Brian Pietrangelo [00:00:00] Welcome to the Key Wealth Matters weekly podcast, where we casually ramble on about important topics including the markets, the economy, human ingenuity, and almost anything under the sun. Giving you the keys to open doors in the world of investing. Today is Friday, May 30th, 2025. I'm Brian Pietrangelo and welcome to the podcast. And thanks for joining us today.
We were off last week, as you may recall, in observance of the Memorial Day weekend, So we appreciate you rejoining. And just as a final note, we had a fantastic celebration of observation of the Memorial Day in my hometown with a guest speaker from the former military, really quite moving. And again, we always remind people to observe the day for the reason for the day, which is to remember those that gave the ultimate sacrifice for our country as freedom is not free.
In addition, this is the time of the year where we congratulate many of the graduates from both high school and college as you continue to move forward in your endeavors in your life and in your career. Congratulations and good luck to all of you.
With that, I would like to introduce our panel of investing experts here to share their insights on this week's market activity and more. George Mateyo, Chief Investment Officer, Rajeev Sharma, Head of Fixed Income, and Sean Poe, Director of Multi-Strategy Research. As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our Wealth Institute on many different subjects, and especially our Key Questions article series addressing a relevant topic for investors. In addition, if you have any questions or need more information, please reach out to your financial advisor.
Taking a look at this week's market and economic news, we've got three economic releases for you and we will start first with the initial weekly unemployment claims report that came out just yesterday, for the week ending May 24th, and the number was 240,000, which was a little bit above average tick-up from the prior week at the level of 14,000 increase from the prior week. We've seen this before, but again, we've had stable initial unemployment claims for roughly the last 15 to 18 months, so as this number continues to remain normal, we'll look to next week to see if it comes back or it's a trend in the upward direction and we'll give you more news at that time, whether this is favorable or unfavorable.
And second, as we look to GDP, we get the second estimate for the first quarter of 2025, which was somewhat favorable in that the first estimate was a negative 0.3% for the quarter. The second estimate that we just received yesterday was minus 0.2% for the quarter. Again, minus 0.2%, so an uptick of 0.1%. The revision increase was reflective of actual overall consumer spending that went down, but was offset by investment increases. So net-net, just a 0.1% increase in the right direction.
And third, the report that came out just this morning regarding PCE or personal consumption expenditures inflation came in for April roughly at the estimated value of 2.5% year over year. Again, this is consistent with expectations and shows continued declines and although it remains in a slow grind, it's the second month in a row of lower results yet still remains well above the Fed's target of 2%. Goods inflation continues to be deflationary in spite of current and impending tariffs, but services inflation remains higher than desired. So we'll continue to watch this in terms of the dual mandate with respect to the Fed's policy on maximum employment and price stability.
And speaking of the Fed, we also got the minutes from the Federal Open Market Committee meeting back in May that we will talk with Rajeev on to see if there's any interesting news there after the fact. But other than that, it sounds like it's probably a no-issue. With that, let's turn to George to get his reaction to some of this news on inflation. But in addition to that, as we always have George give us a commentary on trade and tariff policy, what's the up-to-date news that we've encountered this particular week, and furthermore, get a little bit of an update on thoughts on tax policy. With that...

George Mateyo [00:04:09] Well, Brian, I'll just kind of kick off by kind of summarizing some of the key economic data points that you already referenced, but just for, I guess, sake of context, we've kind of talked a while now that we would thought we'd be seeing some read-through in the economic data from what we've seen thus far from the administration around tariffs and trade policies and so forth, and we'll talk more about that in a second, but right now, at least it doesn't seem like that's having any meaningful effect.
The inflation report that came out earlier this morning here on Friday around 10 a.m. Eastern suggested that inflation really barely budged. I mean, there really wasn't much to talk about. Actually, we saw the lowest reading on a one level inflation this year. So inflation seems to be somewhat moderating or maybe in check. Not withstanding some pressures maybe later this.
And at the same time, the other news of the week, of course, that we watch pretty closely is jobless claims. Those seem to be somewhat moving a little higher, but not to the worst level. Although, as we said before, there are some small little cracks in the data that we have to pay attention to, which suggests that things are slowing, but certainly not collapsing. I guess that would be my quick summary.
Since you acknowledged, Brian, that last we regrouped was about two weeks ago, we've had a lot of news since then. Of course, from the trade front, we started this week, this last weekend, I guess, I can say, thinking that we'd see higher tariffs imposed on our European trading partners. And that's a pretty big deal, because, you know, notwithstanding our trade agreements between Mexico and Canada, European, the EU comes a close third in terms of the overall impact in terms of trade between our two regions, if you will.
