
Host or Interviewer
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- [30:35]
Co-host or Interviewer
And how about fiscal? You have fiscal as another up arrow here. Obviously we're not seeing the kind of fiscal policy we saw back in 2020, but we still are seeing a supportive fiscal policy here. So what are you seeing there?
- [30:44]
Paul (Chief Investment Strategist at Russell Investments)
Yeah, so that's all about the one big beautiful bill act that was passed.
- [30:47]
Co-host or Interviewer
In July of 2025 and I think there's two tailwinds that are coming out of that stimulus. The first is for households where through the changes to provisions and taxes on tips, through changes to the SALT cap.
- [31:02]
Paul (Chief Investment Strategist at Russell Investments)
Households are likely to have a bigger.
- [31:03]
Co-host or Interviewer
Rebate check in April of 2026 and that always can provide a little bit of a support for consumption growth, at least our expectation here over the next couple of quarters.
- [31:14]
Paul (Chief Investment Strategist at Russell Investments)
And I'd argue even more important than.
- [31:16]
Co-host or Interviewer
The household piece is a number of the provisions in that act for corporates where there's favorable expensing, provisions for corporates to engage in more investment in equipment.
- [31:28]
Paul (Chief Investment Strategist at Russell Investments)
Manufacturing, structures, R and D, allowing kind.
- [31:33]
Co-host or Interviewer
Of immediate expensing of those items, freeing.
- [31:35]
Paul (Chief Investment Strategist at Russell Investments)
Up corporate free cash flow.
- [31:37]
Co-host or Interviewer
And we see that helping to support CapEx into the new year. And so coupled together, that sort of fiscal package, if you will, we estimate is worth a tailwind of around 3, 10 of a percent onto growth for the year ahead, which is.
- [31:53]
And then the last one is one that I think people were most optimistic about with the Trump administration, which is this idea of deregulation. And I think we are seeing some of that. So you see that as a tailwind going forward, right?
- [32:02]
Paul (Chief Investment Strategist at Russell Investments)
Yeah, I mean, this has been one of the most ambitious deregulation agendas from.
- [32:07]
Co-host or Interviewer
A US administration since the 80s under Reagan. George Washington University has a database called reg stats where they try to count up all of the economic significant rules that each administration has put out. And the Trump administration has the lowest count since the 80s. So this has clearly been a priority for them, particularly in the energy and financial services space, cleaning up red tape, making it easier for businesses to engage in the real economy and grow.
- [32:37]
Paul (Chief Investment Strategist at Russell Investments)
I don't think we got that much benefit from it in 2025 around that.
- [32:41]
Co-host or Interviewer
Idea of uncertainty and just how much other change was happening at the same time that we actually had some frozen CAPEX decisions.
- [32:50]
Paul (Chief Investment Strategist at Russell Investments)
But if we're right that conditions settle.
- [32:52]
Co-host or Interviewer
Down here and the broader economic picture is pretty healthy, I think that idea of deregulation as a tailwind could have sort of more teeth into 2026 and offer a little bit more onto growth here for the year ahead.
- [33:06]
One of the things I found when I was doing research for this is you've talked about the distinction between hard data and soft data and how you use it. I forget where I saw it, but can you talk about that and how you view those two pieces of data when you're analyzing the economy?
- [33:18]
Paul (Chief Investment Strategist at Russell Investments)
Yeah, I think the darkest place this.
- [33:21]
Co-host or Interviewer
Has showed up is for the US consumer.
- [33:25]
Paul (Chief Investment Strategist at Russell Investments)
And so when economists are talking about.
- [33:26]
Co-host or Interviewer
Hard data, we're looking at actual measures of dollar or volume based consumer spending. So the retail sales figures that get published, the personal consumption expenditures numbers that go into gdp, for example, that's hard data, but that's what consumers are actually doing with their spend.
- [33:47]
Paul (Chief Investment Strategist at Russell Investments)
Soft data is measures of consumer attitudes.
- [33:51]
Co-host or Interviewer
Consumer confidence, whether that's University of Michigan survey or similar surveys.
