Key Wealth Matters Podcasts

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, 02/14/2025. I'm Brian Pietrangelo, and welcome to the podcast. Happy Valentine's Day to everyone out there. Hope you have a great day no matter what you do.

And interestingly enough, we will talk about CPI inflation later on in the podcast due to the release that came out this Wednesday. But as it relates to Valentine's Day, pretty interesting from an article via CNN this week. Valentine's Day should expect prices for chocolate treats to increase around 10 to 20% over last year as the price of cocoa has more than doubled since the beginning of 2024. The price of cocoa hit a record high of 12,646 per metric ton in December. A lot of bad weather in cocoa producing region of West Africa has caused a lot of inflation.

And in the last two years, the cost of manufacturing chocolate has increased more, but then a 167% according to the producer price index. So as we continue to talk about inflation, that's a really big increase. Hope you're able to take it into consideration for your purchases during this Valentine's Day. 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 Matteo, chief investment officer, Steve Haight, head of equities, and Rajeev Sharma, head of fixed income.

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 adviser. Taking a look at this week's economic and market news, we've got three key economic updates for you. We'll begin first with CPI, the consumer price index measure of inflation, which came in hotter than expected for the month of January 2025 as it increased from December 2024 on a twelve month basis at 3% for all items versus 2.9 last month. Also, core, excluding food and energy, also increased at 3.3% for the month of January versus 3.2% for the previous month.

We've got much increases happening across the curve in terms of energy and goods inflation becoming a little bit more hotter, also persistence in the services inflation component. And second, retail sales came out Friday morning just this morning a few hours ago and showed a decline in the month of January for the advance estimate of negative 0.9 month over month. This is the first time in a while that we've seen such a decline in overall advanced retail sales, so we'll have to consider how that might impact the overall level of consumer spending going forward into 2025. And finally, on the other side of the equation, we've got third, the manufacturing update with regard to industrial production that for January 25 2025 was actually pretty strong, up point 5% coming off the heels of December, which was up 1%. So we've got two consecutive reads for industrial production on the manufacturing side of the economy that shows some relative positivity.

With that, let's turn to our panel for our first discussion and get the reaction of some of the economic news starting with George. Well, those summary points were really, important to call out, Brian. I would think that the market, probably get most of the attention, most interest anyway, on the inflation numbers, which as you noted, were a little bit hotter than expected. And I remember, I think, in January's past, we've seen kind of this seasonal effect. I'm not sure it's just seasonal at the time, but we have to keep that in mind too.

But as you pointed out, things are are still pretty hot. Inflation is not really cooling. We've mentioned this for quite some time where it is getting cooler, but it's not sufficiently cool enough for the Fed to consider backing off. And indeed, I think this report just kind of further validates the notions that the Fed is gonna be on hold for a while. You know, you could kinda parse the numbers in a lot of different ways, you know, month over month, year over year, those kind of things.

But irrespective of how you, put the math together, inflation is is still is still pretty high and prices are at least they maybe the most people when they they think about prices, they think at the level of price, not so much the year over year change and the level of prices is also pretty high. So I think it was pretty broad based too. I think we all saw some uptake in inflation with respect to medical cost, auto insurance, used cars, and even food, which is probably the biggest thing that people pay most attention to when food prices are still a little bit too high. So across the board, inflation is is still hotter than the Fed would like it to be and and that means the Fed's gonna be at least on hold for the foreseeable future as far as I'm concerned. You also are right to point out retail sales.

They're a little bit soft. And I kinda wonder if there's maybe I think a lot of people quickly dismissed that as being somewhat related to weather issues. Of course, it was so cold in parts of the country in last, last few weeks that people probably didn't wanna go shopping very much. And wildfires probably contributed some of that too where people weren't, unfortunately, unable to shop. But I think there's also probably this effect where things have been kind of pulled forward a little bit.

In other words, we had a pretty strong q four, a lot of momentum, a lot of spending and so forth that kind of happened at the end of the year. And maybe that was some of the anticipation of what people thought might be happening with respect to tariffs, which is is certainly topical and gets a lot of attraction, a lot of attention these days, as well. But I suspect these numbers are gonna be kind of, fluky for a while and maybe prone to some distortions. And on the tariff side, I think it is kinda fair to say that there's still a lot of things you don't know. There's, of course, this new mention about reciprocal tariffs, which is some extent sound a little bit more worrisome in the sense that they're gonna be very broad, very broad based.