And so when we saw that headline kind of crossed over Friday, of course, markets didn't take it too well. It was kind of a bit of a sloppy trading session a week ago. But then nonetheless, Trump quickly changed his mind and kind of reverses course a few days later. And we saw a market responding kind and had a pretty good start to this week. And then ever since then, it's been kind of a volatile trading session one after the other. And we got more evidence of that just in the last few days or so, with respect to more tariff news suggesting that maybe these tariffs might actually be paused or put in hold.
We saw one court actually come out and say that the terrorists actually don't have any legal standing, which I think is a pretty big deal. So they effectively blocked the administration's tariffs. But then just a few hours later, an appeals court allowed those tariffs to be reinstated. And now that seems to be headed to a Supreme Court that will probably be kind of coming up with some decision perhaps later today, making these comments somewhat irrelevant.
But I think the bigger takeaway for our listeners is to acknowledge the fact that this trade war is not over. Many people I think have kind of put money to work thinking that the overall trade news is behind us. I still think it's still in front of us and there's still a lot of uncertainty. And the fact that trade policy is shifting around so much between one moment and the next, it just to me that investors need to be pretty careful and pretty disciplined with respect to their portfolios. And not making any big moves at the same time. The fact that there's a lot of headline news that happens instantaneously. So I think our overall view is that the trade war is not over and really being diversified and disciplined is gonna be very important.
You know, at the same time, Rajeev, when we started thinking about, I guess, the news of the last few weeks or so, of course, we have to acknowledge the fact that the House of Representatives passed a pretty significant bill that suggested maybe there's going to be some additional spending, there's probably going to be more issuance of Treasuries and so forth. And of course we saw a backup in yields in response to that. Now, by no means is that over in the sense we still have to hear the Senate side. Of course, the Commerce Committee has to come together and formulate maybe what might be one overall package. But nonetheless, the bond market seemed to initially kind of take that news as bad news, suggesting that rates might actually be higher on a longer term basis. But would you take away from that what your thoughts on what's happening in the bond market since then, and how are we thinking about risk in the corporate sector, particularly?

Jon Poe [00:07:51] Well, George, the U.S. Right now, I feel they're under two lines of stress. One, as you mentioned, is tariff policy resulting trade wars. The other is the government's annual deficit, which at one point nine trillion is not really sustainable. And the proposed tax policy, which has provisions in it and a price tag on it that could be over two point six trillion in borrowing again would lead to higher deficits and would make a recession even more expensive to manage. During recessions, deficits generally go up. The federal government would need to borrow, especially when local and state governments cannot.
And we saw those fears start to hit the bond market back in April when we started talking about tax policy and we started to talk about the impact of that policy on deficits. We also saw the downgrade of the U.S. Sovereign debt. That also moved bond yields higher, put upward pressure on interest rates, and also hampers the Fed's monetary policy. The current federal deficit has never been this large outside of a recession. And that impact, I think, was really felt on the long end of the yield curve. We saw 30-year Treasuries pushing past 5% yields only then to retreat when buyers finally started to step in. But you don't see those types of moves on the 30-year part of the curve. And the 30-year part of the curves is really showing the fears of what a tax policy could do to federal deficit, what this additional spending could do to the deficit, and what would be really the result of trade wars, how much money would really come in to kind of alleviate some of those stresses.
Bond markets are currently trading, in my opinion, on momentum. We had that benign PCE consumption and inflation data. That's not really gonna do much to change the monetary policy story. Tariff uncertainty is still in the picture. And now, as you mentioned, George, the legality of tariffs is in question. You have a Fed that's really unable to make a clear decision on monetary policy as long as there's all these uncertainties out there. And so the Fed remains in a holding pattern, and currently, the market is expecting two rate cuts by the end of the year, with just a little bit over 50% odds that the first rate cut would come sometime at the September FOMC meeting.
In June, however, we will have the Fed's release of the summary of economic projections and the latest projections from the Fed on rate cuts. The big question is going to be, are they going to stick to their projections of two rate cut for 2025, or will they be more cautious and bring that down to one rate cut for 2025? Got some indication of that with the release of the May FOMC meeting minutes. If you go through those minutes, there weren't a lot of surprises, but there are a few things that I think were noteworthy. Again, the Fed reiterated its cautious approach because of all this economic uncertainty out there. And they pointed to a Fed that is now saying that the flexible average inflation targeting has diminished benefits when inflation is high. So they are really looking inflation. I think inflation was the big focus the meeting minutes. And what was interesting was some Fed officials did point out that the loss of the safe haven status could have long lasting implications for the United States. So all of these thoughts are in the Fed's mind right now. And I think there's no clear path for the Fed. The narrative out of the Fed has again, been this wait and see approach.
