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Welcome to Stocks and Translation Broadcasting from the New York Stock Exchange. I'm Jared Blicker, your host, and with me is the People's Voice, Sydney Freed. Kindly like, subscribe, and comment on stocks and translation on Spotify, Apple Music, Amazon, or YouTube, and today we are welcoming Emily Roland, who is the co-chief investment strategist at Manulife, John Hancock Investments. Thinking about recent market actions, something seemingly broke. today we're.Going to flesh out some of the insights as to how and why our word of the day is correlation. We know it doesn't necessarily mean causation, but why are market correlations breaking down? And this episode is brought to you by the number 17.9. That is the most recent low in the S&P 500's Ford multi pole, a crater during the market sell-off, but where does it go from here? As corporates pull guidance in the face of uncertainty.So Emily, just break it down for us. What's your big picture overview of everything that's happened so far this year in 30 seconds

or less, you know, I think one of the most remarkable cross asset dynamics that we've seen is this kind of end of US exceptionalism narrative and the massive outperformance of Europe, and I know we may talk about that in just a bit, but just.These huge rotation and capital flows away from US assets, whether it's stocks, bonds, the dollar, and seeing non-US markets really get a lot of love here. There's almost like a halo effect around anything European, whether it's euros or European stocks or bonds there. So really notable process that dynamics and I would say kind of the breakdown between treasure.in the US dollar last week was really notable aswell.

Yeah, we're going to explore that, and this is a perfect segue into our word of the day, which is correlation. The correlation measures how two things move in relation to each other like stocks or interest rates, and a strong correlation means that they usually rise or fall together. We can also have negative correlation, which means they're going the opposite direction.So let's talk about what we saw last week and by the way, we're taping this one week after we saw that huge market meltdown. And then, by the way, in the middle of the week we had the best day for the S&P 500 in a really long time. So what do you think about these correlations in the dollar and yields kind of breakingdown?

Yeah, something felt like it was breaking in markets last week and it was really notable to watch the yield on the 10 year treasury go up at the same time where inflation missed. We got a softer CPI report, shelter finally 0.2%.And month over month, PPI then came in softer as well, and the city economic surprise index starts rolling over. And then meanwhile, treasury yields are backing up. I don't know if you guys remember in Sesame Street that like song one of these things is not like the other. I'm like this makes no sense to me right now. And then meanwhile you're seeing a weaker dollar, um, which usually have a high correlation with treasury going up and down foryieldfor a long time and that broke down. So there was a bunch of different.Narratives had started going about why we saw this this divergence happening, who's selling treasuries? Is it China, some other larger holder, maybe a big institutional player out there, really hard to quantify exactly what was going on. But then of course we saw Susan Collins from the Boston Fed come in on Friday. calm everything down a little bit by saying, hey, you know, the Fed will intervene if there's some type of, you know, nothing like a Fed put on a Friday, right? So that's what we're seeing.

What's a normal correlation where you said the 10 yearWent up and inflation missed. What would be a normal correlation?

Yes, so normally what would happen with inflation lower is it would bring bond yields down. So if you think about why the 10 year Treasury yield moves are on what, it's usually, it's not really the Fed. Most people think that it is, but it's actually like growth expectations and inflation expectations that drive the majority of those moves, and they move together really, really closely. So it's just strange to see that dynamic playout.

It's interesting. Let's hit on that point for a second.The Fed controls short-term interest rates in the US, and I think that's what you're talking about. They don't explicitly control the 10 year yield right now, longer term yields, I say right now because historically sometimes they have. We had Operation Twist in the 1960s and then again in the 2000 teens, um, do we.See something like that coming up again or you know, the Fed, Susan Collins' comments, I mean, it seemed like she was ready to say the Fed's ready to intervene in the market, but are they willing to go out on the curve?

Well, I don't know the answer to that. It's certainly possible and the Fed has a lot of things in their toolkit. I was trying to remember this morning all the differentUm, names of the facilities that the feds set up over the years, the alphabet soup of it all, and I almost, you know, I went kind of back in my memory for those things, and it's possible and that's really, I think what is again calming markets is the ability of the Fed to intervene if there's any type of dislocations playing out.Um, and I, you know, I think they certainly will. In what form, I don't know. I mean, if you just remember back to COVID, the Fed actually bought bonds, high yield bonds,

corporatebonds, corporate bonds, something that they're really not supposed to do except in emergency. Yeah, I was just thinking about those alphabet soups. We had a lot of those in the pandemic. I think my favorite was MMMFL or something liquidity. It was a mutual fund liquidity facility. That wasn't even a question, but, uh, any.

