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to discuss how you should consider the selloff within your own portfolio. We've got here in studio with us Chris Shipley. Chris is the Fort Washington Investment Advisors co-chief investment officer, Chris. Great to have you here with us in studio today.

Great to be here.

When you look across what we're seeing on the screen right now and people just tracking the ticker at home, hard to find any spots or any green arrows at this point in time. What are you telling investors and some of your clients that might be calling in today trying to figure out, okay, should we be hitting the panic button or should we be looking for opportunities?

We definitely don't think it's time to panic. I think when you look at the the overall setup for the market, I do think that there was a certain vulnerability to the market at the levels that we were trading at. We were really pricing in an outcome that included both durable economic growth and lower inflation, providing the opportunity for the Fed to cut rates. What we're looking at now is a little bit more economic weakness than the market was baking baking on. And when looking at it through the lens of bad news is good news, which I think the market was looking at for some time. Now you've had an accumulation of enough bad news that bad news is starting to be bad news. And we really have to think about whether or not we are entering a more substantive economic slowdown. I think there's a lot of reasons still to be optimistic on avoiding recession. But right now the market is shooting first and asking questions later.

What is the portfolio positioning that people should be considering then for for bad news actually starting to be bad news?

Well, I think it some of it comes down to how much bad news do you expect to accumulate? And I think when we look at the overall state of the consumer, I think it's important to bifurcate the consumer between the two principal categories that we have, which is homeowners and renters. And the reality is the economic experience for homeowners has actually been pretty good over the last couple of years. When you look at the impact of inflation, it's been much less significant on homeowners as the shelter component of the inflation data that we see has been hovering around the Fed's target of 2% for over a year. And so when you look at things from a cash flow perspective, homeowners have actually been okay. And if you look at it from an asset perspective, home values reached new all-time highs in May, and we had equity markets that were at all-time highs not long ago. So from the perspective of the homeowner class within the United States, which has twice the median family income of renters, that means that at least 80% of consumer income is being earned by people who are actually having a fairly good economic experience for the last couple of years. So that should provide a reasonable underpinning to the overall economy and keep the US economy out of recession as a base case. So with that in mind, I don't think that we need to worry about significantly repositioning for much harsher times.

I I got one uncle text me today saying, if the market continues to do this, I might have to go back to work and and find a job at a golf course or something like that. Of course, that'd be beneficial to him. He'd get free rounds. But at the end of the day, for people who are looking at a selloff like this and trying to figure out how they can continue to maintain their wealth, how can you build wealth even when you're seeing precipitous declines like this?

Well, again, if you if you take a long-term view, and I think as a retail investor in particular, you always have to have your eye on the horizon and what am I positioned for in terms of meeting those long-term objectives. If you're like many institutional investors and you've been underweight this AI trade, for example, if you look at the relative performance of institutional money managers this year, it's been fairly challenging, suggesting that they've been underweight that AI trade. Now you're seeing those names on sale. We saw that once before this year when Nvidia sold off 20% in late March, early April, and of course, there was an opportunity there that did not present itself again until just now. And so I think when you look at some of these factors and you think about where are where am I positioned and where do I want to be positioned for the long term, when stocks are on sale, it's time to start taking a look.

When we think about some of the stocks that have driven, and we're showing it on screen right now with the MAG 7 trade, and how much that has really permeated throughout the mind of retail and institutional investors here, is the Fed pivot now, or at least the the cutting cycle, is that the pin that could burst the generative AI thematic trade that we've seen really take on so much luster and fanfare?

I do think that if you go back to July 11th when we had the CPI print that really started that rotation, and you really got a sense as to where investor positioning was on say small caps or on value, and you saw those begin to run as the expectation was that the Fed would be cutting rates. I do think that you have to think about some of those exposures. And right now, the S&P is exceedingly concentrated in these large growth names. And so incrementally, it appears as though the S&P 500 is less of a broad representation of the US economy as it once was. And so when you look at areas like small caps, which are under pressure right now, as people worry about the US economy, if there is a broadening of performance within equities, it does seem reasonable to think that value or small caps are going to start to take a little bit more notice on the part of investors and potentially broaden out this trade beyond just this dominant AI theme that we've seen for some time.

Where are we likely to see the most evidence of a broadening even as we're looking at some of the declines today?

Well, it's interesting. If you look at valuations, so for the S&P 500, we were north of 21 times not long ago. Yet the S&P equal weighted, meaning the median company in the S&P was actually trading right on top of its 10-year average of around 17 and a half times. Now all stocks have cheapened since then. So there has been places that you can find value within the equity market if you've been looking for discounted names because there's been plenty of them to buy. Now those names are starting to come into favor. The real question will be, if we do see a more consequential decline in economic activity, then maybe we see a shift back toward these growth names, which are more secular and less cyclical. And so value small caps, they do tend to be more cyclically oriented. They tend to be more sensitive to economic outcomes, particularly in the US. And so we'll see how far this this degradation in the economy goes. Our base case is that we do avoid recession. And so ultimately, we do think that as some of these stocks come up for sale, that it's probably worth broadening that portfolio a little bit.

Chris Shipley, who is the Fort Washington Investment Advisors co-chief investment officer. Thanks so much for taking time here with us in studio today.

Thank you.