Transcript

Operator:

So now, without further delay, let's begin today's PNC 2022 Impact of the Midterms Recap. It's my pleasure to introduce your moderator for today, and that is Lou Cestello, Head of Regional Markets and Regional President, Pittsburgh and Southwest Pennsylvania.

And with that, Lou, you have the floor.

Lou Cestello:

Well, thank you very much, and welcome, everyone. And thank you for joining us for the final installment of PNC's three-part webinar series on the 2022 midterm elections. I'm Lou Cestello, as our host said, Regional President for PNC here in Pittsburgh, and head of PNC's 54 regional markets coast-to-coast. It's 11:00 a.m. -- well, it's actually 1:00 p.m. Eastern Time here, and very cold in Pittsburgh, albeit the sun is shining. We have more than 2,300 of our clients and colleagues from across the country registered for our continued conversation regarding known and potential outcomes of the midterms.

Much has transpired since our election recap on November 9, the day following the election, and most races that were too close to call have been decided, with the Democrats retaining control of the Senate and Republicans getting control of the House. Mitch McConnell retained his GOP leadership role in the US Senate, and Republican leader McCarthy is still trying to secure the votes to be next House Speaker. And expectedly, former president Donald Trump has officially announced his candidacy for president.

Now, today you will hear timely insights on known outcomes and impacts of these and other developments from PNC's Vice Chairman of PNC's Corporate and Institutional Bank, Mr. Harold Ford, Jr., and Amanda Agati, Chief Investment Officer of PNC's Asset Management Group. First, my good friend and colleague Harold will set the stage with observations and insights against the backdrop of today's political, economic, and social landscape. In addition to his role as Vice Chair of PNC's Business CNIB segment, Harold also serves as Chairman and CEO of the Economic and Inclusion Capital Corporation. Harold is a regular contributor to Fox News, currently serving as a rotating co-host on The Five.

Following Harold's remarks, we'll move to Amanda Agati.  As Chief Investment Officer for PNC's Asset Management Group, Amanda oversees AMG's overall investment strategy, portfolio and risk management, investment solutions, and the development and execution of investment policies. Following Harold's remarks, Amanda will share her perspectives on real-time and longer-term potential market impacts of the midterms as we know them today, and what they mean for investors and businesses.

So, without further ado, I'll turn it over to Harold. Mr. Ford.

Harold Ford, Jr.:

Boss, thank you. And again, welcome to all of our clients, and thanks for taking the time to hear our thoughts about the political landscape and how it's affecting, will affect, the markets. When we last spoke, we didn't have the finality that we now have with many of the races across the House, Senate, and for that matter, the gubernatorial landscape. When we spoke -- it seems like we spoke months ago, but it was just a little over a week ago, now -- the finality around the House was not settled.  We now know, as Lou mentioned in his introduction, that Republicans have achieved at least a one-seat majority. They're still counting seats, and it's expected they could rise as much to a four- or five-seat majority, which would probably -- if we were having this conversation four weeks ago and people were speaking objectively about what a majority would look like for the Republicans, four- or five-seat majority would probably have been -- would have been deemed or put in the category of being a disappointing margin. However, I'm a believer that any margin is good if you're in the majority. I'm sure the Democrats would trade with the Republicans now, and with the expectations -- although not met like some Republicans wanted in the House -- they indeed have the majority.

In the last few minutes, in the last 30 minutes, the leader of the Democrats -- the current Speaker of the House, Nancy Pelosi, some may have seen, decided to step down from her leadership role. It's unclear if she will step down from Congress once the new Congress convenes January 3, but she's made clear, in really a great set of remarks that was well-received by Democrats and Republicans in the House -- that she would not seek reelection to be leader of the Democrats. She highlighted -- and it's easy to forget, she is one of only -- well, no one in the modern era has achieved what she achieved in terms of winning the Speakership, losing the Speakership, winning the Speakership again, and now losing it, all within a 16-year time period.

I think I noted on our call before, our conversation before, how rapid change is now in the partisan makeup of Congress, or I should say, the partisan composition of Congress, for 40 years prior to '94, where Democrats had a majority in the House even though the Senate may have changed back and forth, and obviously the White House shifted political party hands. But for 40 years, Democrats were in charge of the House. From '94 to now, you obviously had -- 2006 you had Democrats take it back, 2010 Republicans, 2018 Democrats, and now, Republicans again in '22. So, four times since '94, in just 28 years, we've seen that kind of change.

I mention it also, and dwell on it a bit also, because I think that her stepping down as leader will usher in -- will likely, if not guarantee to usher in, a new generation of leadership for Democrats. Although President Biden is the leader of the Democratic party as the president, Nancy Pelosi is probably as recognizable a figure in Democratic party circles as President Biden is. And I would argue, Nancy Pelosi is maybe not -- might not be as much of a household name as our President, she certainly, if you think about other politicians -- national politicians in the Democratic party, there's probably not a name that is more known outside of, perhaps, the Obamas.

She will -- this exit, again, will usher in a new generation of leaders, and it will be interesting to see what this also means for Republicans as they think about their leadership as well, which brings me to what Lou touched on in his introduction as well about Kevin McCarthy, the Congressman from California who is currently the minority leader in the House of Representatives. He achieved I think 185, 186 votes, maybe 188 votes, excuse me, to be the leader of the Republicans. He lost, I believe, a little more than 30 votes in his caucus just a few days ago. 188 to 30 is a margin anybody would take in any game or political contest. But in this contest, it's difficult because he needs 218 votes to be the Speaker. And if he does not get those 218 votes, obviously he won't -- he can't -- he won't win the vote on the floor.

Some of you may know, to be Speaker of the House is not to -- there's not a requirement to be a member of Congress, although Congress has not had in the modern age, a Speaker who has not been a member of Congress and a member of the majority party. I mention this only because I think over the next several days, the machinations that will occur on the Republican side about Kevin McCarthy's future as Speaker will certainly unfold for us publicly. It appears that Mr. McCarthy is having to make some concessions to certain wings of the Republican House Caucus that many are voicing concern about, and skepticism at best, but concern at worst, about whether or not he will be able to effectively govern after all of the concessions that he's making. And he still has not secured the votes to do it.

I'm a contributor to Fox News, and I publicly have stated that I've known Kevin McCarthy a long time, and I like him personally.  So my comments are not at all directed at him. But I think over the next several days, he's going to have a very difficult time wrestling and managing control of that caucus, which I think will -- leads me to my next point, which is, once you get the Speakership done, then you have to figure out how you get the debt ceiling bill passed. So, those two things are things that you have to build some consensus around, in Congress, for the process to move forward in an orderly and less-than-chaotic way, which I think we all want, regardless of whom you may have voted for, what party you might reside in.

And then I think that deeply American tradition that has been ingrained, I should say, in our political system for a while, gridlock, will likely embrace our political system because of the partisan energy in the House and obviously with the Democrats controlling -- still controlling the Senate. It's very likely you will have the House push forward many pieces of legislation that likely won't get raised or even considered by the Senate. There might be a handful of things that they put forward that the Senate will consider, but my hunch is that gridlock will be the sort of the defining, or I should say, foundational definition for how politics is litigated over the next few months.

And obviously with the presidential race now already starting, with former president Trump having announced the other night, or a few nights ago, and with the prospect of other Republicans getting in the race -- and even the prospect, which I will come back to, whether or not President Biden seeks reelection, which would obviously unlock and unleash a race on the Democratic side to elect -- to be the nominee of the party and to be the nominee in '24, and hopefully, for the Democrats' sake, I would imagine they would want to win as well.

On the Republican side, it is very clear that the person who probably poses the greatest challenge to President Trump, who is the only announced candidate right now, is likely the governor of Florida, Ron DeSantis, who I believe probably had -- on the Republican side, had the most successful and decorated evening of any Republican having been reelected in Florida and winning the way he won with the coalitions that he was able to create, as well as carrying over the partisan -- or I should say, political -- finish line, those in his party seeking local, and for that matter, Federal office, including the reelected Senator Marco Rubio.

On the Democratic side, I think Gretchen Whitmer from Michigan, I think I might have said in our last call, I think she probably had the best night for Democrats, considering that the legislature in Michigan, the House and the Senate, the state legislature -- excuse me -- both flipped from Republican to Democrat, and the Secretary of State there was reelected, and the Attorney General, and they're all Democrat. She's a name that, for those of you who have some curiosity, or might be thinking aloud, or might have some curiosity around whom Democrats might put forward if President Biden -- excuse me -- does not seek reelection.  She certainly has made a pretty compelling case for herself and more importantly, a pretty compelling case for what she stands for.

I will let Amanda dig into a little bit more -- or not dig into it more, but really, give us the overview and dig in more around it, about how we think about markets being affected by this. But I'd say one or two last things, and I'm happy to answer any questions as we get to that part of the -- part of -- part of our program or part of the effort here. The one area where I do hope that the President and Republicans in the House and Democrats in the Senate, and Republicans, for that matter, in the Senate, are able to find some harmony on, is some of the foreign policy issues. And obviously, we're confronted day in and day out with images and information and messaging coming from Ukraine and how the Ukrainians are standing up to president Putin. It'll be interesting to see if the Congress and the Senate are able to maintain the unified front of support.  There's a $37 billion ask from President Biden. We'll have to see if that -- that would be the third leg of this, one being who's the Speaker, two, the debt ceiling, and three, whether or not in my humble estimation, whether or not the Congress and the Senate and the President can show unity in terms of continued support for the Ukrainians.

Two, I think the most recent meeting between President Biden and President Xi in Bali. One of the reasons that meeting, I think, went as well as at least some are suggesting, or the press is suggesting, certainly there were expectations. There was an expectation that maybe might not go well. One of the reasons, I think, it did go as well, is because the Chinese -- China respects power, and President Biden projected power. Even though the Democrats lost the House, the expectation was that there would be bigger losses in the House and that the Senate could have gone Republican. The fact that the Senate remained Democrat and the Republican margin seems to be small, and some of the governors' races across the country, Democrats made gains -- I think that it certainly increased and improved President Biden's standing as he stood there and sat there with President Xi, negotiating on our country's behalf. I think whatever our partisan background and partisan aspirations may be, I think one of the great principles and I should say, organizational principles of our politics, is that whatever party our President is in -- when he or she -- and we'll say she, one day, is meeting with a foreign leader, we want them to project strength for America and get the best deal they possibly can for the country. So that was one positive, whatever you thought about the outcome of the elections. And I would have said this, if this were a Republican president winning. You would want to project strength on behalf of the country.

With that, I turn it over to my -- and I'm happy to answer any questions as we get -- as the process unfolds here as well. I'm happy to hand over to my esteemed and astute colleague, Amanda Agati.

Amanda Agati:

Okay, great. Thank you so much, Harold and Lou; I'm delighted to be with all of you this afternoon virtually to talk about the midterms, markets, and the path forward. Let me just start by saying, we may not have gotten a Fed pivot yet, but you're going to get Amanda pivot on this call. Because I think we've said plenty as it relates to the impact of the midterms on the markets. At the end of the day, gridlock is gridlock. And although the margins of control here are somewhat narrow, the market believes that a similar dynamic is going to play out, just like what we've seen over the last few years. And so, an environment pretty difficult to get anything meaningful -- or, said a little bit differently -- extreme, done.

And so, divided government tends to be the most favorable outcome for the markets. Markets always prefer gridlock. We've been saying that we thought that was going to be the outcome in general. And so, it really does limit the potential for major significant, negative political surprises, in one direction or another. So at a time when we're in a very high volatility regime as a function of a lot of macro forces. Washington's not going to be quite so volatile, and so, I'm going to do what I do best here and pivot, and change the subject, and answer questions that I think are perhaps more important as it relates to the path forward for markets and the economy. 

And so, this won't be a full-blown investment and economic outlook. We certainly don't have time to get through all of that. But I want to give you some thoughts around the key things that are most top-of-mind for me in kind of gauging and guiding the markets' path forward. In order to do that, though, I just want to take one step back and just kind of assess how we got to this point.

So, from a performance perspective, it has been an absolutely brutal year for multi-asset investors. I'm not telling you anything that you don't already know. We've had three straight quarters of negative stock returns. We haven't had that dynamic in place since 2008. Before that was 2002; before that was 2001. And so, to have this in play outside of a recession is, let's just say, #unprecedented. We have gotten some strength here in the month of October, and some choppiness, but in general, positivity in November. But we're digging out of a really significant hole, and there's -- I think -- a really important, or series of important, reasons for that.

What's also creating this significant pain for multi-asset investors, is that bonds are also down three quarters in a row. We've had this dynamic in play in the past, but not outside of a recession. So I just want to re-emphasize that. It's really been a nowhere-to-run, nowhere-to-hide kind of environment for investors this year. And so when the only two things that are really kind of "working" on a year-to-date basis are energy-related exposures and volatility, you know it's a tough slog. Those two exposures don't make for a well-diversified portfolio and certainly do not make for an all-weather portfolio. And so, it has been a very, very tough slog.

But I think it comes back to an important concept that we've really been talking about over the course of the year, and it's this function of a perfect storm of macro headwinds that continue to swirl seemingly unabated, although we may be starting to see a little bit of a light at the end of the tunnel on some of these fronts. The big one, and the no-brainer, is certainly the sustained, elevated inflationary readings, not only in the US but also across the globe. I'll talk about some observations relative to the last couple of readings we've got here over the past week or so. But we're also very much focused on what's happening with the zero tolerance COVID policies and the lockdowns in China. We've seen a lot of flickering of the lights on and off, as it relates to China, and other parts of the emerging markets. And so, that has continued to apply a ton of pressure on supply chains and create a lot of disruption.

You asked me at the beginning of the year what I thought was the single most important catalyst to keeping the market rally going, to keeping economic growth on the trajectory it was on. It was getting some normalization and stabilization in supply chains. We're three-plus quarters of the way through this year -- we're in the home stretch, right, until the end of this year. And only very anecdotal evidence has started to come out more recently, about some stabilization as it relates to supply chain. So that's a really significant, but under-appreciated, force, really adding inflationary fuel to the fire here.

Russia and Ukraine continue to apply a ton of pressure on the energy complex and commodity prices in general. We don't really see a quick resolution there. If anything it's sort of leaning towards a bit more in terms of escalation. And so again, that's a force that's going to continue to be with us, likely into the new year. And again, injecting a lot of additional fire into the inflationary backdrop.

And then of course, last but not least, it's this pesky Fed, you know, really on a roll here with tightening policy much more significantly tighter and faster than the markets have anticipated. The markets have been playing catch-up to the Fed, effectively all year long. And so, I still believe the Fed is very much in the driver's seat in terms of the path forward. And so, I want to kind of pivot from that point to start talking about some of these key observations that we have and what it ultimately means for the path forward.

Last week, we got a really significant shocker -- that's a technical term for you -- as it relates to the CPI report that came out. It was much better, a.k.a., lower than consensus expectations. But it's still far too high.  What's interesting, though, is it catalyzed a perhaps record-breaking, by almost every major index that you could track both on the equity side and also on the fixed-income side, really record-breaking one-day performance. And it's the market just clamoring for every possible data point that shows we're gaining some ground in this inflationary backdrop, and also trying to get to a signal that the Fed might, at some point, pivot, pause, or even turn a corner and move back towards lowering rates.

I think it's a false hope, so I just want to be very clear. I'm not overly bearish here at this moment, despite a lot of the headwinds that are looming. But I think this very recent strength in terms of markets is a bit overdone. I think it is a little bit of false hope that we're going to get a reprieve on the part of the Fed in the very short run.

The PPI report came in earlier this week; again, it followed and continued that trend of coming in better than expected, a.k.a., lower. But in the case of both, we're still at much too high levels to call off the Fed at this point. And so, the Fed is still very much in the driver's seat in terms of the path forward.