What if they did intervene with the 10, how does that work? Like

what happens? Well, there's lots of things, but they're providing liquid so they could do things like overnight lending rates and basically make it easier for banks to lend and for the market to function correctly.

Would that like kills intervention as a desperate like oh no and then drops.

Has like before.

That's when the Fed is cutting 50, 100 basis points at a time when the, when the Fed cuts a bunch at once, you know something has hit the fan. Exactly, yeah, um, getting back to correlation here, uh, what about the rest of the market? You know, this bull market was kind of predicated on the AI trade that has definitely fallen off a cliff, as most of, most things have. Does it come roaring back? Do we need a new paradigm for a new bull market? Do we get a little bit of the old, what do you see happening?

So one of theMost notable things that we're pointing out is that the highest quality assets are the ones that have gotten sold off the most this year. So it's US Mega cap tech. To your point, there was a major valuation problem, and we came into the year with the S&P 500 growth index trading at almost a 50% premium to its 20 year average. So that means people are willing to pay a lot for the the future earnings of these companies. And meanwhile, we got back to back 25% return.On the S&P 500, so we just came into the year with a tough starting point and what went up the most is coming down the most. But when you look at what the playbook has been, it's like German industrial companies and European banks. Like that's not a great tariff playbook

to me. It's been dead forever.

It's dead and the earnings aren't that great. If you look at where the best earnings growth is, it's still in the United States in large cap companies. So I think there is an element of the baby.thrown out with the bathwater here as US sentiment shifts to a great extent and there's going to be some value that opens up within some of those names.

If therewas a valuation problem then is re-rating the right word here like rating like is this, is it a good thing then that we're seeing them stocks come down a bit? I mean,

part of it is a healthy reset. Like we were talking about again this 50% return over two years and peats are really hard. I wasI was googling like sports analogies for that's the one I came up with and but it didn't seem to hit that well with the people I was talking to, so I gave up on that. Um, but 3 peats are tough and the valuation reset, I think was healthy, but the challenge is nobody really knows right now what the E is. So stocks have gotten cheaper. They, the sorry, on the PE ratio, what is the, there's a lot of uncertainty around what is the earnings estimate right now. So yes, prices have come down.But stocks may not be as cheap as they look because that the earnings probably has to adjust lower, and we're starting to see some of that with earnings. Yeah, let me,

I mean, I think we're going to talk about earnings, but do you think we haven't seen the worst of the D ratings yet? Do you think because we're in the beginning, we're still in the beginning of earnings season. We've got a few companies pulling guidance. I mean, frankly, not as many as I would have thought, but how do you see this evolving? Yeah,

I mean, analysts are still penciling in 10.5% earnings growth for the S&P 500 this year.I think that likely needs to come down. I haven't really put pen to paper in terms of those uh write downs yet. This quarter we've gone from 11 to 7, so the bar is a little bit lower, but corporate guidance is really interesting right now. I don't know if you noticed there was an airline this morning that that gave two sets of guidance, one for severe tariffs and one for kind of more benign tariff scenario. I think it was nice that they gave something it was very creative, I thought, but I think guidance is gonna be.Bit more difficult to come by because CFOs and CEOs are sitting around and trying to model for something that's neverhappened.

They're producing Choose your own adventure earnings releases. So let me ask you about Wall Street predictions because we've seen the widest disparity in what people think the S&P 500 is going to end at the end of the year in the history of this time series that I've seen going back like 25 years to the beginning of the century. So what do you make ofthat?

Yeah, I mean, there's always been a wide band with like a really tight, you know, median estimate.Um, so we've like tried not to go there because it's really difficult to go out. Yeah, but I think what you're going to see is not a lot more multiple expansion. So we just had extraordinary, I mean, it was really the bulk of the returns that we saw the last couple of years. So I think you probably get a little bit of a contraction in multiples and then you probably get the earnings coming down to maybe mid single digits from where they're penciled in now. So I think like a low single digit return is probably.Within the realm of possibility in our view.

What areas of the market do you like right now?

So we talked about kind of man on stocks, right, just the starting point, that's a technical word we use at John Hancock. I mean, no, just kind of benign, like not great, you know, earnings, probably multiple contraction, you know, stocks aren't really on sale yet. Bonds are.So we're looking at the income that's available on high quality bonds as being something that can play a bigger role in portfolios. It's income over capital appreciation for us, and we're looking at any backup in bond yields as really a gift that the bond market is giving us to lock in those elevated yields.

we've had, we've had guests. RIAs on the show to say, give me 5% in the 3 year, back up the truck on that. We will take that all day long. And we saw that recently. We've seen 5%.In the 30 year twice in the last couple of years, and I think they were both buying moments for bonds. Yeah,

I mean, we're not talking about extending duration that far because there's a lot of volatility out way out on the curve, but I think just looking at an intermediate part of the curve, belly of the curve, like a kind of benchmark level of duration. I'm talking boring bonds like investment grade corporate bonds, mortgage backed securities, treasuries.And I think with the ad getting close to 5%, we would look at that as a really attractive income and most importantly, the most popular investment of the last year has been money market funds like by far. And this idea that there's $7 trillion of cash sitting in money markets, we're suggesting getting some of that cash off the sidelines and redeploying it into high quality bonds just to take advantage of the ability to log.That income stream in for years.