Many countries are gonna be affected by this. The US is certainly gonna be affected by this, and it probably doesn't, again, suggest prices are higher. I guess if there is a silver lining to reciprocal tariffs though as far as I'm concerned is the notion that those things could actually be moderated more quickly. So in other words, they're harder to actually enact. It takes some more time to implement.

They might be more costly, but at the same time, there's probably some more flexibility that if they need to get rolled back later, they can do so a bit more easily. So we'll see how that plays out. Again, it's it's probably too fair. It's too early to to draw some firm conclusions from this, but I think overall, the key takeaway from this week anyway is that inflation is still a little higher than expected. And I think the other thing we kinda kinda point to that we probably don't, we didn't mention directly is the overall job market, which continues to be pretty strong.

Jobless claims dropped this week as well, and they were, they were actually pretty, pretty moderate as well. So we didn't see any major uptake there, which suggests again the overall labor market, which is solid, and that's where the key is the overall consumer as far as I'm concerned. So, again, a lot of headlines, a lot of back and forth, a lot of concerns, but I think overall, the market seem to take these things in stride. We actually saw yields come down a little bit this week and stock prices up. And, of course, Steve, it was a pretty pretty pretty busy week for earnings.

What were your takeaways from this week and what you kind of glean from some of the earnings reports that were come that that came out this past week? Well, George, earnings has been a headwind for the market since the January. And, you know, if you look at the S and P five hundred's forward earnings line, it peaked just shy of $2.75 shortly after mid January and got down as low as $2.73, here within the last week or so. It's come up very little bit here this week. But, you know, the the the downtrend that we saw from mid January to early February is a bit concerning because I think it it has a chance to play out through the rest of earning season two.

And and that's kind of been playing into the price performance of the S and P 500. Essentially, we've gone nowhere, since the post election rally, and we've been kinda choppy. I I think the market is going through the process of digesting this idea that, earnings growth this year is not gonna be 15%. It's gonna be something lower than that. We came into the year with the the market really thinking 15 was gonna be the number.

Our view has always been that eight to 10 is more likely this year and that you've gotta go through this downshifting of expectations, sometime during the first half of the year that's gonna create, you know, some some choppiness, while the market digests this. And and quite honestly, as we've gone through earning season, that's exactly what we've gotten. It seems like, you know, there's for for lack of a better way to describe it, there's enough chaos coming out of DC that, it's provided kind of cover for companies to take down expectations, and just cite uncertainty. Right? And I think policy uncertainty indices and things like that have have gone to to levels we haven't seen in years, and corporate America is, using the using the the uncertainty, as a way to or as an excuse to to set the bar so low that they can walk over it in the back end of the year.

So I think that that's part of what we're seeing here. And and, again, it's, you know, giving the market a a little bit of pause. That said, I there my Bloomberg screen this morning, and we're within, a a a few points of a new all time high. So it's like the market doesn't seem to care about what's going on with the earnings line or the earnings, guidance right now. The market seems to be shrugging off any of that and powering higher, and that's one of those things that, it's a sign of a bull market.

You know, when the bull market kinda shrugs off, shrugs off uncertainty, it climbs the wall of worry, and that's that's basically where we've been this week. I will say, though, that underneath the hood of the market, when you go go inside and look at market internals, there is some deterioration now, and it's something to keep your eyes on. The technicians such as myself, we pay attention to indications of trend. And one of those simple indications of trend is the the fifty day moving average for a security relative to its two hundred day. We have, service providers that that calculate all this kind of stuff for us.

And and one of the interesting things that I noticed this week was that if you take a look at the percentage of stocks in the S and P 500 with their 50 above their 200, that number has deteriorated from from over 75% at the end of twenty twenty four to 57% today. So what that shows is that there's some deterioration in trend underneath the hood of the market right now, and it's something to to pay attention to. Again, doesn't mean that that the market can't go higher here. It just means that there, right now, are fewer stocks powering the market higher once again, than than what we had at the end of the year when the rally was really broadened out, and it had broadened out to to such that 75 of stocks were in an uptrend. So speaking of trend, Rajeev, I'm gonna get you in the conversation here too for a second.