- [33:56]
Paul (Chief Investment Strategist at Russell Investments)
And so normally you'd think those two lenses would rhyme.
- [33:59]
Co-host or Interviewer
In an economy, consumers are feeling better.
- [34:02]
Paul (Chief Investment Strategist at Russell Investments)
They spend more Right now, there's a huge divide. And what we've seen is pretty resilient.
- [34:08]
Co-host or Interviewer
Pretty steady consumption growth in the hard data, but abysmal soft data.
- [34:16]
Paul (Chief Investment Strategist at Russell Investments)
So when consumers are responding to surveys.
- [34:18]
Co-host or Interviewer
And talking about how they feel, in.
- [34:20]
Paul (Chief Investment Strategist at Russell Investments)
Some instances, those confidence figures are as.
- [34:23]
Co-host or Interviewer
Bad as they were at the bottom of the global financial crisis when the unemployment rate was above 10%. And so this has been a huge gap and a huge puzzle for economists to deal with.
- [34:35]
Paul (Chief Investment Strategist at Russell Investments)
My own sort of lived experience, and.
- [34:36]
Co-host or Interviewer
Certainly what we've seen over the last three years is that fundamentals matter more than the soft data for actual consumer outcomes. And so we've been leaning positive into this uncertainty and puzzle because we've seen a pretty healthy labor market, at least up until recently, where wage income's been positive, because we've seen that record household.
- [34:59]
Paul (Chief Investment Strategist at Russell Investments)
Wealth that we were talking about being a tailwind.
- [35:02]
Co-host or Interviewer
And so we leaned into that positive insight as opposed to the confidence numbers being very weak. And so, at least for now, the uncertainty has been resolving towards the hard data and our expectations that can continue.
- [35:15]
Do you think the soft data will come around? I mean, this kind of gets to the idea of the Vibe session, which Kyla Scanlon coined, that term that people have talked about. Do you think the soft data is going to come around here as the economy continues to grow and maybe that gap will narrow?
- [35:30]
Paul (Chief Investment Strategist at Russell Investments)
Yeah, I don't know. As best as I can tell, there seems to be two drivers of the disconnect. One is we live in a world.
- [35:38]
Co-host or Interviewer
Of hyperpolic polarized politics in the United States, and half of the United States doesn't like the US Administration. Half of the United States likes the administration, and so that's creating some distortions to the numbers.
- [35:52]
Paul (Chief Investment Strategist at Russell Investments)
The other effect is around inflation, and not so much that the inflation rate itself is as high as it was.
- [36:01]
Co-host or Interviewer
In 2022, but consumers just really don't like high prices at the grocery store or wherever else. And that seems to have been a meaningful drag here, disrupting attitudes.
- [36:13]
Paul (Chief Investment Strategist at Russell Investments)
And so as I look going forward.
- [36:15]
Co-host or Interviewer
Partisan politics is just sort of a way of life here in the United States.
- [36:19]
Paul (Chief Investment Strategist at Russell Investments)
I think the inflation picture over time is settling in. At least we're not seeing the 4.
- [36:25]
Co-host or Interviewer
To 5% inflation numbers anymore. It seems like we're settling into a new world a little bit above 2%. So my hope is the soft numbers will gradually catch up in a healthy economy. But the divide is still very stark and has a long way to go.
- [36:39]
That may play a role in my next question, which is this idea that we've had many economists calling for a recession for a long time. We had the yield curve invert. We might have had the SAHM rule triggered, but we haven't had the recession. I'm just wondering if you have any thoughts on why that is, why so many expected us to get a recession, but we didn't actually get one.
- [36:56]
Paul (Chief Investment Strategist at Russell Investments)
Yeah, I'd say a couple of things. First, economists are really bad at forecasting recessions. They're. They're almost impossible to forecast. And so I think the community as a whole needs a little bit of hubris, if you will, around our ability to, to make these goals in terms of where things have really broken down. You mentioned one of them. So under this general view that these things are hard to forecast, one of the indicators that has been most useful in the past that's had the most forecasting power was the shape of the yield curve. This idea that yield curve inversions for.