Yeah, what's really interesting about that, we can touch on this after the break if it comes up, is that it takes, there's a delay. The Fed lowers rate and then you got all these trillions on the sidelines. People don't seem to realize right away that those rates are going down, but we've got to leave that there. We're going to take a quick break. But coming up, we're talking earnings and a runway battle for foodies over the best place to get served some tasty market victuals.This episode is brought to you by the number 17.9. That is the most recent low of the S&P 500's Ford earnings estimate that we saw crater during the market sell-off. So where do we go from here? We've seen, we're talking about corporates pulling their guidance. Do you see earnings as so I how, how severe does the D rating that we're talking about get, do you think? And what's the bear case? What's the bull case?

So we've seen a number of the big banks revise lower their estimates for earnings. We watch that closely, um, you know, we're looking at kind of a towards 250 on an EPS basis, you know, I think looking at year over year earnings growth right now again it's 11. I think maybe you get to more half of that is probably more realistic in a decelerating growth environment.I think the challenge is that companies are frozen in a lot of ways right now in terms of making a decision. Now we have these 90 day delays on tariffs. We're kind of waiting for more information around that. So I think that kind of puts us in this wait and see pattern as far as forward earnings estimates go. But what I will tell you is that in the United States we still have superior earnings estimates. There are stocks with great earnings growth prospects here that are now trading on sale. Meanwhile, the rotation's been to Europe where the earnings are lower quality. So still like the.for earnings growth here.

What sector earnings wise are you looking forward to seeing this

quarter, healthcare is expected to see the most outsized earnings. We've been overweight, the healthcare sector, we've had to be a little bit there,

but you know it.

Why would you just kidding. I think that's the challenge. It's, it's a more defensive sector. It's about the stuff that people need versus what they want.And right now we're seeing consumers pulling back a bit. They're showing signs that they don't want to make big purchases. We also like the utility sector. It's about embracing the things that people need to do versus the stuff they want to buy that segment of it? Yeah, and I think utilities have done well because of the ideas around power generation and AI have really helped the sector, but we think there's a pretty long runway there as well.

Butwhen we were talking about like US stocks not doing as well right.But then our healthcare and utilities, these seem like opportunities for people. Is that right? Like if you're searching, if you do still want to deploy your cash into stocks, this seems like a good spot.

It is, and they're still on sale. Healthcare is trading at about a 20% discount to the broad market. Midcap stocks are another area that have kind of been left behind that are trading at a 30% discount to their large cap counterparts. They're higher quality than small caps. Um, so we, we like midcaps as kind of the sweet spot in terms of US equities right now as well.

I want to circle back to kind of the beginning we were talking about correlations and we mentioned the US dollar had a huge drop, um, and I, I want to tie it into earnings because a lot of times, uh, when somebody, when a company needs a good excuse for missing, they, it's currency issues, uh, and we've seen this before, but we just got the the BFA Global Fund Manager survey for, I believe it was what is it April, and the dollar, the positioning and the expectations, the sentiment on the dollar.is extremely negative, and yet it is in this 3 year trading range. It just kind of dipped below. I'm thinking that is a perfect time for a rally that just catches everybody off guard. What do you think about that? So

by by using traditional inputs into figuring out currency dynamics, which is really hard, by the way, but usually you want to think about where's the best relative economic growth and where's the best relative earnings growth and who's, and it's also looking at divergences andCentral bank policy. So by all intents and purposes, the US dollar should be stronger. Our economy, we're kind of, I'm not saying we're great, but we're kind of the cleanest shirt in the dirty laundry from an economic perspective here. If you look at um central banks, the Fed's on hold at least for now. Other central banks globally are cutting. We also have much higher sovereign debt yields that should be bringing a flow of dollars onto our shores. We talked about all the reasons that it's not, but the dollar should be stronger now.I'm always looking for positives about things. The dollar weakened and the, I know, like people are like, what, where's the good news? The dollar weakened in the first quarter meaningfully, and that should be really helpful to US companies who have a lot of their revenues derived from overseas. 40% of revenues in the Russell 1000 index come from abroad. So I'm waiting to hear from CEOs that this is a key theme that their earnings are going to show us in the first quarter,

