Brian Pietrangelo [00:00:01] 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, June 13th, 2025. I'm Brian Pietrangelo, and welcome to the podcast.
Well, we certainly had some sad news this week with the escalating Middle East conflict. We also had the plane crash in India. And a legendary music icon, Brian Wilson, had passed away this particular week. Again, a legend within the band known as the Beach Boys.
And on a much lighter note for any of you that are golf fans out there, this week brings us the U.S. Open from the storied and overall fabled course just outside of Pittsburgh at the Oakmont Country Club. The Open kicked off yesterday on Thursday and will run through Sunday as most golf championships do, so what an exciting time to watch some great golf at a very challenging course.
With that, I'd like to introduce our panel of investing experts, pros in their own area, here to share their insights on this week's market activity and more. Steve Hoedt, Head of Equities, and Ather Bajwa, Managing 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, the economic calendar was fairly light this week, so we only have two updates to share with you this morning. First, the initial weekly unemployment claims data that came out yesterday for the week ending June 7th was fairly stable at 248,000 initial unemployment claims, and this was the same as the report from May 31st, so no increase there week over week. That's fairly important because the prior two weeks did show meaningful increases and we'll have to see whether this is a temporary increase or something more meaningful with deterioration in the jobs market. So we'll keep you posted every week we're on.
Second, the inflation read for CPI, the consumer price index measure of inflation, came out on Wednesday and it showed month-over-month increases that were fairly decent at only 0.1% increase for both all items and core inflation excluding food and energy. However, overall on the year-over year numbers, the all items inflation came in at 2.4%, which was one tick up from 2.3% going from April to May. And the core inflation for CPI in May of 2025 came in at 2.8%, which has been the same for the past three months, both May, April, and March.
So a little bit of a good news, bad news story there, the good news being that inflation has not increased meaningfully with the inflation concept related to tariffs. But the slight bad news is that it isn't declining again at a meaningful rate towards the 2% target for the Federal Reserve's mandate. And although energy inflation has been going down significantly, food inflation did tick up a little bit and services inflation continue to remain elevated at around 3.6% overall.
And speaking of the Fed's mandate, the dual mandate around inflation component, we've got the Federal Reserve Open Market Committee meeting next week for the two-day meeting on Tuesday and Wednesday, 6/17 and 6/18 that will culminate with the press conference and the release of the statement on Wednesday, June 18th. Jay Powell certainly to provide his comments as he usually does within the press conference and the decision is likely to be a no-decision meaning rates will remain the same for a variety of reasons. One of those being inflation not coming down and the other being the jobs markets is somewhat resilient although we are seeing signs of worsening in some of the components of the jobs market.
Overall, the chances of a rate cut for the meeting on June 18th are roughly only 3%, so that's pretty much a no action meeting. For July 30th meeting, it's about a 23% chance that there'll be a Fed cut of some type, and then September gets a little bit more meaningful at about a 72% that that might be the first cut in the most recent cycle for the Fed.
So now let's turn to Steve to get his read on the overall stock market these days, and as we make the comparison to the U.S. Open course at over at Oakmont, where there are many challenges, including bunkers and 5-inch roughs to continue to provide the pro golfers many challenges. They continue to execute on the course and make some really good progress. In the same vein, the stock market has many challenges facing it as well, including geopolitical tensions, including tariffs, including inflation, and including consumer sentiment, but it continues to marshal through as well. So just like the pros on the golf tour, investors need to make those palatable risk return tradeoffs in terms of the market. So Steve, where do you see the market heading right now, given your perspective?