Much ado has been made about how to characterize the Fed's path going forward.  It's been slower for longer, higher for longer, more rapid, like, trying to kind of come up with how to frame this. I'm just going with a very simple, longer-for-longer approach here, as it relates to the monetary policy backdrop. From my perspective, it's really just the easiest way to characterize the name of the game here. And in describing the Fed's monetary policy strategy, but also this game on the part of the market, trying to call the Fed's bluff, seemingly unsuccessfully. We've seen that very unsuccessful over the course of this year.

And so when I say longer-for-longer, what I really mean here is, just more rate hikes, a higher terminal rate, and a longer overall tightening cycle. To me, in Amanda-speak, it's longer-for-longer.

Since so much of the path forward really on a year-to-date basis has been and continues to be dependent on Fed rate hikes, I just want to level-set on where market expectations are going forward.  So, market expected 75 basis points at the November meeting; it was basically a snoozer. That's another technical term for you. So, market was already there. Fed acted the way the market expected, so the market kind of moved on to messaging and signaling for what might come next. When we look at the Fed funds futures market, we're still looking at about 50 basis points in December; another 50 basis points in February; and 25 basis points in March. So, if the Fed follows that path -- and I will not characterize going 50 in December as a pivot, despite what many folks in the industry kind of describe it as -- I think it's more of just like a slowdown, like to take a little bit of a breath here, a little bit of a reprieve, and take stock of how much action has already started to filter through the economy. So, that's not a pivot as far as I'm concerned.

But that's what the market expectations are. And so to the extent that the Fed delivers on these expectations, I think the market can actually handle these next couple of rate hikes, seemingly in stride.  The challenge comes in, in what ultimately is going to happen in 2023. The market is still pricing for a series of rate cuts in the back half of 2023, but I think it's pretty clear based on Fed messaging and Powell himself, that we shouldn't be expecting rate cuts at this point. It's way too premature, and it's way too hasty to expect that abrupt pivot. And I think it's just really a not-so-friendly reminder that the Fed and the markets have not really been on the same page all year, and that the Fed's really focused dual-mandate objective, if you will, is on the labor market and also price stability, a.k.a., inflation. It's not supporting the stock market. And that's why the market continues to wrestle with and struggle with this aggressive path forward.

At the end of the day, though, I've been saying this for a while: it doesn't necessarily matter how much they move on any given meeting, and all of the noise that a out of Fed governor-speak -- what really matters for the path forward is where the end state for monetary policy is likely to be. Coming out of the November Fed meeting, they did not change their dot plots so we're still sitting at about 4.6% as the end state for monetary policy. But they were pretty clear in hinting or signaling that that is likely going to have to move higher. It may be as soon as at the December Fed meeting. And so, that's really where my mind is at in terms of gauging the path forward.

Even landing at 4.6% is pretty darn restrictive territory for the markets and the economy and financial conditions. And so, I think the odds have gone up a lot, and in fairly short order, that a hard landing is more likely to occur in 2023 and potentially earlier than what we might have otherwise thought, even just sticking with that 4.6%. We go much further than that, and I think it's effectively a foregone conclusion. There has never been a tightening cycle on the part of the Fed over the course of history where they've raised rates to 4.6% or higher, and not tipped us into recession.

So again, I keep coming back to this idea that the Fed is very much in the driver's seat. I haven't even really talked to you at all about the underlying fundamentals, because I think it's almost irrelevant with the Fed continuing to take this very, very hawkish stance.

The other thing that's very much top-of-mind for me, though, is what happens to earnings growth. We've been hanging on to the hope maybe somewhat naively, maybe contrarian, however you want to describe it, optimistically, that we were going to avoid an earnings recession. We're not going to have an earnings recession in 2022. The underlying fundamentals are strong enough for us to claim victory and finish in positive territory, maybe 5%, maybe 6% earnings growth on the S&P 500 for 2022. But the jury is definitely out on what will happen in 2023. And again, to the extent that the Fed continues to tighten financial conditions, I think we're going to start to see the bottom drop out of earnings growth expectations for next year. They have come down some, but I think there's probably room for them to fall further from here. And so, based on last check before I got on the call this afternoon here, expectations for next year are sitting at about 5% earnings growth. Still positive, but it doesn't really leave us a lot of headroom for financial conditions to tighten more materially from here. And so, that's going to be critical in terms of a driver for the market's path forward.

So where do we go from here with all of these kind of moving parts and key variables? We've really been saying all year that fair value for the S&P 500 continues to be in a range of about 15 times to 17 times a forward PE. We're creeping up above 16 times, so the market has been very choppy, but has been in this kind of trading range here for the last number of months. But the key assumption for this fair value trading range is really that we continue on a slowing, but still positive, growth path. So, a.k.a., that soft landing scenario. We are definitely not priced at recessionary valuation levels, and so based on what the Fed is saying, that's why I spent so much time kind of beating to death our view on and interpretation of what the Fed is likely to do. I think that does drive some additional downside from here.

The good news, though, is that the market is already down a lot, in a very counter-intuitive way of saying it. And we've also seen pretty significant multiple compression, down 6 multiple points on the S&P 500 since the beginning of the year. So the market is anticipating a more significant slowdown and a contraction, but not full-on recessionary valuation levels. I do think there's more downside, but I do think there is an interesting angle to take here in that it may be somewhat short-lived. With the Fed remaining firmly in the driver's seat, the market's just going to continue to anticipate and try to price in all of the Fed's tightening moves very quickly. It's been a hallmark of this high volatility regime, and I think that will continue to be very much in control here.

So as we start to gain some more powerful signals, and confirm the trend that inflation is becoming tamer -- think about the CPI report last week; think about PPI this week; think about the market reaction to both -- we start to get signals that confirm those trends, and/or we start to get rhetoric from the Fed that says, yeah, we're gaining ground, here, we can start to slow down rate hikes from here. Or, dare I say, even pause, which would be just incredible from an investor perspective in the short run. I do think multiples can bounce back, so that's -- I'm giving you some hope here that I think the downside may still be in front of us, but somewhat short-lived. And that's really the power of monetary policy.

In our view, a Fed pause is almost the same as a cut in the market's eye. And so, I think to the extent that we get some confirmation of these signals, we could easily see two or three multiple points of valuation multiple expansion, all else equal. Like, that's how significant the snap-back could potentially be. But we really do need to see some of the other macro headwinds as a function of the perfect storm start to abate. The Fed's fighting this battle seemingly alone, and has only so effective policy tools in the toolkit. And so, I would like to see some of these other forces start to stabilize or settle down a little bit. I think that will ultimately make the jobs easier -- the Fed's job easier. So it's not a foregone conclusion that we are likely to tip into a recession, but we definitely need these other variables to start helping out, and in short order.

So with that, I know I threw an awful lot at you in a very short period of time. I'm going to hand it back to Lou to start the Q&A portion of our session, and I have no doubt that there are a lot of questions out there about some of what I said and also some of the market reaction to the midterms. So, even though I joked at the beginning, like I'm changing the subject, I don't want to talk about it, I'm very happy to talk about the impact of the midterms on the markets, too.

So Lou, back to you.

Lou Cestello:

Thanks, Amanda.  There's a lot of great questions in the box, but you know, one of them we might go with first is, it's pertinent to what you were just talking about.  And that is, the term, we're still outside a recession, while it may feel like we're inside to many.  Can you talk about the difference between where we are and what a true recession is?

Amanda Agati:

Well, the technical definition is really two quarters in a row of negative GDP growth. But when you look at the early reports for Q3 GDP it was actually in really strong positive territory. So, Q1, modestly negative; Q2, also modestly negative; but then a boom, a shot in the arm, in terms of economic growth for Q3. And so I would say, you have to take that traditional definition a little bit with a grain of salt. Yes, we did have two quarters in a row of modestly negative economic growth.  But we're also in really unprecedented conditions, here.

You think about the onset of the pandemic, the lockdowns that came, the record-breaking collapse in markets and economic growth, everything effectively screeching to a halt, and then trying to flip the lights back on. Things break, and things don't necessarily work the way they have in prior cycles because we haven't really experienced a dynamic like this, basically ever. And so when you look at last year's flipping the lights on and just record-breaking economic growth, I think we finished the year somewhere in the neighborhood of 5.7% to 5.9% GDP growth. That's massive. And it makes for a very, very difficult comparison year-over-year coming into this year.

So I don't think this two quarters in a row of modestly negative growth is really reflective of the underlying fundamental strength because we had record-breaking difficult comparisons. And so, I think there's still -- we're going to finish this year in positive territory as it relates to GDP growth. And so I think there's still time left on the clock. There's still time left in this economic cycle.  We're not officially tipping into recession here. And you know, to the extent that we get a reprieve on the part of the Fed, we can potentially be in a soft-landing scenario. And so I think -- I don't want to make it as simple as the math, but I think the punch line here is, the math is what drove Q1 and Q2 to kind of make it feel like a recessionary environment, even though the underlying fundamentals have still been hanging in there. They can't hang in there forever, and that's why I think 2023 is going to be a very different backdrop to the extent that the Fed continues forging ahead.

Lou Cestello:

Switch to a question for Harold.  And Harold, maybe talk a little bit about the Georgia runoff? How important is it, now that both -- you know, the House and the Senate have been decided, and maybe what that means -- what it potentially could mean to Trump?

Harold Ford, Jr.:

So, great question, and I should have addressed that in my opening. And I'm sorry that I did not. The Georgia race is -- remains important for two reasons, two policy reasons and one political. I'll deal with the political first, because the former president's name was mentioned. I think the -- Herschel Walker is a candidate who was endorsed by President Trump. He is one of the -- he's the only candidate, because this is the only race that perhaps President Trump could win, if Herschel Walker wins -- meaning that his candidate would be victorious in the race. It also is important politically because if the Republican Party can remain united in Georgia behind Herschel Walker, it will obviously not only help Herschel Walker, but help, I think, the Republican party's standing. As much as I'm a Democrat, I want both parties to be credible and strong because that's the only way you can potentially get sustainable or lasting legislation or new policy or new laws that really help the country.

The final thing on the policy side of it is, Democrats have a majority now of 50/50 regardless of the outcome. But a 51/49 would give Democrats more seats on Senate committees. It would allow President Biden, if there were those in his cabinet who require confirmation by the Senate, which is just about everyone with the exception of the Chief of Staff, that person or those new nominees would likely have a better chance of securing a recommendation from whatever committee they have to go before first. And then obviously a majority vote, because it'll be 51/49. So there is some tactical advantage and policy advantage to Democrats having a 51/49 advantage, which is why I think that both parties have a heavy incentive to campaign and spend a lot of money in Georgia.

On a much smaller note, and lighter note, and really a joking note, it'd be great to own a small radio station in Georgia over the next month because of the tens of millions of dollars that will go there trying to help either side or both sides advance their candidate.

Lou Cestello:

Thanks, Harold. Back to Amanda. Amanda, can you talk about in the box here, about the 60/40 split? Any -- with where now cash is, any changes to investment philosophy around mix?

Amanda Agati:

Sure. I'm happy to talk about it. I'll maybe take a step back and talk a little bit about the playbook when there is no playbook. But let me just say, Georgia radio stations are not part of the tactical portfolio recommendation, despite Harold's recommendation.  That's not on my short list for this playbook.

When I think about the playbook, it's definitely a tough dynamic, right, considering how much the Fed is really in the driver's seat. I'm inherently, I feel like, a contrarian, and so at inflection points in cycles I get really excited about the new investment opportunities that are likely to be borne out of inflection points. When everything's rising rapidly and all moving in the same direction, that's kind of dull and boring. And so I want to pick my spots very carefully.

That being said, and even where the market has kind of adjusted to over the course of this year, I think we still have to play a little bit of defense. And so when I think about equity exposure, I'm definitely leaning larger over smaller market capitalizations. We're leaning US over international. US by far -- for the challenges that we may have in the US economy, we're by far the best house on the global block. So, from a defensive posturing perspective, you've got to go US over international. And then I would say from a style perspective, we've neutralized our bets around value and growth. We were leaning more growthy, environments where growth starts to get scarce, investors tend to pay up for growth. The challenge this year is that growth exposures and valuations of growth exposures haven't been able to outpace how fast rates have moved up, and the tightening of financial [inaudible] really been this tough slog, with the pendulum swinging back and forth between value and growth. It hasn't been really paying, from an investor positioning perspective, to be all one way or all the other. And as I said in the beginning, like, energy and volatility are the only things working. And so, when you ask questions about like, the 60/40 split and 60/40 portfolio, diversification is not dead even though it might feel like it, and it hasn't worked out well this year. So we're still very much focused on having high quality, diversified exposures across the multi-asset universe.

In fixed-income, though, it's just going to be a really tough slog, whether you're in investment-grade exposures or below investment-grade credit. Until the Fed signals the end of its tightening cycle, I think those exposures are going to continue to be under pressure. It doesn't mean we should be selling them or exiting them. We still need that insurance policy in the portfolio and some ballast that day will come again, even though it's disappointed investors this year.

I have to say, cash has gotten really interesting. With how fast interest rates have moved up, we've actually started to incorporate cash allocations into our fixed-income portfolios. To be clear, we are not selling equities to build cash positions. This is very much specific to a fixed-income portfolio allocation, but with where interest rates have moved to, cash as an asset class is actually starting to look quite interesting after effectively being dead for the last 10 to 15 years.

And then what's not incorporated -- I could talk about this all day long -- but what's not incorporated in the question around a 60/40 portfolio is actually the role of alternatives. So, I think that's a really important conversation to have. It's not the right thing for all investors, but the role of alternatives, especially in this environment, can be really important. And especially given how challenging public market valuations have been this year, it actually catalyzes a really interesting entry point for vintage years for private market investments. And so, we really do like areas in private equity, venture capital, private debt, private real estate, even though I know that one can be a little tricky with where rates are. And even private infrastructure. And so it's not a silver bullet, it's not a one-size-fits-all solution, but a properly-constructed component of a multi-asset portfolio that has alternatives in there can actually be very well-positioned in this environment. So if you don't have that in your portfolio, I encourage you to talk to your investment advisor, whoever you're working with, to see whether it might make sense to incorporate some of that as we move into the new year.

Lou Cestello:

Thanks, Amanda. And another question, I'll kick it back to Harold. Harold, with the gridlock and the split, is there anything that you could see both sides being able to work on together that could benefit the economy?

Harold Ford, Jr.:

So another good question. I think two things -- so, highlighted the three areas where there needs to be consensus right away before we get to some of the -- before I think gridlock really kind of becomes the organizing force in Congress. And one is obviously the Speakership. We've got to get through this conversation around the debt selling in a meaningful way, and we have to I think figure out on the Ukrainian front whether or not the $37 billion -- I think it's a little under $38 billion -- $37.7 billion -- will be funded. There are two other issues that seem to unite Congress. One is China, and Democrats and Republicans alike when it comes to finding ways to make America more competitive, to create more opportunities and more investment opportunities, and for that matter, to create and build more things here that we have for a long time been reliant upon Asian supply chains for, particularly China supply chains for. I think you'll find a lot of commonality and common ground there, as well.

And obviously just in the last day or so, with some of the renewed attention around crypto companies, for the first time the chairwoman of the Banking Committee, Maxine Waters, who is the outgoing chair, and the ranking member of that committee who is the incoming chair, a Republican named Patrick McHenry, they have agreed on something. They have agreed on doing an oversight hearing around the FTX, the challenges and the bankruptcy around FTX. So I think there will be some issues like that. But when it comes to some of the things that I -- I think that when -- the way I interpret a lot of what Amanda is saying -- and Amanda, I did not want to put your advice in my radio ownership bag that I was promoting. But some of the things I think you're thinking about in terms of tax policy, tax changes, I think it's going to be very hard, Lou, to achieve anything in that regard. There may be some regulatory relief as it relates to our domestic energy production that you could find some commonality on.