The trend in credit has actually been really benign too. What we have really seen much concern about the economy, much concern about inflation, or even much concern about the political sphere around tariffs. They really kinda shake up the credit markets. So by our light, I think the credit markets are a pretty good indicator too. But what do you see this week on your screen?

Well, your point, George, is well taken about the credit markets. They've been very well behaved, staying in a tight range. These spreads are pretty resilient, with all the noise happening about tariffs and everything else in the market. That's the one silver lining, I think, in the bond market right now that's not showing any volatility. And you're seeing these credit spreads, really behaving the way they are because there still continues to be this huge demand for corporate bonds.

And, you just can't have enough supply to satisfy the demand right now. And the real rationale is you're getting, blue chip companies that have, very decent yields on them, decent coupons that we haven't seen for a long time, and you're not taking a lot of credit risk to achieve those kind of yields. But where we are seeing volatility is is really, across treasuries and the and the rates market. And there really wasn't much dispute for fixed income about how it was going how the bond markets were gonna react to the CPI print that we saw that was higher than expected across the board. Basically, the Fed, can't really look at those numbers, those CPI numbers, and think about cutting rates when inflation seems to be moving away from their target goal of 2%.

Even if you wanna chalk up this report and call it seasonality, for now, inflation is not acting the way to suggest that policy is restrictive in any way. And it's also even before anybody can even consider anything about what the tariff impact will be on inflation, These numbers are not really looking at something that the Fed is gonna be excited about. And we saw the result of that immediately across the yield curve. We saw bonds selling off sharply, yields moving higher across the yield curve as traders start to price in, not just, higher for longer rates in the near term, but also higher risks for longer rate longer term rates. Specifically, see speaking, we saw the immediate reaction of the two year treasury note yield, which is most sensitive to Fed policy.

That yield moved up seven basis points to 4.35%. The ten year treasury note yield moved at even a higher, at a faster pace, nine basis points to 4.62%. This is a bear bear flattening of the yield curve. And what this also did was it took those multiple rate cut bets off the table. After that CPI print, traders are pretty much calling for just one twenty five basis point rate cut by December, and that was not fully priced in, post the inflected inflation report.

And it's, it it's kind of a sharp turnaround than what we saw last month when the market was expecting two rate cuts for the year. Couple that with Fed chair Powell's comments earlier in the week that pointed towards a Fed that's willing to wait it out and, and really no rush to cut rates until the data supports further rate cuts. Well, this CPI print that we saw did not support further rate cuts. And, again, the market is expecting higher for longer now. But then you get whipsawed in this market.

The very next day we had, after the CPI report, we had the PPI report released. And that data for January came in overall better than expected or in line, and it was enough to bring yields down again. So we saw a reverse. It didn't really change the rate cut outlook for one rate cut of the year, but it did bring down rates, down to pre CPI levels. And traders kinda feel that the PPI numbers will not lead to some kind of material increase in core PCE, which is the Fed's preferred measure of inflation.

But, really, now, all we have really is, you know, we've got the next FOMC meeting is not gonna be until March 18 and the nineteenth. That gives the Fed one more round of monthly job and inflation reports. If we do not see any surprises, in those two, data reports, the Fed will likely remain on pause. And it really shouldn't materially change their rate cut expectations that we're gonna see in their, new summer of economic projections that will be released at the same time. So again, the market is really, again, data dependent, looking at this data, hoping to see inflation not move away from that 2%, target, which it has.

And, I think what's gonna really be important now is, again, those two reports that we're gonna see before the FOMC meeting. Well, speaking of trends, Steve, one thing that's also caught my attention lately is just in some interesting reversions to the mean. I mean, some of the the laggards, of last year have actually turned out from this year. But one quick exception, of course, is what's happened in the commodity complex and copper is breaking out, Seems like a close to a new high or moving trapped up to the right. And and the same thing with gold.

I mean, gold's kinda taken a life on its own. What are you glean from that? Is that a single inflation, or is that a concern about, geopolitical issues? What's what's kind of driving the commodity complex recently, and what should we take away from that? Seems to me, George, that there's there's a couple different things that work in both in both of those cases.