- [37:35]
Co-host or Interviewer
The last six decades have always preceded economic recessions.
- [37:39]
Paul (Chief Investment Strategist at Russell Investments)
A lot of economists leaned on that.
- [37:41]
Co-host or Interviewer
That Insight failed in 2022 and 2023, where the economy held up into very aggressive Fed hikes and restrictive monetary policy.
- [37:50]
Paul (Chief Investment Strategist at Russell Investments)
I think the third issue that stands out to me more for 2025 was in real time in April, we were confronted with really dramatic policy change. And I think what some forecasters did was to take those announced tariff rates.
- [38:10]
Co-host or Interviewer
Literally run them through their trade models.
- [38:12]
Paul (Chief Investment Strategist at Russell Investments)
Get an estimated drag on growth, looking.
- [38:15]
Co-host or Interviewer
At the market being down almost 20% and saying this is really bad.
- [38:19]
Paul (Chief Investment Strategist at Russell Investments)
And I think it was fair to.
- [38:20]
Co-host or Interviewer
Say there were some real risks during.
- [38:22]
Paul (Chief Investment Strategist at Russell Investments)
That period, but there was also the potential for a lot of policy dynamism. So if I think back to the.
- [38:29]
Co-host or Interviewer
Conversations we were having kind of T.
- [38:31]
Paul (Chief Investment Strategist at Russell Investments)
+1 after Liberation Day at Russell Investments, not only were we talking about those big tariff rates and potential drags, but we were already looking at a number of important trading partners offering to take their tariff rates down to zero, seeing the potential that the administration could move.
- [38:49]
Co-host or Interviewer
Towards taking some deals.
- [38:51]
Paul (Chief Investment Strategist at Russell Investments)
And that opportunity for policy dynamism we thought was important to think about in.
- [38:57]
Co-host or Interviewer
Terms of the balance of risks and scenario probabilities.
- [39:00]
Paul (Chief Investment Strategist at Russell Investments)
And I think maybe some economists were.
- [39:03]
Co-host or Interviewer
Looking down instead of looking up and.
- [39:04]
Paul (Chief Investment Strategist at Russell Investments)
Thinking about that possibility for the economy.
- [39:07]
Co-host or Interviewer
And policy itself to be dynamic, which it always tends to be.
- [39:11]
And to defend the economists a little bit to your point, this is a really hard thing to figure out. Like if you think about when tariffs came on, first of all, we haven't had tariffs in forever. Second of all, we don't even know what the tariffs are going to be because the policy's changing on a day to day basis. So for anyone to try to project the impact on the economy going forward was effectively an impossible task. I want to ask you about recession risk going forward. So it seems like with your take on a re accelerating outlook, you don't think there is much recession risk. And we've obviously just talked about the idea that it's very hard to forecast a recession. But how do you think about that going forward? I mean, do you see the potential for a recession? If you had to put it in percentage terms, do you think it's a very small percentage?
- [39:45]
Paul (Chief Investment Strategist at Russell Investments)
Yeah. So if you didn't know anything about current economic conditions and just looked at how often recessions have occurred over history.
- [39:52]
Co-host or Interviewer
You get a number like 15%.
- [39:54]
Paul (Chief Investment Strategist at Russell Investments)
So a lot of economists use that as their benchmark to think about if.
- [39:57]
Co-host or Interviewer
Recession rates are higher or lower than normal.
- [40:01]
Paul (Chief Investment Strategist at Russell Investments)
We're relatively upbeat for the year ahead, but still see some downside risk. So our recession risk estimate for 2026 is 25%. So a little bit higher than normal. When I look at the consensus of other forecasters, their odds are closer to one in three. So I'd say we're a little bit more upbeat than the rest of the market, but still seeing some risk. And one of the key risks that stands out to me right now is what's happening to the labor market. And while I'm glass half full on the prospects here, I think there's no doubt that hiring has slowed to unusually weak levels. And if that continues and extends into 2026, that could put more pressure on.