I do think if I were -- if I'm a client, or those who follow this closely, the one thing I would look at is, if you look at the Senate around where there might be bipartisan work on something that may emerge, is to watch Joe Manchin. I think I mentioned on our last call, he's up for reelection in 2024, and has already inspired one or two significant Republican officeholders in West Virginia to oppose him. So I would imagine if he -- if his record is -- and his history in the last two years is any indicator, he will be outspoken on energy. And I could imagine him in the near term here siding with Republicans to try to advance an energy -- a domestic energy production bill. So, China, crypto, and energy security are three areas -- two of those -- the first two are areas where there's demonstrated bipartisan support on. And I think the third area, energy, you will find a number of Democrats, not just Senator Manchin, but just for the sake of it, the Democrats are defending 20 seats in the Senate, 20-plus seats in the Senate -- 21, to be exact -- next go-around in 2024. And a lot of those senators are from states where domestic energy is a key issue, and in every one of those states people are buffeted around by the price of gasoline and the price of oil products. So that's where I think the bipartisanship could emerge.

Lou Cestello:

And with the good meeting between -- I mean, the reported decent meeting between Xi and Biden, do you think that that pulls the Russia conflict closer to a closer, further away from a close? And then I don't know if the question would be for you or Amanda, and if that was settled, this conflict was settled, what happens with inflation?

Harold Ford, Jr.: 

I'll tackle for 30 seconds, then give it to Amanda. With Biden's performance, the Democrats' performance in this midterm here, it certainly improved, as I shared earlier, Biden's standing with China, for that matter, on the global stage overall. China has been the biggest ally and the most worrisome ally of Russia in -- over the last nine months, as it relates to Ukraine.

I mentioned the $37.7 billion funding package that President Biden is trying to get passed through the House and the Senate. I think that's critical to helping to achieve an end, because there's going to have to be a settlement between Putin and Ukraine.  And we want Ukraine -- my personal book is, I want Ukraine to have as strong a hand as possible in that negotiation. And if that happens, which I think it is likelier today that it happens than it was a week ago, in light of the fact that the Russian military is not performing as well, men in Russia whom are of age are either fleeing Russia or hiding because they don't want to be drafted or deployed. And you consider that China, again, the biggest ally of Russia in this whole ordeal, seems to be at least showing there's some distance between. 

You may recall President Xi said at the beginning of the year that there was no -- there was no part of the relationship with Russia -- or no relationship with Russia that couldn't be explored or expanded, which we widely interpreted to mean that it had a very wide and serious relationship they were developing. China's leader has backed off of some of those comments, and I think the actual meeting that the two, our president and China's president had just in the last week, further reinforces for me that there is a sight -- or I should say, there is an end in sight and Ukrainians -- the Ukrainians will probably fare much better than they would have, had the end in sight been two months ago versus where it is today.

Lou Cestello:

And Amanda, the -- what would happen with inflation? Would it rapidly drop?

Amanda Agati:

So I -- there's a couple of things to unpack as it relates to that. I think it will certainly help, as the geopolitical risk premium starts to come out of energy prices and commodity prices in general. We will see a little bit of a reprieve there. But in the US, we're already seeing that reprieve, right. Gas prices rolling over, energy prices in general, have not seen the same level of pain that I would say Europe has experienced, for sure. And it's really because of our energy independence and positioning in the world.

So, yes, I think it will help our inflationary backdrop, but perhaps not quite as much to the degree as you might initially think. We need some of those other forces to also help get some of that inflationary fire out of the backdrop. No question, the biggest beneficiary, though, would be Europe. My concern, though, is that it's going to be too little and too late. We're already seeing just really significant hits in terms of economic growth, energy prices through the roof. We're seeing shuttering of capacity across the region. Not a lot of ability to kind of switch to other energy sources.

And so while I think it will help them the most, the challenge is, we probably needed it two or three months ago as opposed to now or over the next couple of months. And so I think we'll get a little bit of a reprieve, potentially, in the market reaction to it. But I don't think that it's going to be enough in the very short run to reverse course on the economic growth and structural challenges in the region. So, I wish I could be more optimistic on it, but I think it's just one in a series of forces that we need to see stabilized to get the inflation backdrop under control.

Lou Cestello:

Amanda, there's been a lot of layoffs in tech. You look at Twitter and Meta and Amazon. You know, is that a side effect of 5% cash, and in terms of advertising, I think, for sure -- but how about in terms of speculative and R&D-type of investment into the metaverse, for example?

Amanda Agati: 

Well, it's a doozy of a question, and I think I would just say, the punch line on that one is that everybody thought those types of business models were truly inflation-resistant, or protected from, or insulated from, inflation. And I think the reality is not the case. Everybody, I think, fundamentally changed their belief around some of these aggressive growth, aggressive tech-oriented exposures, communication services exposures, at the onset of the pandemic. They effectively used the pandemic to their advantage, pulling away from the pack with greater fundamental strength. They had a lot more opportunities to invest in their business and innovate when everybody else was kind of hunkered down.

The challenge is, they are very much beholden to the economic backdrop. And you called it -- certainly, advertising spending is drying up pretty significantly. The consumer is hanging in there but certainly they can't keep up this aggressive pace of growth that we saw as a function of the pandemic and the lockdowns, and then turning the lights back on. And so I think it's much more about kind of right-sizing and leveling out. We've had a very extreme environment the last couple of years as a function of the pandemic. And so we're starting to see that pendulum swing back a little bit.

From a valuation perspective, I'll just reiterate what I said earlier. It's not necessarily that these were materially overvalued based on the underlying fundamental strength, but what changed completely is the cost of capital, and seemingly overnight.

If we think about where we were expecting the Fed to be at the beginning of the year, the Fed was talking themselves about maybe one or two rate hikes of 25 basis points of sorts, at some point, over the course of 2022. We're in a completely different place than we were, and so the cost of capital has gone up so aggressively that it's really catalyzed this very significant reset. I don't think the business models are broken. I just think we've had such a significant regime change that we're really seeing the markets try to kind of right-size and reset to that. And of course, you're seeing the companies take action as well.

So I think there's room left for them, but not before a seemingly painful reset here in the short run.

Lou Cestello:

Thank you. Harold, any frontrunners for the Dems to run in 2024? Outside of, you know, whether President Biden does or does not?

Harold Ford, Jr.:

So that question, I'm glad you gave the addendum there, what is contemplating. I think a couple things. First, President Biden feels vindicated after this midterm election. Some may wonder, well, Democrats lost the House, so it seems to be a mix.  But I think the expectation was -- the expectations were much worse. And number two, I think the news today, Speaker Pelosi saying she won't seek a leadership position in January once her speaker -- once the Democrats turn the gavel over to the Republicans because the new Congress is installed, it could very well embolden some in the party to suggest to President Biden, you know, you should leave on top as well. You had a good midterm and maybe it's time to allow another generation or new generation of Democrats to be moved in. I don't know if he will -- if that's in his cards, but a year is a long time, or six months is a long time from now. And we'll have an opportunity to see if that pans out or not.

But your question asks names. I've mentioned, I think, Gretchen Whitmer, the governor of Michigan who is now in her second term, is someone who a lot of people are watching. I think the governor of California, Gavin Newsom, is another person that a lot of people are watching. He has talked openly about perhaps being a candidate himself. He's really the only Democrat that is a prominent Democrat that has openly said and candidly said that he would run, if President Biden does not seek reelection.

I think in the president's cabinet, President Biden's cabinet, the Transportation Secretary, Pete Buttigieg, has said that -- has indicated or expressed interest, and in some of the polling -- which I don't trust polling like I used to -- but in the polling data that we do have, that some are looking to, Secretary Buttigieg leads all of the candidates. I have intentionally not mentioned Vice President Harris, because I think it's probably difficult for her to talk about running against her boss, for lack of a better way of describing the relationship. But if President Biden does not run, I would imagine that she would be a candidate as well as the other three that have been mentioned, and very likely names that we're not even thinking about right now because the vacancy is not there.

I think it's a healthy thing for any party to have people on the bench who are ready to run for higher office. I know it's probably uncomfortable for President Biden, as some in the party are talking about this as he's trying to finish his first term, but he, himself has said that he intends to run and he has certainly not closed out the idea or the -- or I should say, the reality that he would not run. So this conversation will continue, and until President Biden says that he's definitely running, and until right behind that, Vice President Harris says, "I'm definitely running with him." That may be the only thing that gives us some clarity.  But until then, this rhetoric will certainly continue, and we'll certainly see a jockeying amongst a lot of Democrats.

Lou Cestello:

Thank you, Harold. Amanda, maybe this will be -- we're coming up close to time, but maybe the last question would be, how do you handicap or predict a hard versus a soft landing? And is a soft landing doable with all the balls that are in the air?

Amanda Agati: 

Oh, my gosh. You saved the hardest question for the end. I would say -- oh, gosh. Oh, the pressure of quantifying it. I think if the Fed goes to 4.6% or higher, as the end state for this tightening cycle, its effect, I'm going to say 100% probability of an economic recession. But we don't know for sure that that's the case, and that's just based on historical evidence and data, right, that I said earlier, that they've never managed to avoid tipping into a recession going to that level of restriction on rates and financial conditions.

A soft landing is absolutely still a possibility, though. That's why I said, recession is not necessarily a foregone conclusion. But the only way to get the soft landing scenario to work out is if the inflation backdrop -- and some of those other perfect storm headwinds -- abate and in very short order. We're just every so slightly starting to see some ground gained as it relates to those inflationary readings, but we still have a long way to go. And that end state for monetary policy is not that far away. Like, we're talking at least March or April, right. Very, very short term in terms of that path forward.

So I'm sure our chief economist is going to be horrified that I said 100% probability, but I think my -- from my perspective, that's the critical piece in terms of the path forward. It's not a foregone conclusion, but if the Fed goes that far, I think you have to assume the hard landing.

Lou Cestello:

Well, thanks, Amanda. And as always, fantastic insight. Harold, much, much appreciated. So proud to be partnered with both of you here at PNC. There are many questions that were not answered in the chat box. My apologies for that.  But we're going to keep to the hour. So, please reach out to your PNC banker if you want further clarification.  We'd be happy to follow up and get to your specific point.

But in the interim, thank you so much for what you do with PNC. Thank you for trusting in us, and look forward to continuing to service your needs going forward. Thank you so much for your time.

Operator:

Thanks, Lou, and ladies and gentlemen, again, that does conclude PNC's 2022 Impact of the Midterms Recap. Thank you so much for joining us, and you may now disconnect. Have a great day, everyone.


Watch more from PNC Private BankSM:

Post-Election Webinar Replay

November 11, 2021

Transcript

Operator:

So now, without further delay, let's begin PNC's 2022 Post-Election Recap. It's my pleasure to introduce your moderator for today, and that is Lou Cestello, Head of Regional Markets and Regional President, Pittsburgh and Southwest Pennsylvania.

And with that, Lou, you have the floor.

Lou Cestello:

Well, thank you very much, and welcome, everyone. And thank you for joining us for the second of PNC's three-part webinar series on midterm elections. I am Lou Cestello, as our moderator said, head of PNC's 54 regional markets coast-to-coast. And I have the privilege of also serving as the Regional President for PNC in Pittsburgh. But today, I'm with clients and colleagues on the west coast where it's 11:00 a.m. Pacific Standard Time.

With more than 2,300 of our clients and colleagues across the country registered for our recap, what certainly turned out to be an interesting election day with a number of key races still too close to call as of this morning. Today, you're going to hear timely insights of known political outcomes and the impacts on the midterms from PNC's Vice Chairman of PNC's Corporate Institutional Banking, Harold Ford, Jr., and Amanda Agati, the Chief Investment Officer of PNC's Asset Management Group.

First, we'll set the stage with an update on what we know today from the results from more of the more critical races and insights relative to potential implications against the backdrop of today's political, economic, and social landscape. There's no one better suited to do exactly that than my good friend and colleague, Harold Ford.  In addition to his role as Vice-Chair, PNC's CNIB segment, Harold also serves as Chairman and CEO of our Equity and Inclusion Capital Corporation. Prior to joining PNC in 2020, Harold served as Director of Live Oak Acquisition Corporation, and of course served in the Congress for 10 years representing Tennessee's 9th Congressional District, and was a member of the House Financial Services, Budget and Education committees as well as the Congressional Black Caucus. Harold is a regular contributor on Fox News, currently serving as a rotating co-host of The Five; and Harold is operating on a few hours of sleep after last night's elections. He was on Fox most of the night, if anybody saw that.  But he's excited to be here today to give you his perspective on where everything stands this morning -- at least, what we know as of right now.

Following Harold's remarks, we'll move to Amanda Agati. As Chief Investment Officer of PNC's Asset Management Group, Amanda oversees AMG's overall investment strategy, portfolio and risk management, investment solutions, and develops and executes the investment policies. Amanda is, of course, well known for her timely and compelling marketing and investor updates, and following Harold's remarks, we look forward to hearing her insights on real-time and longer-term potential market impacts of the midterms as we know them today, and what they mean for investors going forward.

But without further ado, and I'm going to hand it over to you, Harold, the floor is yours.

Harold Ford, Jr.:

Lou, thank you. Good afternoon. Good morning to you, Lou; good afternoon to all of our clients and to my colleagues.  What a night we had last night in politics. It's one of those nights that for those of us who love politics, and I'm blessed to have been a part of it from the standpoint of being elected to office, I share with some of my colleagues with my friends, election night is like New Year's Eve, Christmas Eve, whatever eve you enjoy if you don't celebrate those eves, all in one.

It's incredible because voters get an opportunity to validate polls, or more importantly, to validate what they're thinking and to give pollsters and politicians a clear guide on what they should be thinking about -- and more importantly, what they should be doing.

We still don't have a full picture, a clear picture, as Lou's opening remarks demonstrated and as all of the results last night make clear to us as well.  We don't know what the final numbers will be in the House, and certainly don't know in the Senate.  But what we do know is that the expectations that I think both sides had, I think if you would talk to people who thought they were studied and experienced in both -- in the Democratic party or the Republican party, those are our two major parties -- both would have probably told you that they expected the House of Representatives to go decidedly Republican, and some of them would have probably told you they thought the Republicans would win the Senate, or take the majority in the Senate.

As we sit here this morning, it appears that the Republicans have a majority in the House. It's a far smaller majority than they thought they might have had, meaning, they didn't win as many seats as they thought they would have. But just to dwell on that for one moment, that still means, for those of you who follow this closely, or not too closely, that Republicans will gain the chairmanships of all the committees in the Congress, including the Ways and Means Committee, which writes the taxes or determines our tax policy, or what new taxes may be introduced by Congress. They will take over the Financial Services Committee, which determines bank policy and banking regulation policy as well as all of the other committees, including the Oversight Committee.

Forgive that background noise here. I live in New York City, and things are happening.

All of the regulations that affect the banking industry will be now controlled by Republicans in Congress, for those of you that did not hear that, as well as the Oversight Committee which will have jurisdiction over whether or not the various agencies and departments in government will be investigated, including whether or not President Biden, his son, Dr. Fauci -- and I say Dr. Fauci as a -- really a catch-all for COVID and its origins, which Republicans have said they want to investigate. So, all of that will change, because the control will go to the Republicans there.

Now, there are those in the Democratic party who still believe there's a small percentage chance that Democrats will retain control of the Congress, but I think those who are being honest realize that the numbers have moved to a majority for the House.

In the Senate, we don't know yet. It's very likely that the race in Nevada and the race in Georgia -- the race in Georgia could very well go to a runoff. And the race in Nevada, we don't know all the results, and it's more likely than not we'll have some people contest results in one or two -- one or two other states, including Arizona. But what is clear is that at most, it will be a one-seat majority for whichever party has the majority. It may be a two-seat if you consider a 50/50 margin for Democrats a majority because of the fact the Vice President is a Democrat and can break a tie in the Senate.

So, as a result, expectations were not met as some may have thought. I happen to think that last night, again, was a validation of what voters believe. Just a 30-second commentary on what I think politically, I think the country made it clear that excesses and excessiveness in either party is not something they cling for, or not something they clamor for, or not something they're going to applaud or congratulate, or for that matter, ratify. They want both parties to be in the middle. I hope the Democrats take the right lesson from this, and I hope the Republicans take the right lesson from this, that voters want action on the issues that they care most deeply about. I'll leave the politics to -- to all of our clients to sort out, and to rather -- to be either happy, sad, or gratified by what happened last night.