First, with copper, it seems to me that the the market is smelling out some kind of a recovery in China. If you take a look at the price performance this week of the Hang Seng Tech Index, which is a proxy for Chinese tech stocks that trades in in Hong Kong, it skyrocketed to to new multi month highs. So that's kind of a leading indicator for for Chinese stocks. And I think that the the the takeaway for me from that is that the the Chinese are gonna do whatever it takes, to use Mario Draghi's phrase, and that's likely gonna be be bullish for for copper given that their consumption is the largest, in the world. So that's what's going on there.

But I think gold is kind of an an interesting case in and of itself because, I I think that the the move in gold has been happening over a multi month, if not multi year period if you go back, to to, again, multi year. But the the move here recently seems to have accelerated to the upside on policy uncertainty here in The US. The US has been viewed as a reliable partner by by the most of the countries in the world for quite a while. They park their money in US treasuries, and I think that the administration's, tariff commentary where they are, putting putting tariffs on on, or talking about putting tariffs on friendly country, That has kind of changed the game, so you don't have just countries like Russia and Iran and and China talking about, or buying gold anymore. You've got countries that used to be viewed as friends talking about needing to buy gold instead of treasuries right now.

So I think all of this is kind of combined to push the gold price higher. I mean, and we're within hailing distance of $3,000 now, and, you know, people had had looked at that 3,000 number as something that maybe we would we would get to at some point this year, and and I I I look at my Bloomberg screen, and we're almost there. So, you know, some it's very clear that that there's, like, a powerful, push behind that, and I think it's largely driven by by what's happening in Washington. So it's a good reminder that as we've talked about for quite some time, we'd actually been recommending that clients use real assets as a way to hedge some of the uncertainty in your portfolio and the broader uncertainty around the world these data teams. But I think overall, it's really just kind of emphasizes the point of really being diversified and that that's gonna be important for us for much of this year.

A lot of volatility, a lot of headlines to contend with. But I think really staying diversified, staying invested is also important too. Not really trying to jump in and out of market. So it's really recommended and, and really just kind of being patient and disciplined is gonna be important too. So, again, it's gonna save the course for us in that sense, knowing that there's a lot of things that could come our way.

Some things we can kind of anticipate, some things we just clearly can't. So really diversification and prudence and discipline is gonna really, I think, be the winning strategy for much of this year. Well, thanks for the conversation today, George, Steven, Rajeev. We appreciate your insights. And thanks to our listeners for joining us today.

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Brian Pietrangelo:

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, February 7th, 2025. I'm Brian Pietrangelo and welcome to the podcast. And as we head into the weekend, Sunday is the Super Bowl where the NFL does show up its best and we'll see who wins the game and talk about it on Monday at the water cooler. 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. Some might say they're the best in the business as well. Steve Hoedt, head of Equities, Rajeev Sharma, head of Fixed Income, and Conner Cloetingh, director of Equity Research and Portfolio Management.

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 key economic releases for you this week. Beginning first with the Institute for Supply Management, Purchasing Managers' Indices, which on the manufacturing side registered 50.9% in January, which was up 1.7 percentage points from December. Manufacturing activity expanded in January after 26 consecutive months of contraction.

On the services side of the economy, it registered 52.8%, which was 1.2 percentage points lower than December. And economic activity in the services sector expanded for the seventh consecutive month in January, and expanded for the 53rd out of 56 months since recovering from the Coronavirus pandemic back in June of 2020. Second, job openings in the United States, as courtesy of the JOLTS report earlier in the week, came in at 7.6 million for December, which was down from 8.1 million in November, which, again, is an indicator that employers are not posting as many jobs as they once were, which may indicate some directional slowing in the labor market.

And third, are a final update just came in this morning at 8:30 from also the Bureau of Labor Statistics on the employment situation, which carries a couple key items within it. That being the new non-farm payrolls, which came in at up 143,000 in the month of January from the prior month. In addition, even though that was slightly below estimates, the revisions for November and December combined were revised up by 100,000. The unemployment rate ticked down by 1/10 to 4.0% for January. And average hourly earnings for the last 12 months were up plus 4.1%, so still a little high in terms of overall earnings and labor costs. So net-net, the employment situation report was somewhat benign and neutral given multiple factors that we just shared with you this morning.