Stephen Hoedt [00:05:06] Well, Brian, you know, when you take a look at what the market has been doing this week, if we had recorded this two days ago, you know, the market was at all time highs again on Wednesday, but as we sit here Friday morning, seeing a little bit of a sell-off in reaction to the news out of the Middle East. I was having a Bloomberg messenger with my team about this morning. And some of them were a little bit mystified why the market sell off actually wasn't worse on the news that we saw out of the Middle East. And you know, from my perspective on that is the market has seen this story before where we get news flow out of the Middle East that is, you know, very negative on the face of it. And I don't want to provide short shrift to this. It's, you know, from a human perspective, it's a very it's a bad event. I mean, there's no two ways around it for both sides. I think the market is looking at this, though, and saying, you know, we've seen a lot of these kind of things happen in the past. And unless this time is different, and it really spirals out of control and turns into a conflagration that takes a major amount of oil supply out of production and again, spirals and who knows what, the market is basically shrugging its shoulders and going, okay, there's a little bit of extra risk here, but we don't need to have a wholesale sell off for this.
So the 1% decline that we've got today, I think, is a reasonable adjustment for the increased level of risk here, given the fairly strong underlying fundamentals. I think that the CPI number this week should have caught people's attention. Because we've been post the tariff stuff long enough that we should start to see the tariffs situation flow through the CPI a little bit. And the fact is we aren't. And I think that that you know, maybe the administration was right. The tariffs didn't cause inflation as opposed to some of what the economists had feared.
So, you know I think that we remain in a pretty good place on the inflation side and you know sentiment from a consumer perspective of when I just saw the UMich survey come out this morning and consumers, they survey a whole bunch of things in this consumer survey, right? And one of the things they ask is, do you expect the stock market to be higher 12 months from now than it is today? And for multiple years, this number has never been lower than where it's at today. And if you look at that historically, the market has never not been higher 12 months down the road when the numbers have been at the level that they're at today.
When you look at the AAII survey on a bull-bear basis, we've reversed back to neutral from being highly negative earlier this year. Going back to neutral is not a bad thing, it's actually a very good thing because the market just doesn't stop going up because you go back to neutral. Typically, you don't run into problems until you get extreme euphoria on the upside. And we are, judging by the consumer sentiment survey from UMich, we're a long way from having people be euphoric about this market.
So, you know, not withstanding the kind the geopolitical stuff that's impacting the market today, as we sit here and look at the second half of the year, we see a pretty solid pathway to new all-time highs as we head into the second-half. And we expect that that's gonna play out to the tune of our down first half, which we've experienced up second half playbook that we've been working on all year.

Brian Pietrangelo [00:09:25] Steve, you talked about the contra-indicator of consumer sentiment. When it gets really bleak, it's actually positive for the market longer term. The second one we look at similarly is the VIX. When it spikes and is very high as a fear index, it tends to be positive for the market long term. Where's the VIX at these days and what are your thoughts?

Stephen Hoedt [00:09:41] So, volatility has ticked higher again this morning relative to where we've been, but nothing like what we saw at the post-Liberation Day sell-off. So volatility this morning is back over 20. It's around 21. The recent lows were around 17. But keep in mind, during the post liberation day sell off, we got to over 50 on the VIX. And the long-term average on the VIX is 19.5. So we're only just a tiny bit more this morning. So you're seeing a little bit of adjustment in volatility, but this is not a volatility explosion in terms of negativity, right?

Brian Pietrangelo [00:10:25] Thanks for the perspective. And now I'd like to bring into the conversation our Director of Multi-Strategy Research, Ather Bajwa, for his perspective as he's got some thoughts on what we talked about last week. If you remember, we had Sean Poe on to talk about what's happening in the private equity markets. And now we've got the corresponding conversation with Ather Baja on what's happening in the private credit market. So Ather, thanks so much for joining us. We'll pitch the first question to you. And then let's talk about what is private credit. And why might investors allocate private credit into a portfolio? Thanks, Brian.

Ather Bajwa [00:10:59] Private credit is a very broad asset class, but generally speaking, when we think about private credit, we think of it encompassing lending and borrowing transactions that are conducted between private companies and private lenders. This is generally beyond the traditional source of lending that you see, for example, bond markets, banking activity, government lending, etc. These are private transactions that are between private lenders and private borrowers. If you think about it, within the private credit market, borrowers need access to capital, and they try and find access to the capital in many different ways. Private credit has become an important component of that over the last few years. Many of these companies do not have access to traditional forms of financing for many different ways. They can be smaller, they can be more complex transactions, they need something done quickly. There are a whole myriad of reasons why traditional sources of capital are just not a viable solution for these kinds of private borrowers. But then they turn towards private credit to try and fund some of the requirements that they have. So maybe it's building a new factory, maybe they're expanding, maybe it’s a merger and they need some capital to buy this company. Et cetera. And this is where private credit and these alternative lenders come in, where we have dedicated organizations now whose sole job is to provide capital under these circumstances.
So why would you do private credit? Private credit offers borrowers significant options beyond what we traditionally look at. And then they also, for investors, provide potential for higher returns because they tend to be at rates much higher than you would get as a lender in terms of a bond or in case of banks as well.
We've seen private credit become more and more important in the current market conditions for many different reasons. Again, first, banks have sort of pulled back considerably over the past few years, but certainly since the global financial crisis all those years ago and they still haven't come back in the market in the way that we'd expected them to. Secondly, companies themselves have become very complex and they want to have different options as far as investing is concerned. So at this point, the private credit market is almost $2 trillion in size, which is larger than both the high-yield market and the broadly syndicated market. That have been prevalent over the past several decades.

Brian Pietrangelo [00:13:54] Great, so to make the comparison and contrast, if you're a big Fortune 500 company and you want access to capital, you can go to the lending market and you can issue bonds like corporate bonds. But if you are a private corporation, like you said, which is a pretty sizable middle market company perspective across America, there's a lot of private companies, they don't necessarily have that access to issuing bonds so they go to private credit market. Would you agree?