I think from a policy standpoint, and my colleague, Amanda Agati, who I think is the best at analyzing how this is going to impact markets and how we should think about this from a market perspective -- but as I think about the politics of it, and the policy implications of it, I think two or three things in the short term. First, from the politics standpoint, the winners last night from a national level, were Brian Kemp and Ron De Santis, who won resounding victories in Georgia and Florida. I think the losers last night are those who, again, sit on the extremes in politics -- either the Democratic side or the Republican side. And we all have names that may populate whatever that might be. These are just sort of my impressions of this.

And I think that as a result, it will influence how policy is pursued in national politics over the next two years. I think President Biden will have an incentive to do what I think he wanted to do -- at least many of us hoped he wanted to do when he was elected to office -- which was to try to bring not only the country together, but to bring our politics together, to help the country move forward. I think there are two or three issues that will animate our agenda. One will be our foreign policy as relates to China and Russia. I think you will find more harmony, and for that matter more consensus between the parties, on those two fronts.

Two, I think there will be more harmony around, and certainly more congruence around, a voice urging the Fed to slow down its efforts to halt inflation, or to curb inflation. I think you'll see more bipartisan effort on that front.  I think a lot of that will be motivated by the fact that we will see Republicans who are aiming to run for President, and trying to put themselves in front of the line. And although there are those on the Democratic side who wish that President Biden would not run for reelection, I think it's more likely than not that he will run for reelection. But if he chooses not to, you're going to see a number of Democrats that want to move into that space. I mention this only because I think you're going to see Democrats, as a result, again want to be united around fighting or curbing China's influence and curbing Russia's influence, as well as getting the Fed to slow down its efforts to restrain or curb inflation because they think it's hurting the economy and hurting job creation in the country.

And finally, on the two or three issues that animated the campaign, inflation, the border, crime, and the threats to democracy which Democrats talked about, I think you will see on at least three or four of those issues, I think you'll see a Congress that wants to try to come together around protecting our border in a more serious way and ensuring that crime comes down, and for that matter, helping with inflation, which I think for a lot of members of Congress and the Senate going forward, will be finding ways to make America more energy-independent. I think you can believe that there will be efforts on that front, and a more consensus way to deal with those issues.

Amanda will talk -- I know she will talk a little bit about what this means for tax policy, which obviously will impact how we think about the markets. But I think there won't be a lot of action -- my two-cent and cheap-seat view on this -- is that there won't be a lot of action to raise taxes. President Biden is going to try to find ways to ensure that he's stronger going into a reelection season. Even if he does not run, I think Democrats are going to want to be in a stronger position, whomever that Democrat might be, to be elected to the presidency in '24 if President Biden does not run. And this is not a statement on my part about him running or not running; I just think that's how the politics will shake out.

Finally, on the political front, I think it's a maturing for the country in some ways in that when voters speak, both sides listen. And I think last night, with expectations being so high on one side, I think that many in both parties will view and interpret the results to mean we should all get back to work and try to work together and try to make the country more whole. 

Again, I start where I finish: we don't know all of the results yet. It could very well be a one-seat majority for either party in the Senate, which could impact a little bit what I'm saying, but I don't think very much. I still believe strongly, even if it's a one-seat majority for Republicans, this will indeed be the case. If it is a one-seat majority for Republicans, I do think there will be a little more likelihood for a little more gridlock increases slightly because the veto pen that President Biden has will likely be used if Republicans attempt to do things that the President does not agree with. And I think it's very likely that the cabinet that the President has today will likely remain intact. At least the people who are -- many in the country believe -- are most important, the positions we believe are most important.  Not the people, but the positions, including the Secretary of the Treasury, the Secretary of State.  Remember, these are all positions that have to be ratified by the Senate, and I think the President will think very hard and seriously about whether or not he can actually get people confirmed through the Senate in light of the way the Senate may be made up if, indeed, it is a majority Republican Senate.

Furthermore, I think it puts more pressure on judicial nominations and judicial confirmations, whether -- more aptly said, whether or not those who are appointed to the District Court, the Appellate Court, or the Supreme Court, if there's a vacancy on the Supreme Court, it's very likely that a Supreme Court nominee might not get confirmed over the next two years because of the hyperpartisanship that I think infects our politics today.

If the Democrats do retain a majority in the Senate, I think it is likely that there will be some shake-up in the White House staff, particularly those who might -- would have to be confirmed. It's important to note that White House staff itself, meaning the Chief of Staff and some of those who report to the Chief of Staff, and report directly to the President in the White House, do not have to be confirmed. So there could be movement there. And there is a lot of conversation, and I think a lot of credible conversation, about there being some movement amongst the White House staff in light of last night's results. I do think if Republicans do take control of the Senate, I think that it is a likelier chance that there will be some shake-up in the White House staff, and that's a staff that does not have to be ratified or confirmed by the Senate.

With that, I'd love to turn over to my colleague, and to my friend, Amanda Agati.

Amanda Agati:

Well, thank you so much, Harold, and good afternoon, everybody.  I'm delighted to be with all of you. I, actually, am the more well-rested, I think, of the two of us here which is a very unusual thing for me to say, although I would say one day out of the calendar year does not make a trend, given all of the issues that the market has wrestled with over the course of this year. Believe it or not, the midterms really was not the thing that markets were totally fixated on, and weren't really focused on as being a headwind in terms of the path forward. So, I slept a little bit like a baby, I guess you could say, last night, thinking about kind of the lead-up to it, and then kind of what we're seeing in the early results here today. And I'll kind of talk through why I felt like I was sleeping pretty soundly, despite the high volatility regime that we continue to be in.

Let me start by saying, the midterms are always, you know, a volatile time. There's always change afoot as it relates to the midterm elections. The party controlling the White House almost always loses House seats in the midterm, so we were expecting change to be afoot and a challenge of the status quo. In the past 50 years, I think it was the only time this didn't happen was during the George W. Bush midterms right after 9/11 in 2002. And so the average loss of House seats in the midterms for a president's party tends to track in the 30-seat range, plus or minus a couple of seats.

Based on what we know so far, there's a loss of 12 -- or said differently, the Republicans are picking up about 12. So, really significant underperformance, or performance differential, relative to historic norms. And I think that just kind of reinforces some of the thoughts that Harold shared earlier. For as uneven a midterm election cycle as this was, I would say it just chalks it up to yet another aspect of the high volatility regime. We saw really significant moves in favor of the Democrats, in favor of the Republicans, and back and forth. Again, really developing on both sides over the course of the year, and then seemingly fizzling as different issues kind of came to light over the course of the year, and came into investor focus and voter focus.

So let's just say, even though it's not final-final, that US voters have effectively removed the party in power with this change in control, even though it's razor-thin, this change in control now in eight of the last nine election cycles. And so, no better example there in terms of a stat as it relates to the high volatility regime. For as much as markets have been in it, certainly Washington has been in its own version of a high-volatility regime.

What I think is just really interesting about the outcome here is that the results are just so outside some of the historical norms that we might have expected, so this loss potentially of 12 seats in the House really didn't jive with some of the polling and tracking and probability that we were looking at, kind of leading up to it. Based on where President Biden's approval rating was tracking in the 40-plus-percent range, that actually would have tied to about a 40-seat loss. So, nowhere near what some of the historical precedent might have suggested there.

I think punchline, just very much reflective of what Harold said.  What have we learned as it relates to what may be coming in 2024? Yes, the President may have lost the House to some degree; may have lost a little bit in terms of the short-term agenda, but it's such a narrow, thin margin here in terms of a change in control that he effectively overcame history with this election cycle. But that doesn't mean that, you know, we're going to throw out the policy playbook in terms of the path forward. And I think as Harold said, both sides seem like they're going to have to figure out how to work very closely together, and hopefully will be able to get more accomplished than what we've seen over the last couple of years.  So, that's good news, all else equal, certainly for the market.

It's hard to say that this was really an outright win for the Democrats. Yes, they were able to hang on to more and effectively outperform relative to what we were expected, but certainly, more of I think a loss in terms of expectations for the Republicans. But the net effect of this, really, we can slice and dice this a whole bunch of different ways. The net effect of this for the market is largely the same; it's gridlock. And markets tend to prefer gridlock.  It tends to be the most favorable outcome because you can't have too many negative policy surprises move in one direction or another. So, that's why I slept like a baby last night. Even if it wasn't a significant strong gridlock scenario, still felt like we might get some calm as it relates to Washington policy.

When I think about some of the guide posts that we talked about in the last webinar, kind of trying to get a crystal ball framework for what this election cycle might bear out here, the one thing that we were really focused on, that might be really kind of giving the Democrats an edge, or at least keeping them in the game, was gas prices.  If you look at economic data, it was clearly signaling the potential for a change in control -- not necessarily a Republican sweep, but certainly a change in control. Polling data, though volatile, was suggesting a change in control. Even market performance at the index level and also at the sector level was also suggesting change in control. But we did think that the wild card was going to be gas prices. And so, in and out of cycles, no other issue drives voters the way the retail price of gas does.

And so, top of voters' minds, certainly as a gauge for the state of this economy and their standards of living is certainly what's happening with gas prices. I think we talked last time about how gas prices bottomed in mid-September. They peaked out in early October, and they were coming back down again. So, was that going to be enough to keep the Democrats in the game?

The punchline is, that yes, it apparently was enough to keep them in there. And I think it sends a big message to the Democrats that high gas prices are not really the single biggest issue here, which perhaps may translate -- this feels like way going out on a ledge here -- but may also translate into high inflation, is not necessarily the biggest issue on voters' minds. And so, the net effect from a policy perspective is, we think that policy makers are going to keep going as it relates to alternative energy, clean energy. We're not going to see kind of like a stopping in the tracks and a reversing course on a lot of the legislation, particularly as a function of the Inflation Reduction Act over the course of the summer. We don't expect a lot of that to be pulled back.

So, what is the market's reaction here? As much as I'm saying I'm sleeping like a baby, I'm feeling pretty good here, the market is down a little bit today. And so you might be like, what gives with that, right? The market should be flat to like, modestly higher, based on what Harold's comments would suggest. And I would say a couple things going on here.

So, the market leading up to the midterms was absolutely making a bet that the Republicans were going to handily win, and also take control of the Senate. I suppose it's still possible that they may take control, but they do need to win both of the seats that are still open and get to 51 seats there. So, it's still a little bit of a jury being out there, but certainly not the landslide that the market was starting to price in. So, leading up to the election, we were seeing a big move in energy and energy-related infrastructure.  We were seeing moves in biotech. Anything immigration and security-related, defense in particular, was outperforming pretty much everything by a wide, wide margin. And even financials started to pick up some tailwinds as well.

On the flip side, alternative energy was getting absolutely crushed leading up to the election. So an indictment, potentially, on the outcome of the election, the Democrats losing control by a wide margin.

What's interesting, even just yesterday, is that defense stocks basically tracked the overall market, over the course of the day, whereas clean energy, alternative energy, were up big, 350 basis points on the day just yesterday. So, effectively, the market gave us a little bit of a pivot.  It's not the pivot I'm looking for; I've been talking all year long about how I want a Fed pivot, or at least a Fed pause. So we didn't get that.  But the market did pivot a little bit as it relates to sentiment on the potential midterm election outcome.

Where we are today, the market's down and I -- by market, I mean the S&P 500 -- is down about a percent or so, driven lower by tech and energy. I think what's notable is if the market finishes down today, that is in negative return territory, it'll be the first time the day after a midterm election where markets were negative, since 1994. Guess what else was happening in 1994? Rate hikes.

And so at the end of the day, you know, we can talk all day long about needle movers here and there, policy implications. I still very much believe the Fed is in the driver's seat in terms of the path forward for the market, and certainly the trajectory of inflation from here.

When we look at the bond market, it's effectively asleep.  It's sleeping like a baby, like I was last night. Bond yields haven't moved hardly at all today, plus or minus a basis point. Credit spreads basically are unchanged. And so this is the bond market saying, we've moved past this; we are not focused on the election, we are absolutely focused on Fed, inflation, and the perfect storm of macro headwinds that come next.

And so, if I wrap all of this up because I know we want to get to a lot of Q&A. I think the punchline for me is, does this change -- this outcome change -- any aspect of our outlook for a post-election rally? And I would say, no, because we really weren't expecting much of a post-election rally. I wasn't thinking that the election was going to be a headwind, per se. So we might see a small, modest tailwind here, but I don't think the net effect changes our outlook at all.

I keep coming back to the idea that it's potentially different this midterm election cycle, relative to history, because we've never had a recession begin in the third year of a presidential cycle or term. And that's really starting to become, I wouldn't say a foregone conclusion, but the probability is rising pretty significantly here, and in very short order, given the Fed rhetoric from their recent meeting. They didn't move their latest dot plot up, but there's never been a tightening cycle in history where the Fed has gone to 4.6% on the Fed funds rate or higher, and not tipped us into a recession. So we do think that that is still really the fixation and the governor in terms of the path forward. Fed, inflation, and ultimately what happens to the cycle. 

And so I think the other aspect of this is very much connected here. So, markets tend to rally off midterm elections, assuming that we're going to see more policy accommodation. I hope that Harold's prediction is right, and that we get some influence to get the Fed to kind of slow down a little bit or pause here. That would be a massive tailwind for markets. Like, literally if we get a Fed pause, I think it could add two or three multiple points to valuations, seemingly overnight. That's really the power of monetary policy here.

But absent some kind of unforeseen influence here, in terms of what the Fed is going to do, certainly monetary policy accommodation is going to be very restrictive. And even on the fiscal side, while we may be able to get a little bit more done than perhaps what we would under normal gridlock scenarios, I don't think it's going to happen quite fast enough and be stimulative enough to circumvent or override what's happening in terms of Fed policy. And so I think that does set the stage for a very different market reaction this time relative to history.

I think when I'm thinking about movers in terms of policy or fiscal accommodation, regardless of the outcome of the election, you have to assume higher defense spending. I think at the margin there may be some higher non-defense spending, some tax changes at the margin. But we're not looking at corporate tax increases in a big way beyond what was contemplated in the Inflation Reduction Act. And I can get into some of the details on that if you want.

So, modest fiscal policy bump: yes. I think the market is going to have to determine whether it's going to be enough to offset the potential for going into a recession, or if the market will view it as actually making Powell's job a little bit harder, meaning, putting some upward pressure on inflation there. At the end of the day, though, you have to buckle up, right. Because I think the Fed is still very much in the driver's seat. In the battle with inflation we get another important data point tomorrow, with the CPI report coming in.

But consensus expectation is that it will fall ever so slightly. But the bad news is, it's still got a 7-handle, and if we round up, it's basically 8. It's 7.9%, is what the consensus expectation is, so it's nowhere near where it needs to be. And it's not even getting close to the Fed's 2% long-term target, even when we back out food and energy prices, so we look at core. It's only expected to move from like 6.6% down to 6.5%.  So, the net effect here, I think from my perspective, is that the perfect storm continues to swirl; these macro headwinds and other forces continue to apply a ton of upward pressure on inflation. And so, even with outsized rate hikes, pretty consecutively here that we've had on the part of the Fed to try and tamp it down, it really hasn't had the effect that it needs to, and in short order, yet. And so, we think tomorrow, the inflation report is not going to fall fast enough to justify certainly a pivot, and certainly not a Fed pause, much to my dismay. 

And so I think, you know, there's a lot going on here, a lot to unpack. But really, if I boil it down to the one or two things that matter most for the market and the path forward, it's the Fed and what they do as it relates to inflation, and how fast we start to get confirmation of inflation peaking and rolling over.

So with that, let me stop there, and I will hand it over to Lou to start the Q&A portion of our session.

Lou Cestello: 

Well, thank you, Amanda, and thank you, Harold. And as I read through a lot of the questions, I think there's a lot of political questions, Harold. So I think I'll ask you the first one.

