WisdomTree Investment Strategy
Hi everyone. Welcome to WisdomTree Office Hours, Fed Watch: Will It Be a Charlie Brown Halloween? You'll hear from Professor Jeremy Siegel, Senior Economist for WisdomTree; Jeremy Schwartz, Global Chief Investment Officer; and Kevin Flanagan, Head of Investment in Fixed Income Strategy.
With that, I'll turn it over to Jeremy Schwartz to get us started.

Jeremy Schwartz
Well, Professor, maybe not the scariest Halloween pre-Fed conference, but kind of boring, as you were foreshadowing before. But there's a lot of things happening in the market.

Professor Jeremy Siegel
Yeah, there were a few things.

Jeremy Schwartz
We're going to get some earnings reports while we're on the call, so maybe we'll get some instant reactions to that.

Professor Jeremy Siegel
Yeah, you can interrupt me if you get something on earnings. I know that's coming.

I said it was going to be one of the most boring FOMC meetings in years. And in terms of forward guidance or learning basically what they're going to do in the future, there was almost no information. A little caveat, but I'll talk about that. There were a couple of interesting nuances.

First of all, Lisa Cook dissenting. She's not really a monetary economist. They put a lot of people on the board who have specialties in banking and other things. She's never dissented before.

I mean, this is obviously the finger at Donald Trump. You're not going to be happy about that. What are you going to do about it? That fight is going to heat up over whether to remove her and investigate her and all the rest. That was clearly there.
Given that was maybe motivated by that, you really only had one dissent in favor of it.

I think the only statement that gave me a little bit of a clue about what he'd do was when he said there was a food fight. Now, what do you mean by food fight? I think there were probably a few more who said we really need to raise rates.
And I'm sure Kevin sees some things on that, but we're six days before the midterms.

I was listening to Jeffrey Gundlach, who does commentary on CNBC always right after me. He said, "Oh, I don't think it had anything to do with it." I definitely think there is a connection, and I think that's a good move. You don't want to be totally on the wrong side of Donald Trump right away.

He did raise rates the last time in the face of Donald Trump's threats, and he accepted it. Now we've got six days. It's not going to kill the economy to wait another six weeks to raise rates. But the fact that we had a food fight means that there were many more who said we do need to raise rates.

Now, the statement about accumulating more information. There are a number of things. What's going to happen after the midterms in six days?

We're going to talk about that on the Friday podcast that we do every week. I'm going to give you a preview of that.

The truth of the matter is that Trump himself has promised there might be some substantial activity on Iran.

A Democratic sweep of Congress might have some impact on certain things, not as much as most people think, and I will talk about that on Friday.
But you're going to get more information. I think he might have actually had the PCE. I think the chairman of the Fed gets important announcements usually on the afternoon beforehand.

I don't know if he had it in hand. Obviously, the statement comes out at 2 o'clock. We're getting GDP tomorrow, and we're getting the employment report on Friday. There is a lot of information coming out, so I don't blame him for putting in that there's more information to come.

A couple of interesting points, though, outside of Cook thumbing her nose at Trump.

He announced, and this surprised me, no change in schedule. We're going to have eight meetings. Then he said one of the meetings, at least in 2027, and two of them in 2028 are going to be devoted to policy discussion, I think he said without a statement.

I don't know how that works. What meeting is it? He didn't specify.
Suppose you're going to plan it for the September meeting, and all of a sudden there are changes and you've got to move the rate in September. Does that mean you're not going to have a policy statement? I don't quite know how that's going to work.

I'm not against them having a meeting where they discuss how their framework of policy might change. I think that's good. That's almost like what we expect at Jackson Hole, where the Fed chair presents some sort of policy framework. But it was a little confusing.

What I also thought was confusing was that he appointed five or six committees, one of which was to look into the structure and what they're going to discuss at the meetings. Well, that committee hasn't even reported yet.

So he's already made a decision for 2027 and 2028 about what they're going to discuss in meetings without the committee that he appointed reporting?

And by the way, he talked about these committees. That was also a little strange. I thought the committees would report in January or February, they'd all look at it, and maybe by March or April, any changes that were going to be made would be made.

But anyway, he made some changes already.

Nothing looks like it's going to affect the first few meetings. December is going to go on, and it looks like there'll be the January meeting and, of course, the March meeting. So the next six months don't look changed.

All right, interesting. He said, "I'm going to this conference about productivity and AI." How many people heard that?

Are you going? He said it's an open meeting. He even said he might have some comments. That's like Jackson Hole comments.
He said, "We want to learn about how AI might affect monetary policy."
I think that's an extremely important question. AI could affect monetary policy in two ways. One is, is it going to cause deflation in goods prices with increased productivity? Is it going to cause layoffs of workers to a significant degree?
Now, I've been to many conferences. You're going to get opinions all over the place. It's good to learn as much as you can, but there's no definitive data on that now.