And you did have that Chair Powell and Trump meeting this week. They had a meeting that was initiated by President Trump, who has been pressuring the Fed to cut rates. He's been pretty vocal about it. And pretty much the gist of the meeting was that, I think President Trump wanted to meet with the Fed Chair Powell and talk about why we're not cutting rates already. And Powell pretty much stuck to his guns and said monetary decisions would have to be careful, objective, and non-political. So the key takeaway is the Fed's gonna still be data dependent and is not gonna really try to do anything preemptive to try to cut rates. Not just did not look political but also because there's just not enough certainty out there for the Fed to make a decision to get in there and save the day, cut rates and all of a sudden have a policy error and have to raise rates after that just to backtrack. I don't think the Fed wants to have any kind of policy error. And so they will continue with this wait and see approach.
What the markets are doing, they're keeping this momentum trade. The 10-year Treasury bond yield is currently below 4.5%, well below the peak that we've seen this year. Despite inflation risk and the slower pace of rate cuts that are now being expected. One would expect that the tariff picture would become a little more clear in the second half of the year. But any negative surprises on the economy or on earnings, they would likely hurt equities a lot more than bonds. If you look at Treasury yields, right now, if you even price out rate cuts, long-term investors are ready to lock in any kind of yields where they can get something over 5%. And if they can do that, they're limiting their downside risks. So you do see those investors step in when they see that magical 5% number on yield. And you're going to continue to see that
Credit spreads on the other side, they continue to grind tighter. It points to a risk on trade, but we've been strong advocates for corporate credit for several quarters, now over two years, we've been talking about how important having corporate credit in your portfolios is, and specifically high quality names. These are those blue chip companies that have strong balance sheets that can withstand any potential downturn in the economy. So right now I think that the market's really trying to anticipate what the next move's gonna be by the Fed. Maybe we'll get some pointers from the June meeting, but right now, I think it's a wait and see approach by the Fed. I think right now the market is kind of in this momentum phase where yields continue to drift lower and below some of those key target levels for the 10-year, that would be four and a half percent. For the 30-year, that would 5%.

George Mateyo [00:13:34] Rajeev, you're right to mention the fact that the overall treasury situation can be somewhat fraught if we're not careful here in terms of the overall borrowing that needs to happen if these tax bills get pushed forward. And one thing that's kind of interesting from my perspective is the fact, that some of the large institutions, large non-profit institutions particular, seem to be in the crosshairs. So in other words, as we think about how the administration is proposing paying for some of these favors, these tax cuts and so forth, one thing that they've focused on more recently has been focusing on higher education. And of course, one institution particularly has got a lot of attention, but I won't spend time talking about that. But more broadly, I've read something more recently that suggests that the tax on endowments might rise from roughly 2% to over 20%. And that's a pretty significant jump. And of course, these large endowments, large universities have large endowments and with inside their endowments, they have a large amount of private equity. So maybe I'll turn it over to you, Sean, to get your thoughts on what's happening inside the private equity landscape these days and maybe some opportunities for our investors to consider given what's happening at the broader level of endowment finance.

Sean Poe [00:14:40] Thanks, George. Before we get into why the endowments are divesting and what it means for investors, first a quick refresher on private equity.
So, what is private equity? In its simplest form, private equity is ownership in any company that's not publicly listed on a stock exchange. So while public stocks like Apple and Nvidia generate a lot of headlines, it's important to remember that private companies make up a large portion of the economy. To put some data to it, 85% of companies in the U.S. with revenue greater than1$00 million are private companies. And if you only invest in publicly traded stocks, you wouldn't have the exposure to this segment of the economy. So, the first reason that private equity can be interesting in a portfolio is diversification. It's simply the opportunity to own a broader part of the market. And given the volatility of public markets so far this year, investors may appreciate this diversification even more.
The second, and to be honest, the primary reason that Private Equities of Interest is simply the potential for higher returns. Over the long term, private equity has generated roughly 500 basis points of annualized outperformance, meaning roughly 13% returns versus 8% for public markets. This outperformance has pretty logical underpinnings when you look under the hood. Private equity investors have long-term control over their underlying companies, which unlocks the ability to create value through initiatives like operating management, building new revenue streams, reducing costs, which, of course, as an owner of Apple or Nvidia stock you would not have the ability to do.
So what's happening today in the private equity market that makes it especially interesting? As George alluded to, there have been headlines about sophisticated investors like Yale and Harvard selling out a portion of their private equity holdings to secondaries funds. This dynamic's been largely driven by the looming threat of increased taxes on endowments, which means that they will need liquidity in their portfolio to make tax payments and distributions.