Maybe talk a little bit about the undecided races. When will there be more clarity, and what are the most important? I mean, it looks like Georgia may go to a runoff and maybe you could talk about the timing of that, to then Arizona and Nevada. Your thoughts?

Harold Ford, Jr.:

So, I wish there was a lot of clarity around the answer -- I can be more specific, rather. What I can be specific about is if the race in Georgia, as we all know, neither -- and it's three -- three people in the race.  We focus on the main two, Rafael Warnock, the incumbent, and Herschel Walker, the Republican challenger. But there was a Libertarian in the race. That conversation is relevant for what may happen if either Herschel Walker or Rafael Warnock did not get 50% of the vote plus 1, and it looks as if, as we sit here today, that neither of them will get to that point. Which means it will go to a runoff, which will be decided December 6. And the Libertarian candidate would not be in that race; it would be the top two finishers. And it is believed that a lot of the Libertarian vote would likely go to -- more of that would go to Herschel Walker than to Rafael Warnock.

But with all things, runoffs, and another election presents another set of characteristics and another set of dynamics. And in Georgia, because they have history with this two years ago, this happened, as we all may recall, and you had both Senate seats go to a runoff, and both seats were won by Democrats. That race was animated and colored by the fact that President Trump, who was still President at the time, chose not to engage until late in that campaign and late in that runoff. And in fact, his lack of energy for the Republican candidates, many believe, caused the Republican candidates -- both of them in that race -- to lose. So it will be interesting to see what happens over the next 30 days.

I saw some of the questions populate the inbox as well, and there's no doubt as we talk about Brian Kemp, who was a winner last night, the Governor of Georgia, he will likely be very supportive of Herschel Walker, which should help Herschel Walker in a runoff. And the question becomes, what does President Trump do in that race? And what do Democrats do to try to be helpful to Rafael Warnock?

Now, the other two races that you mention, Lou, will impact this as well.  Arizona, three races, excuse me -- Arizona, Wisconsin, and Nevada. I think Wisconsin, they've pretty much declared that for the incumbent, Ron Johnson, but Nevada and I think they've all pretty much declared Arizona for Mark Kelly. Or at least the prognosticators believe he will win there. That race has not been -- there has not been a declared winner there yet, I don't believe, because there was some voting irregularities -- or I should say, some voting machine irregularities -- in one of the big counties in Arizona. But I think as we sit here and think about where things are in an honest way, it's really Nevada and Georgia.  And we'll get more clarity around Nevada hopefully today or tomorrow, before the end of the week. And then we'll get more clarity around Georgia.

My thinking is that Georgia will decide whether or not Democrats have the majority in the Senate or Republicans have the majority in the Senate. And we will know that December 6.

Lou Cestello:

Harold, with the strong showing --

Harold Ford, Jr.:

If I can -- if I can add one more thing, I think -- I saw one of the questions. I think that the winner in the Republican last night overall was Ron De Santis, who was able to rack up a victory in Florida that created some coalitions for Republicans, that they -- we've not seen for Republicans in Florida in a couple of decades.  And I think the question now becomes, is he -- does he now seek a larger role on the national stage for Republicans. And if he does, I think he will -- there will be some receptivity for him in the Republican party. I'm not a Republican. As I look at the landscape I think there will be some receptivity for him, but that won't be without resistance from the incumbent, because the incumbent power in the Republican party in many ways still remains in President Trump's orbit. So we can expect a clash of titans there, and we'll see the first clash perhaps in how both of those individuals decide to play in the Georgia runoff, if indeed there is one, which I believe there will be. I'm sorry, Lou. I didn't mean to interrupt you.

Lou Cestello:

No, that was my exact question I was going to ask, is talk about the strike that happened for the Republicans and what that meant for De Santis on the national level. And then on top of that, Harold, there's some strong -- it seems like strong momentum behind De Santis, but do you think Biden will run again? And is there any sort of strength, like a De Santis-type of person, in the Democratic party at this point?

Harold Ford, Jr.:

So Lou, I think the framing of that question is -- it also leads to the answer in a lot of ways. I think President Biden, probably this morning, based on what I heard last night and what I can get confirmation from this morning, is more inclined to run in 2024. And I think he's inclined to run for two reasons. One, he is the incumbent President, and the incumbent leader of the Democratic party. And two, there is no Ron De Santis waiting in the wings on the Democrat side. There are those who want to be a Ron De Santis type. 

And I -- the way I -- the reason I say Ron De Santis, I think he has emerged -- he's in office, he has a wide appeal, growing appeal amongst Republicans and perhaps in the country -- but certainly growing appeal in the Republican party.  And there's no figure quite like that in the Democratic party. There are those who want to be, and there are those who have stature in terms of their titles and in terms of some of the accomplishment that they may have in their own respective political positions, but there's no one with the kind of national appeal within the party that Ron De Santis has on the Republican side. 

So I think Joe Biden sees two things in his favor: one -- and Amanda, I thought, described this aptly -- as we talked about the strength of the -- the performance of Democrats in the midterms. And as an aside, I hope Democrats don't over-read their victory.  I think people want -- what voters are really saying, is I want you -- you men and women to get back into politics and work together, and try to solve the things that are really impacting my life adversely. But President Biden sees it as a win, because the expectations were, the Republicans were going to perform better than they did last night. And then, two, again, as I'm redundant, there's no identifiable -- there's no readily-identifiable figure in the Democratic party to replace him or to be the nominee. They -- don't get me wrong, there are those who are clamoring for that role and for that position, from people in California, to people in Massachusetts, to people in Vermont, to perhaps people in the middle of the country as well.  But there's no one who has the standing that Ron De Santis has. 

And I might even add, there are probably two or three others in the Republican party, including the reelected governor of Georgia, Brian Kemp; the former Secretary of State, Mike Pompeo; the former UN Ambassador, Nikki Haley; and even the reelected senator in South Carolina, Tim Scott. There's no list like that in the Democratic party as we sit here today.

Lou Cestello:

Great. And a question in the chat, flipping to Amanda.  I'll let you get a drink of water, Harold. But flipping to Amanda real quick, Amanda, two questions. One in there about whether you see a quarter or half-point hike in December, but the second around the fact that Georgia will likely not be decided. And does that mean more or less market volatility in the next 30 days?

Amanda Agati:

I'll take the second one first, and say, I think it's pretty much status quo as it relates to the high volatility regime. I don't think that that necessarily moves the needle. Again, it's just one seat, right. It's not -- it's not a landslide in one direction or the other. And so, you know, I'm just really not convinced that it's going to matter that much for the market, that the market has really moved on to the perfect storm of macro headwinds: Fed, inflation, supply chain challenges, zero-tolerance COVID policies. You know, all of those things collectively, I think, matter more ultimately in the short run for the market's path forward than what happens with that one specific race. Even though I know it changes the control and the balance of power a little bit, it's not really enough, I think, to move the needle.

On the Fed piece, I've been saying for the last few months, I have my Christmas wish list already teed up that I want a Fed pause in December. I am not going to get it. I am going to get coal in my stocking. My gift's going to get lost in the supply chain disruptions.  It think the single thing that matters most in terms of the market is getting to a Fed pause and getting to it before we break the cycle.  But unfortunately, I'm not going to get it.

So, our expectation -- and this is also baked into the market, by the way -- the futures market is still suggesting that we're going to get 50 basis points in December. So it's a little bit -- I'm not going to call it a pivot, but it's certainly backing off a little bit relative to the 75, 75 train that we've been on here for a while. The market also thinks we're going to get another 50 basis points in February, and then another 25, starting to be baked in following the November Fed meeting and kind of the press conference that followed, another 25 in March. So we're heading towards a terminal rate of 5% here or more pretty rapidly, but that's kind of what the expectations are for the market.

And even though I want to fight it all day long, I think that's probably the path that they're on, unless the data changes meaningfully between now and then. And I just don't think there's enough time to see a material change in the inflationary backdrop.

Lou Cestello:

And maybe comment on the debt ceiling, Amanda.

Amanda Agati:

So --

Lou Cestello:

Your thoughts around, you know, where it is.

Amanda Agati:

-- this is -- yeah. So this is one that I think Harold should weigh in on as well. We actually were talking about this in preparation for the call today. So the thing that I am worried most about is just the additional cost of debt service as it relates to the debt ceiling. If you think about the last time around, we were looking at Fed funds in the neighborhood of like 1-ish, right. In terms of projections there, I just said a few moments ago, we're looking at a 5% potential terminal rate. And so, really significantly different backdrop as it relates to the debt ceiling going forward.

I think it equates to at least $200 billion or $300 billion, maybe even more. I may be underestimating that, in terms of additional debt service costs. And so I'm not necessarily concerned about the debate itself.  I think Harold should weigh in, but I think we're both on the same page that everybody understands that we need to work toward a collective solution here. But it is going to apply a lot more pressure on market-based interest rates, and I think the opposite effect is a lot more pressure, downward pressure, on potential valuations. And so it's not a great backdrop. Just add it to the list of perfect storm headwinds, as it relates for the market going forward. Not really something that we're going to have to tackle, though. Again, Harold, weigh in here, but not something we're going to have to tackle in the very short run. But it is something that we're going to have to face in 2023.

So, from a market perspective, those are the things that are -- I'm kind of focused on as it relates to the debt ceiling.

Harold Ford, Jr.:

I think -- Lou, if I can just say 30 seconds, I think Amanda's exactly right. Just to add on, I think that there was talk -- there was talk before the midterms from some leaders in the Republican Congress who were reelected last night, that they were going to make demands of President Biden and Democrats around reducing spending and reduction in long-term obligations for the country in terms of spending, for them to agree to a debt ceiling increase. I think that pressure -- or I should say, the pressure the administration may feel from those Republicans, or may experience from those Republicans, was reduced last night. 

However, I do think that what Amanda's speculating about in terms of the country's seriousness about addressing this issue will just -- will end up being a conversation that we have next year, or for that matter, maybe the following year. I don't think that pressure will manifest itself over the next few weeks as the Congress decides to increase the debt ceiling.

Lou Cestello: 

Harold, maybe you can comment on the weight of Roe versus Wade on this election.

Harold Ford, Jr.:

So, the decision by the Supreme Court to overturn it, I think it was not only Roe v. Wade, it really was the Casey decision in Pennsylvania which is relevant to us as a Pennsylvania-based business. It was the Casey decision that that really the Court overturned. I think that had a big impact early on in the race.  Remember, we instituted early voting in many, many states across the country, if not every state, and some have bigger periods of time you can vote earlier. And I think there were a number of voters who voted singularly on that issue.

I think when we look at polling in these elections, I think one of the things to take into account is that the polling is always right, from this standpoint: the people who answered that poll are giving the pollsters the data, the answers to the questions that they ask.  And they're doing nothing but being stenographers and laying that out. What really is the secret sauce to polling is whether or not the pollsters know how to get a representative group of people to ask, and that group is representative of how people are going to vote in that district, that state, that jurisdiction, that province, whatever it may be.

The thing that can upset any polling data is if -- upset it the most -- is whether or not the pollsters are accurate about the number of people who actually will vote in a particular election. So I think the Roe v. Wade decision has impact on the last part of what I'm saying, and I think I'm right about, which is I think a lot more people who had never voted before, who didn't think about voting in midterms, decided to vote.

But I think -- the bigger issue, I think, in this election here, is that I think voters decided to vote for the candidates that they knew, and decided even if those candidates that they knew weren't doing everything they wanted, they would rather not take the risk on voting for a candidate they didn't know, or that they had to hope would do certain things a certain way, or a right way. As much as Roe v. Wade may have made an impact in this race, I think it's important to know that there were a lot of governors who were reelected last night who signed legislation over the last 45 to 60 days making abortions harder to get in their respective states, including Governor Kemp in Georgia, and including Governor De Santis in Florida.

So, as much as Roe v. Wade played a role, I think the bigger role in this campaign was that voters decided to stay with the good or the bad, or however you decide to describe the candidates that they might have reelected or elected. They decided to stay with the candidate they knew best, even if that candidate didn't represent them the most.  They knew them better than the ones that did the alternative.

Lou Cestello:

Thank you, Harold. So, Amanda, you talked a little bit about alternative energy prices, or alternative energy performance, before. Do we think that -- I don't know if this is for Harold or Amanda, or both -- but you know, what do we think about legislation and potential changes that could happen in terms of energy prices in the entire sector going forward?

Amanda Agati:

That sounds like a Harold question, to start with. Harold, do you want to start on the legislation front, and then I'll react to your thoughts?

Harold Ford, Jr.:

Amanda, on that -- you respond and I'll react, because I think the legislative reaction may be --

Amanda Agati:

No -- no, you take it.  No, you take it.

Harold Ford, Jr.: 

-- better to -- no, Amanda, it'd be better to have you do it.  And I'll react to the legislative part.

Amanda Agati:

So, I would say, as it relates to alternative energy and clean energy, by far they were the biggest beneficiaries of the so-called Inflation Reduction Act, right. No matter how you slice and dice it, that industry, that sector, far and away had the most in terms of incentives, areas for investment, focus from a policy perspective in terms of supporting moving further in that direction. And so, you know, as I said during kind of my prepared remarks, thinking about the impact on gas prices and that voters aren't necessarily quite as upset about them, and the level of them as maybe we expected or we were concerned about going into the election, it really does send a message to Congress to keep moving forward, keep going with that shift.  It's not going to happen overnight. To be clear, we still believe that there is a strong role for traditional fossil fuel sources.  You have to come at this from a multi-faceted approach to solve some of the energy challenges in the ecosystem there.

But I think there clearly is a vote in favor of continuing to move down this path, and so, I would expect -- you know, at the margin, potentially more appetite for legislation in that directive. But recognizing that the impact from the Inflation Reduction Act was a very significant signal in terms of a tailwind for the market, but we haven't actually felt the effects of that start to roll through. So, I don't know that it's going to be grand and sweeping additional legislation relative to what passed over the summer.  But that was significant in terms of a tailwind and a kind of length of time horizon or runway for investment in the sector that we really haven't had before. And so, that has been and continues to be, I think, a tailwind for not just energy or aspects of energy, but it crosses over sectors as well, and it crosses over capitalization.

So, that's kind of my take on it as it relates to the market impact and the landscape and outlook for alternative energy. But Harold is going to be a lot closer to the policy piece than I am.

Harold Ford, Jr.: 

No, but I think Amanda, the reason I wanted you to go first, I think that the market reaction is going to help influence heavily what the politics, where the political -- the direction of the politics and the policy around this. I think the other thing to think about, because I agree with everything Amanda said -- the other thing to think about is that in this last election we just faced, and results we're still getting in, there were 35 seats that were up in the United States Senate. 21 were being defended by Republicans; 14 were defended by Democrats, meaning those were the incumbents, when I say "defended."  This is not a political statement. 

In 2024, the political terrain is better for Republicans in that it's more Democrats that are going to have to defend their seats than Republicans. Ordinarily, when you -- the party who is defending the most seats, or the incumbents who are defending the most seats, whichever the party might be -- a majority in whichever party -- is generally the party that has the most to gain. In this instance, it was unique. In 2022, there were only 14 Democrats, with 20 more Republicans, yet there was Democrats who were on the real defensive here. 

In this next election, there are more Democrats who are defending, including one whose name is prominent in national circles, Joe Manchin from West Virginia. Near the end of this campaign, in 2022, some who were watching closely noticed that there was a -- in the last 48 hours or 72 hours now, there was a dispute between President Biden and Senator Manchin because President Biden made some comments that Senator Manchin didn't like about coal production. And Senator Manchin retorted and reacted very aggressively in his language and posture towards President Biden.

I don't expect that to be in retreat, that tension between the two of them around energy, over the next year, or for that matter, two years -- or a year and 363 days, or 362 days, whatever it may be, before the -- 363 days before the next election -- 364 days, rather, before the next election. So, I don't expect there to be major legislation on this front. There could be major talk about it, which could impact the markets, but I don't -- I think the markets will understand that if there's a 50/50 Senate, Joe Manchin is not going to vote with Democrats for any legislation that advances alternative energy options, that disadvantages coal. And for that matter, probably that disadvantages the fossil fuel incumbency.