So now, let's turn to our panel first, and we will start with Rajeev to get his take on what this employment data might mean for the Fed. And in an analogy from last week, with Groundhog Day having six more weeks of winter, do we think we'll have six more weeks of the Fed holding pat in terms of interest rates and the Fed funds rate based on this data? Rajeev.

Rajeev Sharma:

Well, Brian, I think the Fed is going to continue to be data dependent after the jobs number. The employment situation is still stronger than expected on balance. But even if non-farm payroll is increased by 143,000 in January, if we look at the immediate reaction from the market, the market continues to believe that the Fed will cut rates this year, but it didn't really move the needle as far as how many rate cuts we're going to get this year. Right now, we're thinking about, if you look at the rate cut expectations, maybe two rate cuts in 2025. There's a 60% chance that we get two rate cuts. So really, right now I think the market's focused on the July FOMC meeting. And that meeting is going to be the one that, right now, the odds are for 125 base spread rate cut.

But we did see some market movers this week. We had Fedspeak this week. We had Dallas Fed president, Lori Logan, come into the tape and she pretty much had a hawkish outlook for the Fed. She spoke about inflation, she spoke about keeping inflation expectations in line. She said trade policy could substantially affect the economy. And she also said that a strong labor market may make the Fed want to delay any further rate cuts. It was a hawkish sentiment. I think the Treasury market reacted to it. Again, every data point is extremely important, especially inflation data and especially jobs numbers. I think right now the narrative from the Fed, from all the Fed speakers that we heard this week, is that the Fed is in no hurry to cut rates right now.

It hasn't really moved the yield curve too much, but what I can say is that the yield curve has flattened. What that means, really, is that the front end of the yield curve yields have moved higher at a faster clip than the ten-year and beyond. And again, you see the ten-year around 4.5%. I think we could stay here for a little bit longer.

Brian Pietrangelo:

Great, Rajeev. And thinking about the yield curve, it's interesting, I'd like you to opine on some commentary we saw from US Treasury Secretary Scott Bessent and his comment on issuing treasury debt in the form of bills rather than in the form of long-term bonds. What does that mean and could you explain that to our listeners and what it might mean for the overall yield curve?

Rajeev Sharma:

I think there is a big concern in the treasury market right now that they were going to issue longer term debt. And by saying bills, I think that really puts a lot of pressure in the front end. And the refunding announcement that Scott Bessent gave on Wednesday, it really should support central bank liquidity. But really, at this point, I think you're going to, again, see the flattening of the yield curve based on his comments because you're going to see more issuance in the front end.

He didn't really mince words and he really talked about the reliance on bills to help finance the budget deficit he's causing for a potential of... What do you call? Quote unquote, "a financial accident." So, I think bills outstanding as a percentage of the total treasury debt has remained pretty steady last year. I think now we're going to see more issuance in the front end and that could put pressure on the front end, causing a flattening of the yield curve because you'll see front end yields move higher.

Brian Pietrangelo:

Great. Thanks, Rajeev. Now, let's turn to Steve and Conner to get their take collectively on what's happening in the stock market. And we'll start with you, Steve, on your observations and maybe talk a little bit about the Trump tariffs and what it means for the markets and what else is on your mind. Steve.

Stephen Hoedt:

Hey, Brian. It's Groundhog Day. And when you take a look at the market this week, the reason why I'm emphasizing Groundhog Day is because the market literally was a Groundhog week, this week, compared to last week. It was the exact same week. Two weeks ago, we had the DeepSeek news over the weekend. It caused the market to take a header on Monday morning, volatility spiked, and then the entire rest of the week we went up and volatility fell. Last weekend we had the Trump tariff announcement over the weekend. It caused the market to take a header on Monday morning, volatility spiked, and then the exact same thing ensued over the course of the week with the market melting up and volatility melting down. So, it was literally a Groundhog week.

Now, what I find interesting about this is the comments that we said last week are pretty much the same this week. And that is the fact that we recovered the way that we did, it shows that the underlying bid in this market is really, really strong. A lot of the data that I've been seeing says that there's a strong retail bid to it, which can start to get a little bit concerning from a sentiment standpoint if things start to feel a little bit frothy. But the trend is your friend until it ends. And right now, we don't see the trend ending. There are a couple of things are flagging positive, and then one thing that's been a little bit negative. And then, I'll pass it over to Conner to talk a little bit more about that.