As you know, I don't believe there's going to be an AI labor apocalypse. There are others who say there won't be an apocalypse, but there will be meaningful unemployment that might complicate the Fed's policies.
There are differences of opinion there. I'm glad he's looking into it. It'll certainly be interesting to hear what his comments are, but I guess they'll be along the lines I just discussed.

Other than that, the Dow ended a few points below where it started. It fell in the last few minutes. And the long bond ended almost exactly where it was, even after bouncing up and down two or three basis points. No big, significant move as far as that's concerned.

I don't know, Jeremy and Kevin, if you want to ask me something else about what happened.

Jeffrey Gundlach said we're a little bit behind the curve. I've been saying we're a little behind the curve. The spread between the 10-year and Fed funds is a little higher than average. The spread between the two-year and Fed funds is higher than average.

He said the commodity index is in an uptrend. It is in an uptrend because oil is in an uptrend, and we don't know what's going to happen to oil.

Maybe these prices that we see now are in expectation of a high probability of some bombing that might, in fact, cause oil spikes. So all that is driving commodity prices higher.

I don't really look around elsewhere and see commodity prices going up. Jeffrey Gundlach seemed to think we're in this general commodity inflation. Outside of oil, actually, the Bloomberg Commodity Index has been relatively flat.

Kevin Flanagan
Professor, I wanted to come back to the whole meetings issue. Is it a throwaway meeting next year? How do you decide which meeting they're going to have?

Professor Jeremy Siegel
Exactly.

Kevin Flanagan
Put it in a jar and just say, "All right, that's the meeting we're not going to vote on"? I mean, how is this going to work?

Professor Jeremy Siegel
Well, he didn't really say that. And we're not going to issue maybe a policy statement. That's exactly the question I'm asking, Kevin. I don't know how that's going to work.

Listen, I don't think it's worth us spending a lot of time on it because I don't think it's going to affect the first two, three, four, or five meetings. We're along the same path.

I actually thought he would reduce the number of meetings to six. I think six is the mandatory minimum that the Fed can hold, and I thought he might reduce it.
In fact, he's reducing it to six in 2028. But the biggest surprise is that he has a committee to look into it, they haven't reported, and he's made some decisions. That just confuses me.

Maybe there's an explanation, but I was very surprised at that announcement.
As I said, I don't think it has any effect on what I think about monetary policy and all the rest over the next six months because nothing is going to change then. But it did surprise me.

Jeremy Schwartz
Well, you mentioned AI productivity. We've been talking about AI driving rates, and we've got a few developments today.

Oracle is having one of its big investor days in Vegas. I was contemplating going to the conference today, but I ended up staying here for this conversation.
They were up 10% today. Their revenue for fiscal year 2027 is $90 billion, and they're saying in three years they're going to have $225 billion.

They may only need to raise an additional $20 billion in capital before then, so they're sort of self-funding some of this. I think the clear path and the reduced funding needs were among the things that sent the stock back into positive territory.

Alphabet is trading down, Professor, after hours, down 6% or 7%. We'll see what happens on the 4:30 call. It was a little bit of a revenue miss, with CapEx spending.

People worry about whether AI will disrupt their core search business. They were a little soft on some of the YouTube and search business, but it's the CapEx spending that seems to be—

Professor Jeremy Siegel
Now, Google is up 1.6% today, so it actually bucked the trend of the other Magnificent Seven during the day.

Jeremy Schwartz
And Microsoft seems to be more positive. It was up a few percent after hours.

Professor Jeremy Siegel
Microsoft's up a couple percent today? Okay.

Listen, I think the earnings are coming in well. There are ups and downs. I don't think it's quite as good as the second quarter in terms of beats, some big beats, but that was just an unbelievable blowout.

They're still quite healthy, and guidance has generally been good into the future.
There's nothing inherent in the economy. It's the same statement I make every Friday. It's just this idea: Is AI going to pay off all these expenditures?

We have to wait for the data. So far, so good. But whether it's going to pay off depends on so many different things: competition, China, alternative intelligence, quantum computing, you name it. Anything that could derail the profitability of any of these sectors.

Kevin Flanagan
Professor, do you have any concerns with the run-up that we've seen, especially at the back end of the Treasury curve, and how it's impacting investment?

You're seeing Warsh obviously spending more time on it, as you mentioned at the press conference. Do you see it as a hindrance at all from a broader economic investment standpoint, or is it just a hiccup?

Professor Jeremy Siegel
You're talking about the increase in long-term Treasury rates?

Kevin Flanagan
Yeah, its impact on AI investment.

Professor Jeremy Siegel
Well, yes. It's supply and demand for credit. There are big demands for credit, both by the government and from AI. They're driving up the price.