Lou Cestello:

Maybe I could keep on the same theme, but in a different industry. Amanda, any -- you know, the supply chain has been hit hard with chips and semiconductor issues.  You're going to see -- we expect to see more CapEx there. Do we expect to see any change in the semiconductor markets, in post-election?

Amanda Agati:

So I wouldn't say that there's an expectation for a notable change on this front. I think the Biden administration has really claimed all actions, trade policy or otherwise, related to semiconductors in the industry, kind of in the name of national security. So there's clearly a focus on that, and I think that that will continue really regardless of kind of how things shake out over the next couple of weeks.

The net effect of that, though, is certainly going to mean additional encouragement to bring semi manufacturing onshore, and a lot more CapEx investments. In fact, I think that just this morning -- it's a little bit of a haze today -- but just this morning, Taiwan Semiconductor announced that they're going to build another plant in Arizona.  So, that wave of continuing to onshore as it relates to that, I think is going to continue. It is great news in the long run, but it doesn't really bail us out of the challenges and the supply chain disruptions, and the supply shortages in the very short run. Because it's just going to take a while to bring these plants online.

We've been tracking what's going on with the auto sector for a number of quarters now. Well, really, since kind of the bottom of the pandemic and the bottom of the market. And so, trying to get a sense of when we're going to get to some semblance of normalcy as it relates to supply chains, we keep pushing out that normalcy kind of timeline. We're not really seeing lead times narrow too, too much.  And it's really a function of, you know, we're just net very, very short.  And there are some quick and easy solutions.

So, I don't think based on what's happening here, with the election and the potential finalization of the outcomes, it's going to move the needle in a negative way. I think it's just going to reinforce the path that policy makers and really corporate America has been on, and the recognition that it's just critical for our long-term competitiveness.

Lou Cestello:

Amanda, any thoughts about tax changes that could occur that could bring down or prop up, on the other hand, earnings next year?

Amanda Agati:

So, I think no matter how you slice and dice it, earnings are coming down, and probably in a big way, whether it relates to tax changes or not. So, as a function of the Inflation Reduction Act, there's about 300 basis points of pressure on earnings growth beginning next year, beginning in January, as offsets to some of the incentives that were baked into that legislation. And so, when we had the preview webinar, I was quoting a number for next year of about 8% earnings growth.  And this is on the S&P 500. We're now down to about 6%. And so, that includes the corporate tax increases, but there's going to continue to be pretty significant negative revisions and pressure on earnings going into next year.

So, it's less than ideal, in terms of timing, to have tax increases go into effect. I'm not sure that there ever is really, truly an ideal time for corporate taxes to go up as it relates to the market. Markets hate that, hate that story no matter where you are in a cycle, economic or election-related. So, definitely going to continue to see some pressure, but I think really, this is much more a story of how far and how fast the Fed goes from here; how much tighter financial conditions get. Up until kind of the last month or so, we were still kind of holding on to the hope that we'd see a soft landing, that we'd see earnings growth compress, but that we wouldn't actually see an earnings recession materialize. And I think I have to say these words out loud, but you know, in 2023 we're starting to expect a fairly sizeable earnings recession to come to fruition, if the Fed doesn't stop well in advance of where it's suggesting the terminal rate may land.

So we're -- if I zoom out, and say, all right, what are we looking at for this year? Still hanging on to about 6% earnings growth, so still positive, all else equal. But it's very narrowly-led, primarily by energy. Everything else is starting to feel pretty significant pressure. And then even though we're sitting at 6% for next year, I think that's too optimistic, given kind of the backdrop.

The last time we had a situation like this sort of come to fruition, or start to materialize, was in about 2015 and 2016. We saw earnings estimates fall about 10% from peak to trough, and it was about 5 straight quarters of negative earnings growth. I'm not saying that that is the base case this time around, but that's the most recent example, where we had pretty significant negative revisions and ultimately an earnings recession come to fruition.

What's a little bit different this time around is really kind of the opposite paradigm from back then. So we had energy prices and inflation in a very different place, like the polar opposite place of where they are today. And so I do think that that 10% downside is probably a little light, probably a little conservative, relative to what earnings season in corporate America is feeling in terms of the backdrop.

So, don't take that as the base case. That's not the crystal ball forecast. But at this early stage, that's kind of where we are, and I think that earnings recession story definitely starting to be more of a reality for investors.

Lou Cestello:

Well, thanks, Amanda, and also thank you, Harold, as we're coming upon the hour and want to respect everybody's time. But your insights have been extremely valuable to us, and we're going to have the third part of the series, on November 17th. So, next week at 1:00 p.m. Eastern time, and hopefully we'll have more clarity. We don't know if we'll have the full Georgia clarity at that point, but hopefully we have more clarity, and we'll have more to tell you about the thoughts on what's happening politically and what's happening in the markets. So hopefully, everybody can join us next week for that call. And until then, be safe, be [healthy] today.

Operator:

Great.Thanks so much, Lou. And ladies and gentlemen, again, that does conclude PNC's 2022 Post-Election Recap. Thank you so much for joining us, and you may now disconnect. Have a great day, everyone.

Operator: 

So now, without further delay, let's begin PNC's 2022 Post-Election Recap. It's my pleasure to introduce your moderator for today, and that is Lou Cestello, Head of Regional Markets and Regional President, Pittsburgh and Southwest Pennsylvania.

And with that, Lou, you have the floor.

Lou Cestello:

Well, thank you very much, and welcome, everyone. And thank you for joining us for the second of PNC's three-part webinar series on midterm elections. I am Lou Cestello, as our moderator said, head of PNC's 54 regional markets coast-to-coast. And I have the privilege of also serving as the Regional President for PNC in Pittsburgh. But today, I'm with clients and colleagues on the west coast where it's 11:00 a.m. Pacific Standard Time.

With more than 2,300 of our clients and colleagues across the country registered for our recap, what certainly turned out to be an interesting election day with a number of key races still too close to call as of this morning. Today, you're going to hear timely insights of known political outcomes and the impacts on the midterms from PNC's Vice Chairman of PNC's Corporate Institutional Banking, Harold Ford, Jr., and Amanda Agati, the Chief Investment Officer of PNC's Asset Management Group.

First, we'll set the stage with an update on what we know today from the results from more of the more critical races and insights relative to potential implications against the backdrop of today's political, economic, and social landscape. There's no one better suited to do exactly that than my good friend and colleague, Harold Ford.  In addition to his role as Vice-Chair, PNC's CNIB segment, Harold also serves as Chairman and CEO of our Equity and Inclusion Capital Corporation. Prior to joining PNC in 2020, Harold served as Director of Live Oak Acquisition Corporation, and of course served in the Congress for 10 years representing Tennessee's 9th Congressional District, and was a member of the House Financial Services, Budget and Education committees as well as the Congressional Black Caucus. Harold is a regular contributor on Fox News, currently serving as a rotating co-host of The Five; and Harold is operating on a few hours of sleep after last night's elections. He was on Fox most of the night, if anybody saw that.  But he's excited to be here today to give you his perspective on where everything stands this morning -- at least, what we know as of right now.

Following Harold's remarks, we'll move to Amanda Agati. As Chief Investment Officer of PNC's Asset Management Group, Amanda oversees AMG's overall investment strategy, portfolio and risk management, investment solutions, and develops and executes the investment policies. Amanda is, of course, well known for her timely and compelling marketing and investor updates, and following Harold's remarks, we look forward to hearing her insights on real-time and longer-term potential market impacts of the midterms as we know them today, and what they mean for investors going forward.

But without further ado, and I'm going to hand it over to you, Harold, the floor is yours.

Harold Ford, Jr.:

Lou, thank you. Good afternoon. Good morning to you, Lou; good afternoon to all of our clients and to my colleagues. What a night we had last night in politics. It's one of those nights that for those of us who love politics, and I'm blessed to have been a part of it from the standpoint of being elected to office, I share with some of my colleagues with my friends, election night is like New Year's Eve, Christmas Eve, whatever eve you enjoy if you don't celebrate those eves, all in one.

It's incredible because voters get an opportunity to validate polls, or more importantly, to validate what they're thinking and to give pollsters and politicians a clear guide on what they should be thinking about -- and more importantly, what they should be doing.

We still don't have a full picture, a clear picture, as Lou's opening remarks demonstrated and as all of the results last night make clear to us as well. We don't know what the final numbers will be in the House, and certainly don't know in the Senate. But what we do know is that the expectations that I think both sides had, I think if you would talk to people who thought they were studied and experienced in both -- in the Democratic party or the Republican party, those are our two major parties -- both would have probably told you that they expected the House of Representatives to go decidedly Republican, and some of them would have probably told you they thought the Republicans would win the Senate, or take the majority in the Senate.

As we sit here this morning, it appears that the Republicans have a majority in the House. It's a far smaller majority than they thought they might have had, meaning, they didn't win as many seats as they thought they would have. But just to dwell on that for one moment, that still means, for those of you who follow this closely, or not too closely, that Republicans will gain the chairmanships of all the committees in the Congress, including the Ways and Means Committee, which writes the taxes or determines our tax policy, or what new taxes may be introduced by Congress. They will take over the Financial Services Committee, which determines bank policy and banking regulation policy as well as all of the other committees, including the Oversight Committee.

Forgive that background noise here. I live in New York City, and things are happening.

All of the regulations that affect the banking industry will be now controlled by Republicans in Congress, for those of you that did not hear that, as well as the Oversight Committee which will have jurisdiction over whether or not the various agencies and departments in government will be investigated, including whether or not President Biden, his son, Dr. Fauci -- and I say Dr. Fauci as a -- really a catch-all for COVID and its origins, which Republicans have said they want to investigate. So, all of that will change, because the control will go to the Republicans there.

Now, there are those in the Democratic party who still believe there's a small percentage chance that Democrats will retain control of the Congress, but I think those who are being honest realize that the numbers have moved to a majority for the House.

In the Senate, we don't know yet. It's very likely that the race in Nevada and the race in Georgia -- the race in Georgia could very well go to a runoff. And the race in Nevada, we don't know all the results, and it's more likely than not we'll have some people contest results in one or two -- one or two other states, including Arizona. But what is clear is that at most, it will be a one-seat majority for whichever party has the majority. It may be a two-seat if you consider a 50/50 margin for Democrats a majority because of the fact the Vice President is a Democrat and can break a tie in the Senate.

So, as a result, expectations were not met as some may have thought. I happen to think that last night, again, was a validation of what voters believe. Just a 30-second commentary on what I think politically, I think the country made it clear that excesses and excessiveness in either party is not something they cling for, or not something they clamor for, or not something they're going to applaud or congratulate, or for that matter, ratify.  They want both parties to be in the middle. I hope the Democrats take the right lesson from this, and I hope the Republicans take the right lesson from this, that voters want action on the issues that they care most deeply about. I'll leave the politics to -- to all of our clients to sort out, and to rather -- to be either happy, sad, or gratified by what happened last night.

I think from a policy standpoint, and my colleague, Amanda Agati, who I think is the best at analyzing how this is going to impact markets and how we should think about this from a market perspective -- but as I think about the politics of it, and the policy implications of it, I think two or three things in the short term. First, from the politics standpoint, the winners last night from a national level, were Brian Kemp and Ron De Santis, who won resounding victories in Georgia and Florida. I think the losers last night are those who, again, sit on the extremes in politics -- either the Democratic side or the Republican side. And we all have names that may populate whatever that might be. These are just sort of my impressions of this.

And I think that as a result, it will influence how policy is pursued in national politics over the next two years. I think President Biden will have an incentive to do what I think he wanted to do -- at least many of us hoped he wanted to do when he was elected to office -- which was to try to bring not only the country together, but to bring our politics together, to help the country move forward. I think there are two or three issues that will animate our agenda.  One will be our foreign policy as relates to China and Russia. I think you will find more harmony, and for that matter more consensus between the parties, on those two fronts.

Two, I think there will be more harmony around, and certainly more congruence around, a voice urging the Fed to slow down its efforts to halt inflation, or to curb inflation. I think you'll see more bipartisan effort on that front. I think a lot of that will be motivated by the fact that we will see Republicans who are aiming to run for President, and trying to put themselves in front of the line. And although there are those on the Democratic side who wish that President Biden would not run for reelection, I think it's more likely than not that he will run for reelection. But if he chooses not to, you're going to see a number of Democrats that want to move into that space. I mention this only because I think you're going to see Democrats, as a result, again want to be united around fighting or curbing China's influence and curbing Russia's influence, as well as getting the Fed to slow down its efforts to restrain or curb inflation because they think it's hurting the economy and hurting job creation in the country.

And finally, on the two or three issues that animated the campaign, inflation, the border, crime, and the threats to democracy which Democrats talked about, I think you will see on at least three or four of those issues, I think you'll see a Congress that wants to try to come together around protecting our border in a more serious way and ensuring that crime comes down, and for that matter, helping with inflation, which I think for a lot of members of Congress and the Senate going forward, will be finding ways to make America more energy-independent. I think you can believe that there will be efforts on that front, and a more consensus way to deal with those issues.

Amanda will talk -- I know she will talk a little bit about what this means for tax policy, which obviously will impact how we think about the markets. But I think there won't be a lot of action -- my two-cent and cheap-seat view on this -- is that there won't be a lot of action to raise taxes. President Biden is going to try to find ways to ensure that he's stronger going into a reelection season. Even if he does not run, I think Democrats are going to want to be in a stronger position, whomever that Democrat might be, to be elected to the presidency in '24 if President Biden does not run. And this is not a statement on my part about him running or not running; I just think that's how the politics will shake out.

Finally, on the political front, I think it's a maturing for the country in some ways in that when voters speak, both sides listen. And I think last night, with expectations being so high on one side, I think that many in both parties will view and interpret the results to mean we should all get back to work and try to work together and try to make the country more whole. 

Again, I start where I finish: we don't know all of the results yet. It could very well be a one-seat majority for either party in the Senate, which could impact a little bit what I'm saying, but I don't think very much.  I still believe strongly, even if it's a one-seat majority for Republicans, this will indeed be the case. If it is a one-seat majority for Republicans, I do think there will be a little more likelihood for a little more gridlock increases slightly because the veto pen that President Biden has will likely be used if Republicans attempt to do things that the President does not agree with. And I think it's very likely that the cabinet that the President has today will likely remain intact. At least the people who are -- many in the country believe -- are most important, the positions we believe are most important. Not the people, but the positions, including the Secretary of the Treasury, the Secretary of State.  Remember, these are all positions that have to be ratified by the Senate, and I think the President will think very hard and seriously about whether or not he can actually get people confirmed through the Senate in light of the way the Senate may be made up if, indeed, it is a majority Republican Senate.

Furthermore, I think it puts more pressure on judicial nominations and judicial confirmations, whether -- more aptly said, whether or not those who are appointed to the District Court, the Appellate Court, or the Supreme Court, if there's a vacancy on the Supreme Court, it's very likely that a Supreme Court nominee might not get confirmed over the next two years because of the hyperpartisanship that I think infects our politics today.

If the Democrats do retain a majority in the Senate, I think it is likely that there will be some shake-up in the White House staff, particularly those who might -- would have to be confirmed. It's important to note that White House staff itself, meaning the Chief of Staff and some of those who report to the Chief of Staff, and report directly to the President in the White House, do not have to be confirmed. So there could be movement there. And there is a lot of conversation, and I think a lot of credible conversation, about there being some movement amongst the White House staff in light of last night's results. I do think if Republicans do take control of the Senate, I think that it is a likelier chance that there will be some shake-up in the White House staff, and that's a staff that does not have to be ratified or confirmed by the Senate.

With that, I'd love to turn over to my colleague, and to my friend, Amanda Agati.