- [40:45]
Co-host or Interviewer
The consumer over time.
- [40:46]
Paul (Chief Investment Strategist at Russell Investments)
And so I think that's really one of the key watch points for me.
- [40:48]
Co-host or Interviewer
Is if we start to get a stabilization or an inflection up in labor demand, that will be a really important positive. If we don't, then those, those bear cases start to get a little bit more tangible and real here for next year.
- [41:02]
It seems like the labor market's one of the toughest things to analyze right now because going back to what we talked about earlier, we've got this whole immigration thing playing into this. But then we've also got like the cyclical factors impacting the labor market. It seems like those things together make it a very challenging time to analyze what's going on.
- [41:15]
Paul (Chief Investment Strategist at Russell Investments)
Yeah, it's really hard. And that's been a focus for us in our work here over the last couple of months. As best as we can estimate these things, it looks like those immigration restrictions and the step down in government hiring have driven about 85% of that slowdown in job growth, which is interesting and it's a bit of a double edged sword in terms of thinking about the outlook. Those policies in terms of immigration and a smaller Washington D.C. are very likely to remain in place for 2026 and could leave hiring at pretty subdued levels. But I think the positive story that I would argue is more important for financial markets is if that's right, it's not really the private sector coming under distress that's driving this market slowdown in hiring.
- [42:09]
Co-host or Interviewer
It's more of a policy choice.
- [42:11]
Paul (Chief Investment Strategist at Russell Investments)
And if you kind of go back through the history of past business cycles, usually the normal arc of a slowdown into recession is driven by fundamental deterioration from the private sector where they're seeing shortfalls in aggregate demand, they're seeing pressure.
- [42:26]
Co-host or Interviewer
On their bottom lines and they start.
- [42:29]
Paul (Chief Investment Strategist at Russell Investments)
Cutting back on hiring and ultimately laying off their workers. That doesn't seem to me like the mechanism that's in place right now. And that gives me some confidence that.
- [42:38]
Co-host or Interviewer
The outlook can hold and potentially build here into 2026.
- [42:43]
Just a couple more on the economy. You mentioned inflation earlier and inflation seems like an interesting, it's an interesting place right now because it is above the Fed's target. And you have two camps here. You have some people who say that that's a concern, we've got to get it down, while as other people say, you know, it's pretty stable where it is. It doesn't seem to be having too much of a negative impact. So the Fed doesn't have to be too worried about it. Like how do you think about that?
- [43:03]
Paul (Chief Investment Strategist at Russell Investments)
Yeah, inflation's been a big issue since 2022. When I look at the drivers of inflation today, we are getting some higher goods prices through tariffs. Our belief is that's likely to be a one off driver and poised to fade here in the second quarter and through the remainder of 2026. There's the shelter piece to inflation, the housing market that seems to be gradually cooling off. And so your tariff drivers for inflation should be moderating, your shelter drivers of inflation should be moderating. And then there's everything else. That everything else is almost half of the inflation basket intends to be driven by more cyclical dynamics. And I'd say that's where we have a little bit more concern into 2026, that in a world where the starting point for the economy is pretty healthy, we still have an unemployment rate in the fours. If growth starts to re accelerate, that could over time start to put a bit More pressure onto capacity again, put a bit more pressure onto labor markets.
- [44:10]
Co-host or Interviewer
Again, and start to kind of set.
- [44:13]
Paul (Chief Investment Strategist at Russell Investments)
The stage for more inflation pressure towards the end of 2026 and into 2027.
- [44:20]
Co-host or Interviewer
More of that standard sort of cyclical driver of price inflation.
- [44:24]
Paul (Chief Investment Strategist at Russell Investments)
So we see those risks building over, call it the next one to two years. But right now, the labor market is.
- [44:30]
Co-host or Interviewer
Still pretty soft, given some of those policy changes that are keeping hiring very subdued in the short term.
- [44:37]
So you think the Fed's right? I mean, it seems like the Fed is maybe a little bit more focused on the labor market right now than they're focused on inflation. Do you think they're right to do that, at least for now?