So credit, we've talked about credit being the real tell for the stock market for a long time on these calls and other venues. And once again, just like last week, there was no movement in the credit markets in response to the tariff news. So BBB, versus BB spreads stayed very tight. We remain near all time tights in the credit market. And essentially, our view on a intermediate to long-term basis is, as long as there's not a credit dislocation or something that causes a problem for the credit market, the equity markets remain a place where our clients and investors want to be.

The second thing was, from a breadth standpoint, in terms of market participation, we're on a cusp of seeing the cumulative advance decline line confirm the move to market highs. That's a technical way of saying that more stocks are going up than stocks are going down, and we want to see more stocks participate in the move in the market instead of what we saw last year, which was a very concentrated market with the Mag 7 driving performance. So from our standpoint, we've talked for a while about seeing things broaden out and it looks like that's happening.

The one flying in the ointment, from my perspective, has been what we've been hearing out of the fundamental side on corporate earnings. Because if you look at the forward 12 month earnings line on the S&P 500, now it's been trending down for three plus weeks. Guidance has been disappointing from corporates. And on that note, I'd like to bring Conner into the conversation. Conner Cloetingh is my colleague on the equity team. He manages our special ventures product, which is our small and mid-cap SMA. And he also has a penchant for the green eye shade work on the accounting and earnings. So Conner, what are you seeing in the earnings numbers as we go through this reporting season?

Conner Cloetingh:

Yeah. I mean, it's been a exciting earning season to say the least. I mean, companies, their number one job this time of year is, one, close the books on 2024. But then, also provide the investors in the sell side guidance for 2025 earnings. And what we've seen is with these changes, the DeepSeek news and then following tariffs, were literally tariff policy was changing mid-earnings calls and analysts were updating management teams on what was happening with tariffs. It has made it harder for them to give accurate forward guidance than in the past. But I think, on the margin, what we've seen is companies just basically excluding any tariff impact from earnings because they don't really know and no one really knows yet. So taking that into account, there could be another shoot-a-drop if some of these tariff policies do stay around, do get implemented and stay around for a long period of time. But I think we might have to wait until next quarter's earnings calls to get more clarity on guidance on that front.

But just overall, I think the earning season from fourth quarter beats versus misses has been about average to the last five years. 77% of companies have beat, so nothing too out of the ordinary there. But then, I just wanted to touch on a little bit more, give some additional context on what Steve was referring to on market breadth just from a sector perspective. The only sector down year to date is the info technology, which makes sense with NVIDIA and the DeepSeek news that we've seen. Every other sector in the market is up, and up pretty positively, which is showing that even though tech was driving the returns the last few years, the rest of the market is pulling its weight.

And then, just from a broader index perspective, we see the S&P 500, the S&P 500 equal weight, and the S&P 1000, which is the small and mid-cap benchmark that I use in special ventures, year-to-date performance are all within 30 to 40 basis points of each other. So, we've seen a market that is very much healthy, outside of the news we've seen in DeepSeek, and it doesn't seem like tariffs are really spooking investors too much. They're hoping that there'll be some type of resolution. But as it relates to earnings for the remainder of the year, I think still more to come.

Stephen Hoedt:

Yeah. The one thing that it seems very clear to me is the fact that we got these cross currents into the market, whether it was DeepSeek two weeks ago or the tariff stuff, it's given corporate management cover to lower the bar. And the one thing that they love to do at this time of year is always lower the bar because it's a lot easier to have a bar that you can trip over that's set on the ground over the rest of the year, than it is to have expectations high.

So they've gotten carte blanche, from the incoming administration and then the rest of the news flow, to be able to reset the bar lower without really having to pay too much of a penalty in terms of market expectations for this. Because there's a huge excuse to set the bar lower. So, why wouldn't you set the bar lower? And it feels like that's exactly what they've done.

Brian Pietrangelo:

Great. Great content. Conner, Steve, thanks so much for sharing. And we'll finish up the podcast today with a pretty important question going into Sunday. Who are you rooting for? Who do you think will win the Superbowl? I will start with my prediction. Although I think it's going to be extraordinarily tight, I think the Chiefs will pull it off and be the only one to come into the third Superbowl in a row. But let's go around the horn with you real quick. Rajeev, we'll start with you and then finish with Conner and Steve.