Amanda Agati:

Well, thank you so much, Harold, and good afternoon, everybody.  I'm delighted to be with all of you. I, actually, am the more well-rested, I think, of the two of us here which is a very unusual thing for me to say, although I would say one day out of the calendar year does not make a trend, given all of the issues that the market has wrestled with over the course of this year. Believe it or not, the midterms really was not the thing that markets were totally fixated on, and weren't really focused on as being a headwind in terms of the path forward. So, I slept a little bit like a baby, I guess you could say, last night, thinking about kind of the lead-up to it, and then kind of what we're seeing in the early results here today. And I'll kind of talk through why I felt like I was sleeping pretty soundly, despite the high volatility regime that we continue to be in.

Let me start by saying, the midterms are always, you know, a volatile time. There's always change afoot as it relates to the midterm elections. The party controlling the White House almost always loses House seats in the midterm, so we were expecting change to be afoot and a challenge of the status quo. In the past 50 years, I think it was the only time this didn't happen was during the George W. Bush midterms right after 9/11 in 2002. And so the average loss of House seats in the midterms for a president's party tends to track in the 30-seat range, plus or minus a couple of seats.

Based on what we know so far, there's a loss of 12 -- or said differently, the Republicans are picking up about 12. So, really significant underperformance, or performance differential, relative to historic norms. And I think that just kind of reinforces some of the thoughts that Harold shared earlier.  For as uneven a midterm election cycle as this was, I would say it just chalks it up to yet another aspect of the high volatility regime. We saw really significant moves in favor of the Democrats, in favor of the Republicans, and back and forth. Again, really developing on both sides over the course of the year, and then seemingly fizzling as different issues kind of came to light over the course of the year, and came into investor focus and voter focus.

So let's just say, even though it's not final-final, that US voters have effectively removed the party in power with this change in control, even though it's razor-thin, this change in control now in eight of the last nine election cycles. And so, no better example there in terms of a stat as it relates to the high volatility regime. For as much as markets have been in it, certainly Washington has been in its own version of a high-volatility regime.

What I think is just really interesting about the outcome here is that the results are just so outside some of the historical norms that we might have expected, so this loss potentially of 12 seats in the House really didn't jive with some of the polling and tracking and probability that we were looking at, kind of leading up to it. Based on where President Biden's approval rating was tracking in the 40-plus-percent range, that actually would have tied to about a 40-seat loss. So, nowhere near what some of the historical precedent might have suggested there.

I think punchline, just very much reflective of what Harold said.  What have we learned as it relates to what may be coming in 2024? Yes, the President may have lost the House to some degree; may have lost a little bit in terms of the short-term agenda, but it's such a narrow, thin margin here in terms of a change in control that he effectively overcame history with this election cycle. But that doesn't mean that, you know, we're going to throw out the policy playbook in terms of the path forward. And I think as Harold said, both sides seem like they're going to have to figure out how to work very closely together, and hopefully will be able to get more accomplished than what we've seen over the last couple of years.  So, that's good news, all else equal, certainly for the market.

It's hard to say that this was really an outright win for the Democrats. Yes, they were able to hang on to more and effectively outperform relative to what we were expected, but certainly, more of I think a loss in terms of expectations for the Republicans. But the net effect of this, really, we can slice and dice this a whole bunch of different ways. The net effect of this for the market is largely the same; it's gridlock. And markets tend to prefer gridlock.  It tends to be the most favorable outcome because you can't have too many negative policy surprises move in one direction or another. So, that's why I slept like a baby last night.  Even if it wasn't a significant strong gridlock scenario, still felt like we might get some calm as it relates to Washington policy.

When I think about some of the guide posts that we talked about in the last webinar, kind of trying to get a crystal ball framework for what this election cycle might bear out here, the one thing that we were really focused on, that might be really kind of giving the Democrats an edge, or at least keeping them in the game, was gas prices.  If you look at economic data, it was clearly signaling the potential for a change in control -- not necessarily a Republican sweep, but certainly a change in control. Polling data, though volatile, was suggesting a change in control. Even market performance at the index level and also at the sector level was also suggesting change in control. But we did think that the wild card was going to be gas prices. And so, in and out of cycles, no other issue drives voters the way the retail price of gas does.

And so, top of voters' minds, certainly as a gauge for the state of this economy and their standards of living is certainly what's happening with gas prices. I think we talked last time about how gas prices bottomed in mid-September. They peaked out in early October, and they were coming back down again. So, was that going to be enough to keep the Democrats in the game?

The punchline is, that yes, it apparently was enough to keep them in there. And I think it sends a big message to the Democrats that high gas prices are not really the single biggest issue here, which perhaps may translate -- this feels like way going out on a ledge here -- but may also translate into high inflation, is not necessarily the biggest issue on voters' minds. And so, the net effect from a policy perspective is, we think that policy makers are going to keep going as it relates to alternative energy, clean energy. We're not going to see kind of like a stopping in the tracks and a reversing course on a lot of the legislation, particularly as a function of the Inflation Reduction Act over the course of the summer. We don't expect a lot of that to be pulled back.

So, what is the market's reaction here? As much as I'm saying I'm sleeping like a baby, I'm feeling pretty good here, the market is down a little bit today. And so you might be like, what gives with that, right? The market should be flat to like, modestly higher, based on what Harold's comments would suggest. And I would say a couple things going on here.

So, the market leading up to the midterms was absolutely making a bet that the Republicans were going to handily win, and also take control of the Senate. I suppose it's still possible that they may take control, but they do need to win both of the seats that are still open and get to 51 seats there. So, it's still a little bit of a jury being out there, but certainly not the landslide that the market was starting to price in. So, leading up to the election, we were seeing a big move in energy and energy-related infrastructure. We were seeing moves in biotech. Anything immigration and security-related, defense in particular, was outperforming pretty much everything by a wide, wide margin. And even financials started to pick up some tailwinds as well.

On the flip side, alternative energy was getting absolutely crushed leading up to the election. So an indictment, potentially, on the outcome of the election, the Democrats losing control by a wide margin.

What's interesting, even just yesterday, is that defense stocks basically tracked the overall market, over the course of the day, whereas clean energy, alternative energy, were up big, 350 basis points on the day just yesterday. So, effectively, the market gave us a little bit of a pivot. It's not the pivot I'm looking for; I've been talking all year long about how I want a Fed pivot, or at least a Fed pause. So we didn't get that. But the market did pivot a little bit as it relates to sentiment on the potential midterm election outcome.

Where we are today, the market's down and I -- by market, I mean the S&P 500 -- is down about a percent or so, driven lower by tech and energy. I think what's notable is if the market finishes down today, that is in negative return territory, it'll be the first time the day after a midterm election where markets were negative, since 1994. Guess what else was happening in 1994? Rate hikes.

And so at the end of the day, you know, we can talk all day long about needle movers here and there, policy implications. I still very much believe the Fed is in the driver's seat in terms of the path forward for the market, and certainly the trajectory of inflation from here.

When we look at the bond market, it's effectively asleep. It's sleeping like a baby, like I was last night.  Bond yields haven't moved hardly at all today, plus or minus a basis point. Credit spreads basically are unchanged. And so this is the bond market saying, we've moved past this; we are not focused on the election, we are absolutely focused on Fed, inflation, and the perfect storm of macro headwinds that come next.

And so, if I wrap all of this up because I know we want to get to a lot of Q&A. I think the punchline for me is, does this change -- this outcome change -- any aspect of our outlook for a post-election rally? And I would say, no, because we really weren't expecting much of a post-election rally. I wasn't thinking that the election was going to be a headwind, per se. So we might see a small, modest tailwind here, but I don't think the net effect changes our outlook at all.

I keep coming back to the idea that it's potentially different this midterm election cycle, relative to history, because we've never had a recession begin in the third year of a presidential cycle or term. And that's really starting to become, I wouldn't say a foregone conclusion, but the probability is rising pretty significantly here, and in very short order, given the Fed rhetoric from their recent meeting. They didn't move their latest dot plot up, but there's never been a tightening cycle in history where the Fed has gone to 4.6% on the Fed funds rate or higher, and not tipped us into a recession. So we do think that that is still really the fixation and the governor in terms of the path forward. Fed, inflation, and ultimately what happens to the cycle. 

And so I think the other aspect of this is very much connected here. So, markets tend to rally off midterm elections, assuming that we're going to see more policy accommodation. I hope that Harold's prediction is right, and that we get some influence to get the Fed to kind of slow down a little bit or pause here. That would be a massive tailwind for markets. Like, literally if we get a Fed pause, I think it could add two or three multiple points to valuations, seemingly overnight. That's really the power of monetary policy here.

But absent some kind of unforeseen influence here, in terms of what the Fed is going to do, certainly monetary policy accommodation is going to be very restrictive. And even on the fiscal side, while we may be able to get a little bit more done than perhaps what we would under normal gridlock scenarios, I don't think it's going to happen quite fast enough and be stimulative enough to circumvent or override what's happening in terms of Fed policy. And so I think that does set the stage for a very different market reaction this time relative to history.

I think when I'm thinking about movers in terms of policy or fiscal accommodation, regardless of the outcome of the election, you have to assume higher defense spending. I think at the margin there may be some higher non-defense spending, some tax changes at the margin. But we're not looking at corporate tax increases in a big way beyond what was contemplated in the Inflation Reduction Act. And I can get into some of the details on that if you want.

So, modest fiscal policy bump: yes. I think the market is going to have to determine whether it's going to be enough to offset the potential for going into a recession, or if the market will view it as actually making Powell's job a little bit harder, meaning, putting some upward pressure on inflation there. At the end of the day, though, you have to buckle up, right. Because I think the Fed is still very much in the driver's seat. In the battle with inflation we get another important data point tomorrow, with the CPI report coming in.

But consensus expectation is that it will fall ever so slightly.  But the bad news is, it's still got a 7-handle, and if we round up, it's basically 8.  It's 7.9%, is what the consensus expectation is, so it's nowhere near where it needs to be. And it's not even getting close to the Fed's 2% long-term target, even when we back out food and energy prices, so we look at core. It's only expected to move from like 6.6% down to 6.5%. So, the net effect here, I think from my perspective, is that the perfect storm continues to swirl; these macro headwinds and other forces continue to apply a ton of upward pressure on inflation. And so, even with outsized rate hikes, pretty consecutively here that we've had on the part of the Fed to try and tamp it down, it really hasn't had the effect that it needs to, and in short order, yet. And so, we think tomorrow, the inflation report is not going to fall fast enough to justify certainly a pivot, and certainly not a Fed pause, much to my dismay. 

And so I think, you know, there's a lot going on here, a lot to unpack. But really, if I boil it down to the one or two things that matter most for the market and the path forward, it's the Fed and what they do as it relates to inflation, and how fast we start to get confirmation of inflation peaking and rolling over.

So with that, let me stop there, and I will hand it over to Lou to start the Q&A portion of our session.

Lou Cestello:

Well, thank you, Amanda, and thank you, Harold. And as I read through a lot of the questions, I think there's a lot of political questions, Harold. So I think I'll ask you the first one.

Maybe talk a little bit about the undecided races. When will there be more clarity, and what are the most important?  I mean, it looks like Georgia may go to a runoff and maybe you could talk about the timing of that, to then Arizona and Nevada. Your thoughts?

Harold Ford, Jr.:

So, I wish there was a lot of clarity around the answer -- I can be more specific, rather. What I can be specific about is if the race in Georgia, as we all know, neither -- and it's three -- three people in the race. We focus on the main two, Rafael Warnock, the incumbent, and Herschel Walker, the Republican challenger. But there was a Libertarian in the race. That conversation is relevant for what may happen if either Herschel Walker or Rafael Warnock did not get 50% of the vote plus 1, and it looks as if, as we sit here today, that neither of them will get to that point. Which means it will go to a runoff, which will be decided December 6. And the Libertarian candidate would not be in that race; it would be the top two finishers. And it is believed that a lot of the Libertarian vote would likely go to -- more of that would go to Herschel Walker than to Rafael Warnock.

But with all things, runoffs, and another election presents another set of characteristics and another set of dynamics. And in Georgia, because they have history with this two years ago, this happened, as we all may recall, and you had both Senate seats go to a runoff, and both seats were won by Democrats. That race was animated and colored by the fact that President Trump, who was still President at the time, chose not to engage until late in that campaign and late in that runoff.  And in fact, his lack of energy for the Republican candidates, many believe, caused the Republican candidates -- both of them in that race -- to lose. So it will be interesting to see what happens over the next 30 days.

I saw some of the questions populate the inbox as well, and there's no doubt as we talk about Brian Kemp, who was a winner last night, the Governor of Georgia, he will likely be very supportive of Herschel Walker, which should help Herschel Walker in a runoff. And the question becomes, what does President Trump do in that race? And what do Democrats do to try to be helpful to Rafael Warnock?

Now, the other two races that you mention, Lou, will impact this as well.  Arizona, three races, excuse me -- Arizona, Wisconsin, and Nevada. I think Wisconsin, they've pretty much declared that for the incumbent, Ron Johnson, but Nevada and I think they've all pretty much declared Arizona for Mark Kelly. Or at least the prognosticators believe he will win there. That race has not been -- there has not been a declared winner there yet, I don't believe, because there was some voting irregularities -- or I should say, some voting machine irregularities -- in one of the big counties in Arizona. But I think as we sit here and think about where things are in an honest way, it's really Nevada and Georgia. And we'll get more clarity around Nevada hopefully today or tomorrow, before the end of the week. And then we'll get more clarity around Georgia.

My thinking is that Georgia will decide whether or not Democrats have the majority in the Senate or Republicans have the majority in the Senate. And we will know that December 6.

Lou Cestello:

Harold, with the strong showing --

Harold Ford, Jr.:

If I can -- if I can add one more thing, I think -- I saw one of the questions. I think that the winner in the Republican last night overall was Ron De Santis, who was able to rack up a victory in Florida that created some coalitions for Republicans, that they -- we've not seen for Republicans in Florida in a couple of decades.  And I think the question now becomes, is he -- does he now seek a larger role on the national stage for Republicans. And if he does, I think he will -- there will be some receptivity for him in the Republican party.  I'm not a Republican. As I look at the landscape I think there will be some receptivity for him, but that won't be without resistance from the incumbent, because the incumbent power in the Republican party in many ways still remains in President Trump's orbit. So we can expect a clash of titans there, and we'll see the first clash perhaps in how both of those individuals decide to play in the Georgia runoff, if indeed there is one, which I believe there will be. I'm sorry, Lou. I didn't mean to interrupt you.

Lou Cestello:

No, that was my exact question I was going to ask, is talk about the strike that happened for the Republicans and what that meant for De Santis on the national level. And then on top of that, Harold, there's some strong -- it seems like strong momentum behind De Santis, but do you think Biden will run again? And is there any sort of strength, like a De Santis-type of person, in the Democratic party at this point?

Harold Ford, Jr.:

So Lou, I think the framing of that question is -- it also leads to the answer in a lot of ways. I think President Biden, probably this morning, based on what I heard last night and what I can get confirmation from this morning, is more inclined to run in 2024.  And I think he's inclined to run for two reasons. One, he is the incumbent President, and the incumbent leader of the Democratic party. And two, there is no Ron De Santis waiting in the wings on the Democrat side. There are those who want to be a Ron De Santis type. 

And I -- the way I -- the reason I say Ron De Santis, I think he has emerged -- he's in office, he has a wide appeal, growing appeal amongst Republicans and perhaps in the country -- but certainly growing appeal in the Republican party.  And there's no figure quite like that in the Democratic party. There are those who want to be, and there are those who have stature in terms of their titles and in terms of some of the accomplishment that they may have in their own respective political positions, but there's no one with the kind of national appeal within the party that Ron De Santis has on the Republican side.