All these AI people think it's easily worth it. They'll pay an extra point or two. Obviously, on the fringes, they're paying much more than that because CDS is going up and their spreads are going up.

Many of them still think they're going to make a lot of profits, and many of them very well might make those profits.

So you've got one sector that has tremendous profitability and demand, and they're obviously driving up the price. Then you have the housing sector, which is going to be hurt because it doesn't have the productivity gains that can offset the costs.

And incomes are not going up fast enough to offset the costs.
So you can get a depression in all those sectors that borrow but don't have the productivity gains that they do in AI. Yes, it definitely affects the rest of the economy that way.

Kevin Flanagan
And how strongly do you follow financial conditions? Is that one of your top five or ten indicators on your radar?

Professor Jeremy Siegel
And you're referring to which?

Kevin Flanagan
Like when Warsh refers to financial conditions.

Professor Jeremy Siegel
Well, financial conditions, there are lots of them. First of all, there are spreads, absolute rates, short rates, long rates, and money supply.

There's also credit supply. There's the SLOOS, which is the survey of how tight lending is at the banks. That's another thing.

You can even talk about the dollar. When the dollar goes up, that's really like tightening credit. It becomes harder to sell abroad, and that puts on some tightness.

Goldman Sachs has an index of financial conditions with seven or eight different components. Even the stock market is one.

When the stock market is up, financial conditions are easier because firms can issue equity instead of bonds to finance their projects.

So they have seven or eight different financial conditions, and they have a weighted average of those. We could all debate how important each of those weights is, but all of those together give the big picture of what we call financial conditions.

Kevin Flanagan
And do they worry you at all at this point?

Professor Jeremy Siegel
No. There's nothing to worry about now.

You're getting those increased CDS spreads on AI. You're not really getting it outside of AI. The stock market is still pretty darn high.

Even on the Nasdaq, we barely went into pullback territory. I think we were down 6% at the maximum, and we're not even down 5% now.

The smallest decline that's defined as a pullback is 5%, and we barely made it a week ago.

At the same time, the value indices were hitting highs. So there's no tightness there.

Those higher rates are something to contend with, but the strength of the economy is pushing one sector over the other.

As AI looks great, they pull up rates and invest, which hurts some of the other sectors. If AI begins to look wobbly, rates go down, and that eases up on the other sectors.

And don't forget, there's oil on top of all that, diesel and gasoline. We'll see after the midterms whether we see a clear direction on those energy inputs.

Jeremy Schwartz
Professor, I was looking at one of my charts this morning that we update all the time, the valuation on the expanded tech sector.

It's amazing how that's come down. It's literally at almost exactly the 30-year median. Twenty-two times is what the 30-year median is. It's 22.5 this morning.
For non-tech, it's roughly 17.7, very close to its 30-year median.

So you're at pretty normal valuations. There's not this extended valuation. Even tech seems pretty reasonable at 22 times.

Professor Jeremy Siegel
Now, don't forget, and I hear you, remember we're looking at 12 months forward.
The AI boom, which really accelerated this year, is supposed to last another two or three years. So a lot of these profits are going to trail off, and that's why some of these stocks are selling so low.

Look at Nvidia. What is it, a 30% grower selling at, what, 15 times? I don't know.

Jeremy Schwartz
Seventy percent, actually. Growing at 70%, trading at 16 or 17.

Professor Jeremy Siegel
The reason why is, again, and I would repeat this because it's so important, only 5% of a stock market's value is its earnings in the next 12 months, and yet that's how we compute forward P/E.

Ninety-five percent of its value is earnings 12 months and beyond.
So if you think the AI boom, this big hump, is going to go back to normal, then obviously you're going to get a downward movement of P/Es of these companies.

I think what happened when chips started exploding was that everyone said, "Oh, look at these chip P/Es. Buy, buy, buy."

And then people said, "Just a minute here. This is not going to be permanent."
I think that cooled things off. You've got to look far out and look at what the long term is.

Jeremy Schwartz
The Korean names, which reported overnight, Hynix is one of those memory names. I mean, it's trading at two to three times earnings.

Professor Jeremy Siegel
Yeah, I know, because of that.

Jeremy Schwartz
You could buy back the whole company if they actually tried to, you know? And they did say they were going to do buybacks and dividends.

Professor Jeremy Siegel
Yeah, they did say that. But that's it. Look, these companies know. Do you think they're going to have these margins five years out?

Jeremy Schwartz
Right.

Professor Jeremy Siegel
When I said 95% of the value is more than one year out, 90% of the value is more than two years out.

So even if they say, "Oh, we have a two-year boom," or some say, "We have a three-year boom," okay, that's 15% of the value in the next three years, and 85% is three years and beyond.