- [44:45]
Paul (Chief Investment Strategist at Russell Investments)
Yeah. The Federal Reserve tends to focus more on the labor market because if they get that wrong and the labor market rolls over, then they end up missing.
- [44:55]
Co-host or Interviewer
On both sides of their mandate at.
- [44:56]
Paul (Chief Investment Strategist at Russell Investments)
The same time because they have a full employment mandate.
- [45:00]
Co-host or Interviewer
If unemployment spikes, obviously that's a mission.
- [45:03]
Paul (Chief Investment Strategist at Russell Investments)
And during an economic recession, that damage to the labor market, that damage to aggregate demand tends to solve any other inflation problem that you might have in an economy. So whenever there's labor market risk, the Federal Reserve in particular, and most central.
- [45:20]
Co-host or Interviewer
Banks do the same, tend to really prioritize those.
- [45:23]
Paul (Chief Investment Strategist at Russell Investments)
And so I think it was a pretty clear and easy case for the.
- [45:27]
Co-host or Interviewer
Fed to deliver the three rate cuts that we got towards the end of 2025.
- [45:33]
Paul (Chief Investment Strategist at Russell Investments)
Their policy was probably a little bit restrictive.
- [45:35]
Co-host or Interviewer
Hiring had slowed quite a bit. They wanted to get rates back down to more normal levels.
- [45:41]
Paul (Chief Investment Strategist at Russell Investments)
From here, though, now that policy is.
- [45:44]
Co-host or Interviewer
Towards more normal levels.
- [45:46]
Paul (Chief Investment Strategist at Russell Investments)
I think it's going to take a much higher bar for actual labor market.
- [45:51]
Co-host or Interviewer
Weakness, rising unemployment, to kind of get them to keep going into 2026.
- [45:57]
Paul (Chief Investment Strategist at Russell Investments)
And given our outlook is for stronger.
- [45:59]
Co-host or Interviewer
Growth, not weaker growth, I think it's quite likely that we're right on the cusp of a protracted Fed pause here.
- [46:06]
Paul (Chief Investment Strategist at Russell Investments)
Where we may have even already seen.
- [46:07]
Co-host or Interviewer
The last rate cut for the Federal Reserve in this cycle.
- [46:12]
So your third theme in the report is one a lot of us have been waiting for for a long time, which is the for the rally to broaden beyond the mag 7. And you talked about how you think maybe this might be the year that starts to happen. So can you talk about why that is?
- [46:23]
Paul (Chief Investment Strategist at Russell Investments)
Yeah, that theme's really around this idea of broadening fundamentals, supporting broadening returns. And so for most of 2023 and 2024, a lot of the activity and a lot of the earnings growth in particular, was driven by those magnificent Seven.
- [46:39]
Co-host or Interviewer
Hyperscaler superstar US technology companies.
- [46:42]
Paul (Chief Investment Strategist at Russell Investments)
I say we're seeing that start to change already. And our expectation is that's likely to continue to change where fundamentals are broadening.
- [46:51]
Co-host or Interviewer
And becoming more positive at sort of an economy wide level.
- [46:55]
Paul (Chief Investment Strategist at Russell Investments)
And a couple of data points for me on that regard. For small cap, for example, they went through an earnings recession in 2022 and 2023. Through the third quarter 2025, they actually moved back to plus 30% earnings growth. That's off of a weak base, but they're back in positive territory again, which I think is really encouraging. We're seeing a stabilization and an improvement in their board earnings estimates too. So I think some green shoots there for small cap. And the same thing's coming through globally. It's not just a US story, but across international markets now too. The emerging markets are seeing earnings upgrades, Europe is seeing earnings upgrades. And so I think that fundamental delivery, if it can continue, is a really.
- [47:43]
Co-host or Interviewer
Nice catalyst to potentially have returns start to broaden out into 2026.
- [47:48]
And this probably relates back to the AI theme as well because to the extent the AI benefits can carry across the economy, you know, that should also help from a broadening perspective.