Secondaries are a specific version of private equity. And I'll explain what they are. Their main role in the market is to provide liquidity by buying private equity interests on the secondary market, which often comes at some sort of discount, given that the sellers are forced in some way. If you go back 20 or 30 years, this was a total cottage industry. Secondary funds were typically buying just zombie interests from old PE funds. But more recently, as distributions from private equity have slowed and the markets evolved, secondaries have turned into an important strategic lever for both buyers and sellers. In 2024, the secondaries market reached $162 billion in volume, which was up 45% from the prior year. And projections for the secondaries volume in 2025 are to approach $200 billion, which would equate to another 20-25% growth.
So as an investor, how should I think about the opportunity in secondaries? Well, first to understand secondaries better, you might want to think about housing. Typical private equity investments, if you think of a classic buyout investment, are kind of like buying a new build house. You wait for the construction, the landscaping, the neighborhood to develop before you realize your full value. Secondaries are more like buying an existing home. The house is already built, the yard's mature, the neighborhood is already developed. In this way, you already know what you're buying, you make the investment much more certain, and the timeline to being able to resell the house for full value is much shorter. To put a finer point on this, secondary funds often hold underlying investments for two to five years, whereas buyout funds are pushed to five, six, even seven years.
So what should investors consider when thinking about investing in secondaries? So first, many of the traditional elements of private equity are still true. These interests are both complex and illiquid. Investors should expect to be locked into an investment in a secondaries fund with no opportunity to exit until the fund realizes all underlying investments. Additionally, secondaries also experience a notable reporting lag. As an investor, you may not see finalized quarterly values for up to six months after a quarter ends. Now on the flip side, when used properly, secondaries can add a unique element to a portfolio. They offer significant diversification with exposure to a large number of underlying holdings across different industries and different vintages, the years in which the investments were made. Also, as you might infer from the example of Yale and Harvard, sellers are often forced in some way, which often results in buying at somewhat discounted prices. When you roll this up, secondaries can provide the opportunity for diverse exposure at attractive prices with a shorter timeline to realization relative to a traditional private equity fund. These dynamics, in combination with the Yale and Harvard headlines mentioned earlier, have driven secondaries from a cottage industry to representing almost one third of all private equity transaction value.

Brian Pietrangelo [00:19:26] Well, thanks for the conversation today, George, Rajeev, and Seann. We appreciate your insights. And thanks to our listeners for joining us today. Be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app. As always, past performance is no guarantee of future results, and we know your financial situation is personal to you. So reach out to your relationship manager, portfolio strategist, or financial advisor for more information. And we'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you navigate your financial journey.

Disclosures [00:20:02] We gather data and information from specialized sources and financial databases, including, but not limited to, Bloomberg Finance LP, Bureau of Economic Analysis, Bureau of Labor Statistics, Chicago Board of Exchange Volatility Index, Dow Jones and Dow Jones NewsPlus, FactSet, Federal Reserve and corresponding 12 district banks, Federal Open Market Committee, ICE Bank of America Move Index, Morningstar and Morningstar.com, Standard & Poor's, and Wall Street Journal and wsj.com. Key Wealth, Key Private Bank, Key Family Wealth, KeyBank Institutional Advisors, and Key Private Client are marketing names for KeyBank National Association, or KeyBank, and certain affiliates, such as Key Investment Services LLC, or KIS, and KeyCorp Insurance Agency USA, Inc., or KIA.
The Key Wealth Institute is comprised of financial professionals representing KeyBank and certain affiliates, such as KIS and KIA. Any opinions, projections, or recommendations contained herein are subject to change without notice, are those of the individual authors, and may not necessarily represent the views of KeyBank or any of its subsidiaries or affiliates.
This material presented is for informational purposes only and is not intended to be an offer, recommendation, or solicitation to purchase or sell any security or product or to employ a specific investment or tax planning strategy. KeyBank nor its subsidiaries or affiliates represent, warrant, or guarantee that this material is accurate, complete, or suitable for any purpose or any investor. It should not be used as a basis for investment or tax planning decision.
It is not to be relied upon or used in substitution for the exercise of independent judgment. It should not be construed as individual tax, legal, or financial advice. Investment products, brokerage, and investment advisory services are offered through KIS, Member FINRA, SIPC, and SEC-registered investment advisor. Insurance products are offered through KIA. Insurance products offered through KIA are underwritten by and the obligation of insurance companies that are not affiliated with KeyBank. Non-deposit products are not FDIC-insured, not bank-guaranteed, may lose value, not a deposit, not insured by any federal or state government agency.