unlessthey weren't expecting it and they were hedged the wrong way or something.Who knows? All right, time now for our runway showdown, and today we are serving up a tale of two kitchens. First, to sizzle, the pop-up Bistro. This is Europe's surprise comeback, a trendy mini mini minimalist menu with bold plating and rave reviews. Investors, they are flooding in, drawn by a surging euro and the promise of something different. But peek behind the kitchen doors and the fundamentals are under season, Sid, earnings are getting cut, sentiment slipping and industrial production.It just missed. Meanwhile, still flipping orders under fluorescent lights, the 24 hour diner that is the USA, reliable, fast, and built for scale, she's fed generations of global portfolios with high turnover and dependable output, but lately the booths are not quite as full. Burned by recent specials, some diners are heading for trendier spots. So Emily, which kitchen do you trust to deliver this year, the European pop-up that's hot right now, or the American classic that.Might just be resting for a return to full occupancy.

I mean, my brain is flooded with so many possible ways to build on this analogy. It's like almost too much to handle. Um, I am a classic like, you know, burger and fries kind of girl. Um, I don't need the fancy stuff, so I think the US is still the place to be. Um, it's not that we don't have an allocation to international markets. Once in a while you want to go to a French restaurant and have some nice wine.Right, so we still have it in portfolios. We're just modestly underweight given the better relative economic and earnings trends here in the United States. I think it's tough to bet against the US over time. I think Warren Buffett had a phrase like that at one point and, um, so I think we want to follow the earnings. You want to follow the, the economic backdrop and, and here that we favor the US opportunities internationally. I think you've got to get active. Um, I keep trying to bring the restaurant thing back in.I can see you, I'm like trying to go there, um, you want to think, so in our world we're looking to overweight international value stocks over international growth because the relative earnings trends are better there. It's kind of the opposite of the United States. Um, so we think an active manager that can identify stocks with good earnings growth prospects, I think makes a lot of sense in thatenvironment.

If you're really new to investing in anything overseas, where do you start? LikeIs it safe to just do like a like an ETF from another country and call it a day or how would you recommend? Yeah,

you can, you can do that. I think, you know, going up in market cap internationally is something that will allow you to kind of manage the volatility a little bit better. Um, I think an active manager is really important actually internationally just because you want to, I mean, there's a huge difference in earnings trends. Like I said, growth versus value, up in market cap versus down in market cap.the thing to remember about European indices is that they're very cyclical. What I mean by that is that sector composition means the types of stocks that you own in Europe tend to move with the global economic cycle andthe

US.

We just have a gigantic technology sector and like we've had to create like new sectors with new names because tech. Exactly. So I think in Europe that your biggest relative overweights are gonna be financials and energy companies and materials.So you're just gonna get a lot more of that sensitivity. The best time to own it has typically been like coming out of a big contraction in global economic activity when taking more risk gets rewarded. I don't think we're there right now. It's really just about that relative sector composition. So I think something up in market cap with higher quality and maybe more value would be the way I would start.

Doyou have a percentage that you just recommend people invest internationally? 2%, 4%, or

not? So if you think about the the broad.Equity exposure in a portfolio like like a 60/40 portfolio. Our long term strategic recommendations would be a third of that would be an international. We're kind of closer to like a quarter of that right now just kind of giving some of our views, but diversification helps. I mean, think about the first quarter. US stocks did not do well, and diversification worked for people that had international equities, the dollar weekend, so it's important to keep that in a portfolio, but you just want to think about sort of making tweaks based on what's going on around the world.

What do you, we got like a minute left here. Any final word for investors? Anything on the table

here? Yeah, I mean, I think it's a tricky time right now. It is so easy to get like turned into a pretzel dealing with all of these headlines around tariffs because my mornings right? I mean, we all wake up and there's a new headline and it might be the opposite of what you've heard the day before. So I think trying to trade on that is just fraught with a lot of risk. I know it's.Difficult to minimize using politics as an input into making investment decisions because it's more than it's ever been. But I think turning off the TV unless all of us are on it, then obviously keep on um and thinking about, you know, more longer term trends that we've been talking about today around cycles and and earnings like we're investing in companies, not countries. And I think that's something really important.and the 6040 portfolio is I think alive and well here

because I didn't ask about that, but it seemed to be dead for a second. It was

for a few years. I think it was on life support for a few days, but we're back. Very

good. Well, we have wound things down here at Stocks and Translation, so be sure, be sure to check out other episodes of the show on the Yahoo Finance site and mobile app, also on all your favorite podcast platforms. So be sure to like, leave a comment, and subscribe wherever you get your podcast. We'll see you next time on Stocks and Translation.