- [47:56]
Paul (Chief Investment Strategist at Russell Investments)
Yeah, exactly. That's one of several drivers that we're seeing. I think this idea that the benefits of AI are spreading from builders to.
- [48:04]
Co-host or Interviewer
Users supports this idea of sort of.
- [48:07]
Paul (Chief Investment Strategist at Russell Investments)
More diffuse profitability across the corporate landscape. Interest rates are still high ish, but they've come down from peak levels in 2022. And so for a lot of smaller businesses, that's quite important in terms of their financing costs that are more consequential than they are for larger corporates. So there's a couple of things happening here, but we see that kind of.
- [48:28]
Co-host or Interviewer
Constellation as supporting a broadening of profits.
- [48:32]
Paul (Chief Investment Strategist at Russell Investments)
And particularly into what's been a pretty.
- [48:34]
Co-host or Interviewer
Lopsided market for a number of years and pretty lopsided valuations. Stronger fundamentals and broadening fundamentals we think can support broadening returns as well.
- [48:45]
Host or Interviewer
One of the charts you have in this report is the equity market contrarian indicator. And it really is amazing to see how much and how emotional investors can be over time and rightfully so at different sort of points in the market when different things are really worrisome. But I'm just wondering like, I mean, to talk to that idea which is, you know, the importance of sort of behavioral finance and understanding that investors oftentimes are very emotional, especially when there's times of, you know, economic weakness or market weakness or what have you and Then you know, what, what sort of, I guess the takeaway would be in looking at a chart like this and then maybe where we stand today based on these sentiment levels.
- [49:34]
Paul (Chief Investment Strategist at Russell Investments)
Yeah, I think number one, what we do see is evidence that there are bouts of extreme changes in investor psychology. The chart captures, it's a composite of.
- [49:50]
Co-host or Interviewer
Almost a dozen different indicators.
- [49:52]
Paul (Chief Investment Strategist at Russell Investments)
But collectively it tries to measure that.
- [49:53]
Co-host or Interviewer
Root of the market on a real time basis. And when the line's high, that's evidence of a panic. When the line's low, that's when were.
- [50:01]
Paul (Chief Investment Strategist at Russell Investments)
Kind of pushing towards euphoria. And you can see a lot of those big vertical spikes on the page. During past periods of market stress and crisis, the global financial crisis, the eurozone debt crisis, we had Covid the tariffs. More recently in April, investors had real things to be worried about at those moments in time, a lot of headline risk. But those moments were some of the best opportunities to be invested in the market. And so this insight's really important for us twofold both it helps to convey a stay invested message, which is just a really critical philosophy during periods of market volatility. And it's also really useful for me as an investment strategist because when I'm looking at those fundamental risks and thinking about downside risks to the business cycle.
- [50:53]
Co-host or Interviewer
When I have this sentiment lens saying.
- [50:55]
Paul (Chief Investment Strategist at Russell Investments)
Hey, everybody else is worried right now too, that's a really important ballast against.
- [51:00]
Co-host or Interviewer
Those behavioral risks that I might be facing as a professional investor and can kind of keep me more grounded and thinking objectively about the return opportunity set. And I'd say particularly in April of this year, this was a really powerful tool for us as we were kind of engaging with the balance of risk and thinking about portfolio strategy going forward.
- [51:21]
Host or Interviewer
Walk us through how a firm like Russell Investments takes this idea, these ideas, this conviction you have about certain things and sort of changes. It's the way that maybe some of the allocations are structured or portfolio strategy. Like I could, I think I could articulate back to you like, you know, probably you're, what you're saying is, you know, you want to be like equal. I'm just this general equal weight the s and P500 and be upping your exposure a little bit and you know, thinking of, you know, a re acceleration here and not being too conservative with your equity exposure.
- [52:00]
Co-host or Interviewer
So.
- [52:00]
Host or Interviewer
But help us kind of connect the dots between sort of all of this great research and how it actually translates into how portfolios and investment strategies are being built and managed.
- [52:15]
Co-host or Interviewer
Yeah.