So if you think that boom is over then, you'd better put in earnings that are just regular and normal for 85% of the value of that company.

And this is Finance 101: how to value a stream of cash flows and earnings.

Jeremy Schwartz
Kevin, as you think about managing the bond side of the equation, how are you suggesting clients navigate Fed hiking and where we are on the 10-year? What's some of the advice you're giving out there?

Kevin Flanagan
It goes back to when Warsh first came in. There was this uncertainty factor, but a lot of other things were coming into the equation.

We talked about what we call our zero-duration playbook.

Now, where you're seeing the 10-year hit 5.36% a couple of weeks ago and kind of settle into what looks like a higher trading range, what I like to call more of a normal trading range at this stage of the game, you want to think about investing in a 5% bond world.

I think that's the way to do it: pair the two together rather than being out there alone going long duration. I like the barbelling of the two strategies together, just in case.

Like the Professor is saying, if we do see hostilities move again, kinetic hostilities in the Middle East, and you get that drive to higher energy prices, chances are you're going to get that drive to higher rates.

So there's really no reason, I don't think, to be a hero on the duration side. I think a barbell strategy using those two playbooks makes a lot of sense.

And for those of you on the call, if you're not familiar, we have a wonderful barbell tool on our website under what we call the PATH, P-A-T-H.

Reach out to us. We can walk you through it. It really shows your yield-to-worst and duration versus the Agg. A really powerful tool for bond investors.

Jeremy Schwartz
And Professor, as you think about the equity markets and that diversification story, how much would you be shifting toward the value side versus continued AI, as you're talking about the timeliness of their earnings?

Professor Jeremy Siegel
The market, because these P/Es are going down, is saying these big earnings are not going to exist forever, and I think that's right.

Are they still overestimating how big the boom will be? That is very, very hard to know.

What I am saying is I don't see general overvaluation in the market, and I think the economy certainly still looks strong.

We're going to get GDP tomorrow. The trade deficit came in a little higher. I would say GDP is in the low threes now, 3.1%, 3.2% looks like it. But that's still pretty healthy. Jobless claims are still very, very low.

So that's still there.

What I would love, what we would all love, is if we could get some sort of deal with Iran and oil goes back. I don't think it's going back to $60, but even $80, $70 or $80, I think that's really positive for the market, just in terms of psychology.
I think that would be a positive boost if we could get that post-midterms.

Again, totally unknown. We'll have to wait and see. But I think a lot of those unknowns will certainly be realized by the end of the year.

Kevin Flanagan
So, Professor Jeremy, you mentioned it earlier. Here's a little teaser for your podcast. You can pay me my five bucks later on for that.

Less than a week, and we have the midterms.

Real fast, I don't want you to give the store away. I want people to tune into your podcast. But is there any scenario you see in the midterms that creates an issue for the markets? Or are we just looking at gridlock, and no matter how you look at it, it's going to be gridlock?

Professor Jeremy Siegel
Oh, yeah, it's going to be gridlock.

Just as a little preview, a big blue wave, which would definitely produce a Democratic Senate, even a reasonably big blue wave would probably give you 55–45 in the Senate for the Democrats.

What I think would be a negative for equities, and I'll tell you why it would be a negative for equities, is that not only would it be deadlocked for the next two years, but it portends what's coming in 2028.

That's where things could change dramatically. Could the Democrats sweep in 2028? That would be big.

So that's a little preview. Come in Friday and we'll talk more about it. Then come in next Friday and we'll talk about what actually happened.

Kevin Flanagan
What happened? A twofer!

Jeremy Schwartz
Well, it's always great, Professor, to get your comments post-Fed meeting, even though it was a little—

Professor Jeremy Siegel
Yeah, it wasn't as thin as I actually thought.

These changes in schedule, Cook, and the productivity meetings that he's going to, telling us what he's thinking about. There's a little something to talk about.
But obviously, no clue as to what he's thinking of in December. He wouldn't answer whether he thought we were tight or loose at the present time, near neutral, or all the rest.

And there was one dissent. Another one may have been politically motivated by Cook, I don't know.

Some people were thinking there would be three, and there weren't.
I actually thought he could convince people by saying, "Come on to my side. I'm willing to even do 50 in December if we need it."

But we're not quite there.

Kevin Flanagan
A ham on rye sometimes isn't a bad thing, Professor, right?

Professor Jeremy Siegel
Yeah, that's true.

Jeremy Schwartz
Well, always a pleasure to be with you both. We'll see everybody.

Professor Jeremy Siegel
Yeah, and join our podcast. On Friday, we'll review the political situation and what that means.

Jeremy Schwartz
Behind the Markets, every Friday. You can catch the recaps there. Thanks, everyone.

Professor Jeremy Siegel
Okay.

Kevin Flanagan
Take care.