So I think Joe Biden sees two things in his favor:    one -- and Amanda, I thought, described this aptly -- as we talked about the strength of the -- the performance of Democrats in the midterms.  And as an aside, I hope Democrats don't over-read their victory. I think people want -- what voters are really saying, is I want you -- you men and women to get back into politics and work together, and try to solve the things that are really impacting my life adversely. But President Biden sees it as a win, because the expectations were, the Republicans were going to perform better than they did last night. And then, two, again, as I'm redundant, there's no identifiable -- there's no readily-identifiable figure in the Democratic party to replace him or to be the nominee. They -- don't get me wrong, there are those who are clamoring for that role and for that position, from people in California, to people in Massachusetts, to people in Vermont, to perhaps people in the middle of the country as well. But there's no one who has the standing that Ron De Santis has. 

And I might even add, there are probably two or three others in the Republican party, including the reelected governor of Georgia, Brian Kemp; the former Secretary of State, Mike Pompeo; the former UN Ambassador, Nikki Haley; and even the reelected senator in South Carolina, Tim Scott. There's no list like that in the Democratic party as we sit here today.

Lou Cestello:

Great. And a question in the chat, flipping to Amanda. I'll let you get a drink of water, Harold. But flipping to Amanda real quick, Amanda, two questions. One in there about whether you see a quarter or half-point hike in December, but the second around the fact that Georgia will likely not be decided. And does that mean more or less market volatility in the next 30 days?

Amanda Agati:

I'll take the second one first, and say, I think it's pretty much status quo as it relates to the high volatility regime. I don't think that that necessarily moves the needle. Again, it's just one seat, right.  It's not -- it's not a landslide in one direction or the other. And so, you know, I'm just really not convinced that it's going to matter that much for the market, that the market has really moved on to the perfect storm of macro headwinds: Fed, inflation, supply chain challenges, zero-tolerance COVID policies. You know, all of those things collectively, I think, matter more ultimately in the short run for the market's path forward than what happens with that one specific race. Even though I know it changes the control and the balance of power a little bit, it's not really enough, I think, to move the needle.

On the Fed piece, I've been saying for the last few months, I have my Christmas wish list already teed up that I want a Fed pause in December. I am not going to get it. I am going to get coal in my stocking. My gift's going to get lost in the supply chain disruptions.  It think the single thing that matters most in terms of the market is getting to a Fed pause and getting to it before we break the cycle.  But unfortunately, I'm not going to get it.

So, our expectation -- and this is also baked into the market, by the way -- the futures market is still suggesting that we're going to get 50 basis points in December. So it's a little bit -- I'm not going to call it a pivot, but it's certainly backing off a little bit relative to the 75, 75 train that we've been on here for a while. The market also thinks we're going to get another 50 basis points in February, and then another 25, starting to be baked in following the November Fed meeting and kind of the press conference that followed, another 25 in March. So we're heading towards a terminal rate of 5% here or more pretty rapidly, but that's kind of what the expectations are for the market.

And even though I want to fight it all day long, I think that's probably the path that they're on, unless the data changes meaningfully between now and then. And I just don't think there's enough time to see a material change in the inflationary backdrop.

Lou Cestello:

And maybe comment on the debt ceiling, Amanda.

Amanda Agati:

So --

Lou Cestello: 

Your thoughts around, you know, where it is.

Amanda Agati:

-- this is -- yeah. So this is one that I think Harold should weigh in on as well. We actually were talking about this in preparation for the call today. So the thing that I am worried most about is just the additional cost of debt service as it relates to the debt ceiling. If you think about the last time around, we were looking at Fed funds in the neighborhood of like 1-ish, right.  In terms of projections there, I just said a few moments ago, we're looking at a 5% potential terminal rate. And so, really significantly different backdrop as it relates to the debt ceiling going forward.

I think it equates to at least $200 billion or $300 billion, maybe even more. I may be underestimating that, in terms of additional debt service costs. And so I'm not necessarily concerned about the debate itself. I think Harold should weigh in, but I think we're both on the same page that everybody understands that we need to work toward a collective solution here. But it is going to apply a lot more pressure on market-based interest rates, and I think the opposite effect is a lot more pressure, downward pressure, on potential valuations. And so it's not a great backdrop. Just add it to the list of perfect storm headwinds, as it relates for the market going forward. Not really something that we're going to have to tackle, though. Again, Harold, weigh in here, but not something we're going to have to tackle in the very short run. But it is something that we're going to have to face in 2023.

So, from a market perspective, those are the things that are -- I'm kind of focused on as it relates to the debt ceiling.

Harold Ford, Jr.:

I think -- Lou, if I can just say 30 seconds, I think Amanda's exactly right. Just to add on, I think that there was talk -- there was talk before the midterms from some leaders in the Republican Congress who were reelected last night, that they were going to make demands of President Biden and Democrats around reducing spending and reduction in long-term obligations for the country in terms of spending, for them to agree to a debt ceiling increase. I think that pressure -- or I should say, the pressure the administration may feel from those Republicans, or may experience from those Republicans, was reduced last night.

However, I do think that what Amanda's speculating about in terms of the country's seriousness about addressing this issue will just -- will end up being a conversation that we have next year, or for that matter, maybe the following year. I don't think that pressure will manifest itself over the next few weeks as the Congress decides to increase the debt ceiling.

Lou Cestello:

Harold, maybe you can comment on the weight of Roe versus Wade on this election.

Harold Ford, Jr.:

So, the decision by the Supreme Court to overturn it, I think it was not only Roe v. Wade, it really was the Casey decision in Pennsylvania which is relevant to us as a Pennsylvania-based business. It was the Casey decision that that really the Court overturned. I think that had a big impact early on in the race.  Remember, we instituted early voting in many, many states across the country, if not every state, and some have bigger periods of time you can vote earlier. And I think there were a number of voters who voted singularly on that issue.

I think when we look at polling in these elections, I think one of the things to take into account is that the polling is always right, from this standpoint: the people who answered that poll are giving the pollsters the data, the answers to the questions that they ask. And they're doing nothing but being stenographers and laying that out.  What really is the secret sauce to polling is whether or not the pollsters know how to get a representative group of people to ask, and that group is representative of how people are going to vote in that district, that state, that jurisdiction, that province, whatever it may be.

The thing that can upset any polling data is if -- upset it the most -- is whether or not the pollsters are accurate about the number of people who actually will vote in a particular election. So I think the Roe v. Wade decision has impact on the last part of what I'm saying, and I think I'm right about, which is I think a lot more people who had never voted before, who didn't think about voting in midterms, decided to vote.

But I think -- the bigger issue, I think, in this election here, is that I think voters decided to vote for the candidates that they knew, and decided even if those candidates that they knew weren't doing everything they wanted, they would rather not take the risk on voting for a candidate they didn't know, or that they had to hope would do certain things a certain way, or a right way. As much as Roe v. Wade may have made an impact in this race, I think it's important to know that there were a lot of governors who were reelected last night who signed legislation over the last 45 to 60 days making abortions harder to get in their respective states, including Governor Kemp in Georgia, and including Governor De Santis in Florida.

So, as much as Roe v. Wade played a role, I think the bigger role in this campaign was that voters decided to stay with the good or the bad, or however you decide to describe the candidates that they might have reelected or elected. They decided to stay with the candidate they knew best, even if that candidate didn't represent them the most. They knew them better than the ones that did the alternative.

Lou Cestello:

Thank you, Harold. So, Amanda, you talked a little bit about alternative energy prices, or alternative energy performance, before. Do we think that -- I don't know if this is for Harold or Amanda, or both -- but you know, what do we think about legislation and potential changes that could happen in terms of energy prices in the entire sector going forward?

Amanda Agati:

That sounds like a Harold question, to start with. Harold, do you want to start on the legislation front, and then I'll react to your thoughts?

Harold Ford, Jr.:

Amanda, on that -- you respond and I'll react, because I think the legislative reaction may be --

Amanda Agati: 

No -- no, you take it. No, you take it.

Harold Ford, Jr.:

-- better to -- no, Amanda, it'd be better to have you do it. And I'll react to the legislative part.

Amanda Agati:

So, I would say, as it relates to alternative energy and clean energy, by far they were the biggest beneficiaries of the so-called Inflation Reduction Act, right. No matter how you slice and dice it, that industry, that sector, far and away had the most in terms of incentives, areas for investment, focus from a policy perspective in terms of supporting moving further in that direction. And so, you know, as I said during kind of my prepared remarks, thinking about the impact on gas prices and that voters aren't necessarily quite as upset about them, and the level of them as maybe we expected or we were concerned about going into the election, it really does send a message to Congress to keep moving forward, keep going with that shift. It's not going to happen overnight. To be clear, we still believe that there is a strong role for traditional fossil fuel sources. You have to come at this from a multi-faceted approach to solve some of the energy challenges in the ecosystem there.

But I think there clearly is a vote in favor of continuing to move down this path, and so, I would expect -- you know, at the margin, potentially more appetite for legislation in that directive. But recognizing that the impact from the Inflation Reduction Act was a very significant signal in terms of a tailwind for the market, but we haven't actually felt the effects of that start to roll through.  So, I don't know that it's going to be grand and sweeping additional legislation relative to what passed over the summer. But that was significant in terms of a tailwind and a kind of length of time horizon or runway for investment in the sector that we really haven't had before. And so, that has been and continues to be, I think, a tailwind for not just energy or aspects of energy, but it crosses over sectors as well, and it crosses over capitalization.

So, that's kind of my take on it as it relates to the market impact and the landscape and outlook for alternative energy. But Harold is going to be a lot closer to the policy piece than I am.

Harold Ford, Jr.:

No, but I think Amanda, the reason I wanted you to go first, I think that the market reaction is going to help influence heavily what the politics, where the political -- the direction of the politics and the policy around this. I think the other thing to think about, because I agree with everything Amanda said -- the other thing to think about is that in this last election we just faced, and results we're still getting in, there were 35 seats that were up in the United States Senate. 21 were being defended by Republicans; 14 were defended by Democrats, meaning those were the incumbents, when I say "defended." This is not a political statement. 

In 2024, the political terrain is better for Republicans in that it's more Democrats that are going to have to defend their seats than Republicans. Ordinarily, when you -- the party who is defending the most seats, or the incumbents who are defending the most seats, whichever the party might be -- a majority in whichever party -- is generally the party that has the most to gain. In this instance, it was unique. In 2022, there were only 14 Democrats, with 20 more Republicans, yet there was Democrats who were on the real defensive here. 

In this next election, there are more Democrats who are defending, including one whose name is prominent in national circles, Joe Manchin from West Virginia. Near the end of this campaign, in 2022, some who were watching closely noticed that there was a -- in the last 48 hours or 72 hours now, there was a dispute between President Biden and Senator Manchin because President Biden made some comments that Senator Manchin didn't like about coal production. And Senator Manchin retorted and reacted very aggressively in his language and posture towards President Biden.

I don't expect that to be in retreat, that tension between the two of them around energy, over the next year, or for that matter, two years -- or a year and 363 days, or 362 days, whatever it may be, before the -- 363 days before the next election -- 364 days, rather, before the next election. So, I don't expect there to be major legislation on this front. There could be major talk about it, which could impact the markets, but I don't -- I think the markets will understand that if there's a 50/50 Senate, Joe Manchin is not going to vote with Democrats for any legislation that advances alternative energy options, that disadvantages coal. And for that matter, probably that disadvantages the fossil fuel incumbency.

Lou Cestello:

Maybe I could keep on the same theme, but in a different industry. Amanda, any -- you know, the supply chain has been hit hard with chips and semiconductor issues. You're going to see -- we expect to see more CapEx there. Do we expect to see any change in the semiconductor markets, in post-election?

Amanda Agati:

So I wouldn't say that there's an expectation for a notable change on this front. I think the Biden administration has really claimed all actions, trade policy or otherwise, related to semiconductors in the industry, kind of in the name of national security. So there's clearly a focus on that, and I think that that will continue really regardless of kind of how things shake out over the next couple of weeks.

The net effect of that, though, is certainly going to mean additional encouragement to bring semi manufacturing onshore, and a lot more CapEx investments. In fact, I think that just this morning -- it's a little bit of a haze today -- but just this morning, Taiwan Semiconductor announced that they're going to build another plant in Arizona. So, that wave of continuing to onshore as it relates to that, I think is going to continue. It is great news in the long run, but it doesn't really bail us out of the challenges and the supply chain disruptions, and the supply shortages in the very short run. Because it's just going to take a while to bring these plants online.

We've been tracking what's going on with the auto sector for a number of quarters now. Well, really, since kind of the bottom of the pandemic and the bottom of the market. And so, trying to get a sense of when we're going to get to some semblance of normalcy as it relates to supply chains, we keep pushing out that normalcy kind of timeline.  We're not really seeing lead times narrow too, too much. And it's really a function of, you know, we're just net very, very short. And there are some quick and easy solutions.

So, I don't think based on what's happening here, with the election and the potential finalization of the outcomes, it's going to move the needle in a negative way. I think it's just going to reinforce the path that policy makers and really corporate America has been on, and the recognition that it's just critical for our long-term competitiveness.

Lou Cestello:

Amanda, any thoughts about tax changes that could occur that could bring down or prop up, on the other hand, earnings next year?

Amanda Agati:

So, I think no matter how you slice and dice it, earnings are coming down, and probably in a big way, whether it relates to tax changes or not. So, as a function of the Inflation Reduction Act, there's about 300 basis points of pressure on earnings growth beginning next year, beginning in January, as offsets to some of the incentives that were baked into that legislation. And so, when we had the preview webinar, I was quoting a number for next year of about 8% earnings growth. And this is on the S&P 500. We're now down to about 6%. And so, that includes the corporate tax increases, but there's going to continue to be pretty significant negative revisions and pressure on earnings going into next year.

So, it's less than ideal, in terms of timing, to have tax increases go into effect. I'm not sure that there ever is really, truly an ideal time for corporate taxes to go up as it relates to the market. Markets hate that, hate that story no matter where you are in a cycle, economic or election-related. So, definitely going to continue to see some pressure, but I think really, this is much more a story of how far and how fast the Fed goes from here; how much tighter financial conditions get. Up until kind of the last month or so, we were still kind of holding on to the hope that we'd see a soft landing, that we'd see earnings growth compress, but that we wouldn't actually see an earnings recession materialize. And I think I have to say these words out loud, but you know, in 2023 we're starting to expect a fairly sizeable earnings recession to come to fruition, if the Fed doesn't stop well in advance of where it's suggesting the terminal rate may land.

So we're -- if I zoom out, and say, all right, what are we looking at for this year? Still hanging on to about 6% earnings growth, so still positive, all else equal. But it's very narrowly-led, primarily by energy. Everything else is starting to feel pretty significant pressure. And then even though we're sitting at 6% for next year, I think that's too optimistic, given kind of the backdrop.

The last time we had a situation like this sort of come to fruition, or start to materialize, was in about 2015 and 2016. We saw earnings estimates fall about 10% from peak to trough, and it was about 5 straight quarters of negative earnings growth. I'm not saying that that is the base case this time around, but that's the most recent example, where we had pretty significant negative revisions and ultimately an earnings recession come to fruition.

What's a little bit different this time around is really kind of the opposite paradigm from back then. So we had energy prices and inflation in a very different place, like the polar opposite place of where they are today. And so I do think that that 10% downside is probably a little light, probably a little conservative, relative to what earnings season in corporate America is feeling in terms of the backdrop.

So, don't take that as the base case. That's not the crystal ball forecast. But at this early stage, that's kind of where we are, and I think that earnings recession story definitely starting to be more of a reality for investors.

Lou Cestello:

Well, thanks, Amanda, and also thank you, Harold, as we're coming upon the hour and want to respect everybody's time. But your insights have been extremely valuable to us, and we're going to have the third part of the series, on November 17th. So, next week at 1:00 p.m. Eastern time, and hopefully we'll have more clarity.  We don't know if we'll have the full Georgia clarity at that point, but hopefully we have more clarity, and we'll have more to tell you about the thoughts on what's happening politically and what's happening in the markets. So hopefully, everybody can join us next week for that call. And until then, be safe, be [healthy] today.

Operator:

Great. Thanks so much, Lou. And ladies and gentlemen, again, that does conclude PNC's 2022 Post-Election Recap. Thank you so much for joining us, and you may now disconnect. Have a great day, everyone.