- [52:16]
Paul (Chief Investment Strategist at Russell Investments)
To use one sort of past experience around the sentiment insight In April of 2025, when we're seeing all of this panic, you can imagine a lot of war room conversations within our investment division trying to kick the tires on the outlook, how we want to reposition into extreme market volatility. Leaning into this insight of panic, we took the opportunity of April to rebalance.
- [52:40]
Co-host or Interviewer
A lot of our portfolio strategies, add.
- [52:43]
Paul (Chief Investment Strategist at Russell Investments)
Back into areas of the market that.
- [52:45]
Co-host or Interviewer
Had sold off pretty aggressively, whether that be equities or high yield credit.
- [52:50]
Paul (Chief Investment Strategist at Russell Investments)
And so this insight helped us in.
- [52:53]
Co-host or Interviewer
Our portfolio strategies in real time.
- [52:55]
Paul (Chief Investment Strategist at Russell Investments)
As I'm thinking about this point here at the turn into 2026, our economic outlook is pretty upbeat. That supports a state invested posture we.
- [53:07]
Co-host or Interviewer
Think as being appropriate in portfolios.
- [53:10]
Paul (Chief Investment Strategist at Russell Investments)
And then critically, that idea of AI benefits, broadening, broadening fundamentals globally, we think argues and strengthens the case for global diversification and portfolios. Where a lot of markets, whether it be small cap within the US international equities, whether it be emerging markets or Europe, a lot of those areas are trading at cheaper relative valuations and into.
- [53:35]
Co-host or Interviewer
A world where their fundamentals are starting.
- [53:37]
Paul (Chief Investment Strategist at Russell Investments)
To catch up in a positive way to the US mega caps.
- [53:41]
Co-host or Interviewer
We see that as supporting those sort of global diversified exposures and leaning into those areas of opportunity in a measured way in our strategies.
- [53:52]
Host or Interviewer
And how are you thinking? That's great, thank you. And how are you thinking about alternatives and real assets? How do those sort of manifest themselves in the way that you would be advising portfolio construction here?
- [54:05]
Paul (Chief Investment Strategist at Russell Investments)
Yeah, so we always want exposure to both growth and resilience. And I think there's a lot going on in the world right now that's maybe a little bit different than decades past. There was several decades in a row where in the United States inflation was pretty dormant at 2%. Central banks, if anything, were struggling to get inflation up to 2%. And that was a world in which bonds were king as a diversifier, because the only thing that was really moving.
- [54:34]
Co-host or Interviewer
The needle was upside and downside risk to growth.
- [54:36]
Paul (Chief Investment Strategist at Russell Investments)
And bonds are excellent at diversifying against.
- [54:39]
Co-host or Interviewer
Growth shocks in portfolios.
- [54:42]
Paul (Chief Investment Strategist at Russell Investments)
With the world shifting, there's new challenges to supply chains. It seems like we have new geopolitical issues cropping up all the time. And those supply side factors have more of an inflation component to them and could contribute to more inflation volatility over the medium term. And that creates the need for thinking more broadly about targeted ways to get.
- [55:04]
Co-host or Interviewer
More diversification into portfolios.
- [55:07]
Paul (Chief Investment Strategist at Russell Investments)
Historically, real assets, whether that be infrastructure or real estate, have been nice complements to traditional 6040 portfolio building more resilience.
- [55:18]
Co-host or Interviewer
And diversification to inflation risk. So we see that as a core strategic allocation with particularly interesting opportunities in defense into this changing geopolitical environment. Also a lot of energy demand and needs and some nice exposures that can be targeted within the infrastructure space to that trend. And so real assets, in our view, are a really important complement in addition to stocks and bonds for shaping a well rounded portfolio for the environment that we see not only for the year ahead, but for the next decade.
- [55:53]
Host or Interviewer
Now, we recently had James Grant, who writes the Grant Interest Rate observer, and it's kind of sort of like a historic market historian, and he kind of was making the point. These interest rate regimes both up and down can last a lot longer than many people think. So real assets could certainly play a much more important role in a period where interest rates are, you know, higher than we've, you know, used to over the last 40 years, up until a few years ago.