Ather Bajwa [00:14:18] Yeah, Brian, that's exactly right. These are companies that either are too complex, too small, need capital very, very quickly, and just don't have the operational background, for example, to issue a debt in the high-yield market or the leveraged loan market. Banks, as I said, have pulled back considerably. They require more capital. They're only lending to larger companies, etc. So all these companies, essentially their only access is through private capital at this point.

Brian Pietrangelo [00:14:55] And what's happening currently in the private credit market that might be a different opportunity than in the past for investors.

Ather Bajwa [00:15:02] Yeah, Brian. So the market has expanded a lot since the global financial crisis, as we just discussed a minute ago. So it's now almost $2 trillion in size, larger than the high yield market and leverage loan market. So, it is not just a viable, but actually a critical part of the lending landscape right now.
More recently, the reason why private credit has become so prevalent became clear after Liberation Day. So post-Liberation Day, the bond market was essentially closed for between two and three weeks. So there was literally no deal that was priced in the public markets. This is where private credit stepped in. If you wanted to get a deal done, you had a loan that was due, unless you were gonna default or something like that, you're willing to do that, your only option was private credit. And private credit provided that capital, got the deal done at significant premiums to what they would have been able to do in the public market, or the kind of deals that they were doing pre-Liberation Day.
That trend has actually continued since then. It's eased up considerably over the past few weeks, but private credit sort of stepped in once again to provide capital to companies that otherwise would not have any access to it. We've seen that several periods since COVID. So during COVID, it was the same situation during 2022 when we had those massive rate spikes, same situation.
The one thing we have seen, however, deterioration in private credit is the quality of companies coming in and their ability to finance the deals. Of course, as the market has grown, we've seen bad participants move in. So companies that have lower quality have been able to access capital that they wouldn't have otherwise. So we've see a lot of covenant-like deals come in. We are seeing more and more issuance of loans that are what are called payment in kind, basically deferred loan payments, the deferred interest payments. And we've seen more private credit lenders come in who I would call lower quality than they were what we observed just a couple of years ago.
So all of these conditions make private credit both exciting, given sort of the scope. There are many of these deals that were never seen by public markets or private markets. Before have come to where people can invest in them and take advantage of the much higher rates that they're getting in the market. But then at the same time, be careful about the kind of participants now who are entering this market that you have to be very careful about.

Brian Pietrangelo [00:17:28] That's great context, Ather. For our last question for you in our conversation today would really be from an investor perspective. So what are the primary advantages and what are the considerations for investors who are evaluating private credit for their portfolios.

Ather Bajwa [00:17:42] Yeah. Brian, first biggest, I think, advantage just is you're getting significantly higher yield or total return potential with similar sort of risk. So we're talking about anywhere from 3% to 5% above return, what you would get in traditional credit markets, for example, right now. The other thing is the kind of loans that you're getting are very different from treasuries, corporate bonds, high yield bonds. So it is a diversifier and then, of course, when things do go wrong, generally speaking, private credit has much better ability to step in, take over the business, either walk it through bankruptcy much quicker than you would see in other circumstances, or try and right-size the business and make it a going concern once again.
The negative aspect I already sort of covered, we've seen quite a few managers, for example, come in the market who are taking advantage of- they’re seen higher demand for both investors as well as borrowers come in. For us, the number one focus has been to find the kind of managers or the kind of people that we partner with who are experts in this, who've been around for a long time, who have a long-term track record, and who are very transparent and open about the kind of loans that they're making and the companies that they are lending to and the that they're getting right now. So I would encourage investors who are in this space right now or thinking about it to take all of these considerations in mind before making the next investment that they do within private credit.

Brian Pietrangelo [00:19:21] Great. And since we're talking private capital within private credit, talk about liquidity, just so our investors know.

Ather Bajwa [00:19:27] Yeah, Brian, liquidity is challenged here. So as you would expect in all private markets, you should not expect that if you ask for liquidity today, like in a stock or an ETF or mutual fund, you'll get it today or the next day. These are usually long-term investments. So you think in terms of years versus sort of days as terms of liquidity is concerned, There are vehicles that provide liquidity a little bit more quicker. But you always have to be careful if somebody is saying that we can provide you capital with one month notice or one quarter notice. Just take that with a huge pinch of salt, because many times these markets just become less liquid in exactly the wrong sort of circumstances, but liquidity should be one of your key considerations when you think about investing in private capital and private credit under all market conditions.

Brian Pietrangelo [00:20:19] Well, thank you for the conversation today, Steve and Ather. 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.

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