What the Midterm ‘Affordability Election’ Means for Markets

SPEAKER_1 (0:00)

This episode is sponsored by TIAA. A 25-year-old starting their career might say, I'll think about retirement when I'm 50 But the math is unforgiving for those who wait, says Colbert Narcisse, TIAA's Chief Product Officer, Head of Insurance Solutions and New Markets.

SPEAKER_2 (0:14)

They're giving up 25 years of compounding. Money invested at 25 has until retirement at 65, a full 40 years to grow, earning returns on top returns year after year. Wait until 50, and that same dollar only has 15 years to do the same work.

Miriam Gottfried (0:33)

Hi, Telis.

Telis Demos (0:33)

Hi, Miriam.

Miriam Gottfried (0:34)

So, today's show is going to be about the midterms, which are coming up.

Telis Demos (0:39)

They are. I've just been seeing ads, so obviously I live here in New York. I don't think we have too many competitive races that I'm voting in. But I'm seeing a lot of advertisements for like Texas Senate and stuff. I guess they're advertising nationally. I'm not sure why exactly.

Miriam Gottfried (0:54)

Well, the Texas race could be a big deciding factor in the balance of power in the Senate. Which we're going to talk about with our guest today, who is Monica Guerra from Morgan Stanley Wealth Management.

She is the head of policy and geopolitical strategy there. And she was a previous guest on our podcast. She talked about tariffs. And back then, she made the bold prediction that the Supreme Court would strike down Trump's tariffs. And indeed, that came true. So Monica is very prescient and very tapped in.

Telis Demos (1:27)

Yes, her tea leaf reading is pretty good, at least as far as stuff we've talked about. So it's a great conversation.

Miriam Gottfried (1:36)

Before we get to that, I did want to mention CPI. Inflation data came in. And it looks like inflation is still running pretty hot. Came in at 3.7 percent, pushed up by high energy prices related to the war in Iran.

Telis Demos (1:52)

It's having a weird effect on the market, though, because after that report, you started to see longer term treasury yields really come down. Looking at the chart just this morning, I'm talking now on Thursday, I had to do a double take. I was like, oh, what's the tenure at right now? And I said, it was at 5.05 percent.

Miriam Gottfried (2:10)

That's a big decline.

Telis Demos (2:11)

And I was like, oh, I must be looking at another bond. That can't be right.

And I looked again. And sure enough, between when I got off the subway and when I got to my desk, the tenure had gone down like 10 basis points. So the move is pretty substantial. Do you want to know my theory?

Miriam Gottfried (2:27)

Yeah, I was going to ask, what is your theory for why this is happening?

Telis Demos (2:30)

I'm so glad you asked, Miriam. What I think is happening is that now that people think that the Fed really is going to hike aggressively, that news is combining with a bunch of stuff that's going on in AI. You have this kind of sell off happening in chip stocks. You have banks kind of saying some cautious things about AI and credit risk.

And you have some stuff going on with the anthropics kind of numbers, the revenue numbers they're putting out there. Are these numbers showing what we want them to be showing about the pace of growth in AI? So I think it's raising this notion that maybe the AI boom will actually slow down, that the Fed can bend the curve of it, which we talked about has been a real debate. Now maybe the market's thinking, actually, maybe that will work.

Miriam Gottfried (3:20)

Especially the Fed maybe already had an effect on this trade.

Telis Demos (3:23)

Yeah, and so that means, okay, well then you kind of want to own longer-term bonds because the Fed will eventually have to sort of reverse course and stop IK and maybe even cut a couple years from now. So I think that might be what's playing out.

Miriam Gottfried (3:37)

But then again, I wouldn't be shocked if we come in next week and see yield back up again. And I think it's because there's just so many different calculations that are happening in the market's collective mind right now.

Telis Demos (3:50)

And something I've written about is that we have seen volatility measures of the bond market, which up until really a week or two ago had been pretty low.

Meaning that like, though prices were moving, yields were going up. It was kind of like they were sort of marching in order. Then when I saw those volatility measures finally jump up, I said, okay, well, that's typically when a sign that the market's just sort of, we don't know what the price is anymore. And so that's why it's not shocking to me to see like these kind of gapping up and down type moves. Because I just don't think that the market, like you said, it's got a lot on its mind. And I don't think it has a firm sense of, okay, this is where the math clearly says that the 10-year yield needs to be right now.