- [56:22]
Paul (Chief Investment Strategist at Russell Investments)
Yeah, the yield's better, for sure. I mean, there was a protracted period there where your nominal yield was below expected inflation. And that was, I think, a tough pill to swallow for a lot of investors. But that's changed. We're looking in the US at Treasury yields that are a whisker above 4% and to expected inflation that's a little bit north of 2. And so at least you are now.
- [56:44]
Co-host or Interviewer
As an investor, able to preserve your.
- [56:45]
Paul (Chief Investment Strategist at Russell Investments)
Purchasing power in bonds. But we think it makes sense to.
- [56:48]
Co-host or Interviewer
Look even a little bit more broader than that to build more resilience into portfolios for a range of different shocks that could face us over the next several years.
- [56:57]
Host or Interviewer
So we have two standard closing questions we'd like to ask you. The first one is what's the one thing you believe about investing that most of your peers would disagree with you with?
- [57:07]
Paul (Chief Investment Strategist at Russell Investments)
Yeah, it might bend the question a little bit. There's this famous Warren Buffett quote that it's good to be fearful when others are greedy and greedy when others are fearful. I really like and agree with the idea of being greedy when others are fearful. We talked about this idea of markets moving into a panic and that creating.
- [57:27]
Co-host or Interviewer
A lot of opportunity for patient investors to be in the market.
- [57:31]
Paul (Chief Investment Strategist at Russell Investments)
I think what's a lot harder is to identify when everyone's greedy and to time tops in markets. That's actually really dangerous. It's harder to identify in real time. And missing out on the updates in markets can be just as damaging, if not more damaging than avoiding downturns. And I guess one example I think back to many years ago is this famous Greenspan speech from December of 96. That's when he introduced the idea of irrational exuberance for the first time. And he was eventually right. But the Nasdaq absolutely ripped for three or four more years before it ultimately hit its peak. And to kind of miss out on those really good returns as an investor.
- [58:18]
Co-host or Interviewer
Can be again just as damaging as being exposed to the drawdowns.
- [58:24]
Paul (Chief Investment Strategist at Russell Investments)
And so for us, we as a.
- [58:26]
Co-host or Interviewer
Core really want to be invested through the market cycle. So I kind of push back a little bit on the be fearful when others are greedy point. It's just really hard to get right.
- [58:36]
Host or Interviewer
Yeah, totally agree. And the last one here, maybe it's somewhat along the same lines. You would answer it the same way, I'm not sure. But based on your experience in the market markets, what's the one lesson you would teach your average investor?
- [58:49]
Paul (Chief Investment Strategist at Russell Investments)
Yeah, I probably fell in love with Marcus as a teenager. My parents financial advisor recommended I read Jeremy Siegel's book Stocks for the Long Run, which is an amazing book on the history of financial markets. But like the core point from that book, if you've read it, is just around the amazing compounding that you can get as an investor getting your money to work for you for the long term. And so I think that stay invested principle is philosophy number one, helping to improve financial security for people and then where we can trying to add value on top of that, exploiting sentiment overshoots. But really that that compounding the investing.
- [59:31]
Co-host or Interviewer
For the long term, the staying invested theme is probably principle number one for us.
- [59:37]
Host or Interviewer
Great. Thank you very much Paul. We've enjoyed the conversation.
- [59:39]
Paul (Chief Investment Strategist at Russell Investments)
Yep, my pleasure.
- [59:40]
Host or Interviewer
Thank you for tuning in to this episode. If you found this discussion interesting and valuable, please subscribe on your favorite audio platform or on YouTube. You can also follow all the podcasts in the Excess Returns network@excessreturnspod.com. if you have any feedback or questions, you can contact us@excess returnspodmail.com no information.
- [59:59]
Paul (Chief Investment Strategist at Russell Investments)
On this podcast should be construed as investment advice.
- [60:03]
Commercial Narrator
Securities discussed in the podcast may be.
- [60:05]
Co-host or Interviewer
Holdings of the firms of the hosts or their clients.