Rajeev Sharma:

Absolutely the Philadelphia Eagles are going to win this thing. I really feel that this is their time. They've got a better team on the roster. But if the refs start playing games, then I don't know.

Brian Pietrangelo:

Steven and Conner.

Stephen Hoedt:

Go ahead, Conner.

Conner Cloetingh:

I think we're in the same boat on this one. As a Lions fan and seeing the odds that the Lions were favored to win the Superbowl leading into the playoffs, it's going to be a rough one this year. I don't know how much of it I can watch, to be honest.

Stephen Hoedt:

And I'm the same. For those that don't know, we're both based here in [inaudible 00:15:50] and we tend to wear our colors on our sleeves here. So, it's a little bit too close to the heart to watch the Superbowl without the Lions, given that that's where they were supposed to be, and they're not there. My only comment on it is any neutrals around the country, nobody wanted to see the rematch, guys. Nobody wanted to see.

Rajeev Sharma:

Well, I guess the Cleveland Browns will get there one day, We'll see if that happens, Brian.

Brian Pietrangelo:

That's a favorite saying in Cleveland, there's always next year. But in 50 plus years of that not occurring since they won pre-Superbowl in the 60s, they still haven't had a crack at the actual official Superbowl.

Stephen Hoedt:

Only two and a half months to the draft, Brian. Browns fans live for the draft.

Brian Pietrangelo:

Well, thanks for the conversation today, Steve, Rajeev and Conner. 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.

Speaker 1:

We gather data and information from specialized sources and financial databases, including but not limited to, Bloomberg Finance L.P., 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, Key Bank Institutional Advisors and Key Private Client are marketing names for Key Bank National Association or Key Bank, 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 Key Bank 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 it may not necessarily represent the views of Key Bank 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. Key Bank, nor its subsidiaries or affiliates, represent, warrant or guarantee that this material is accurate, complete or suitable for any purpose or any investor, and 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 Key Bank. 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.

Brian Pietrangelo:

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, January 31st, 2025. I'm Brian Pietrangelo and welcome to the podcast. We've got a lot to share with you this morning on our podcast today. But before we begin, we would certainly like to take a pause and acknowledge the horrific airline tragedy in DC this week, and our hearts and prayers grow out to all of those affected and the families, of course.

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 Mateo, chief investment officer, Steve Hoedt, head of equities, Rajeev Sharma, head of fixed income, and Cindy Honcharenko, director of fixed income portfolio management. 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 activity, we've got three pieces of information for you on the market and two pieces of information regarding the economic releases for the week. In terms of the three pieces of information on market activity, we're going to dive in with our podcast panel, especially Steve, to talk about the market volatility this week in a reaction to the DeepSeek announcement regarding AI. We'll also talk to Steve about some tech earnings this week that were somewhat drivers of the market in general. Third, we'll also talk about the federal open market committee meeting and their press conference on Wednesday of this week.

For the two pieces of economic data just yesterday we'll start with the gross domestic product for the United States came out with its advanced estimate or first estimate from the Bureau of Economic Analysis for the fourth quarter of 2024. The annualized rate for the quarter came in at 2.3% for the fourth quarter, which was lower than the third quarter, which was at 3.1%. Overall, consumer spending continued to remain strong within the quarter. Government spending helped a little bit. Imports and exports were a wash, and the overall private investment and inventories was somewhat of a slight drag. Ultimately, overall decent consumer spending continued to drive overall real GDP in the fourth quarter.

Second, just this morning earlier from also the Bureau of Economic Analysis, the Personal Consumption Expenditures Measure of Inflation, which is again the Fed's preferred measure, PCE inflation, excluding food and energy, came in year-over-year for the month of December at a 2.8% rate, which is the third consecutive month at 2.8%, and it has not declined for more than six months. We'll definitely talk about what that inflation read might mean for future Fed decisions and fed policy. Leading to that, we will start with our panel today with Cindy to give us a recap on Wednesday's Federal Open Market Committee meeting. Cindy?

Cindy Honcharenko:

The committee maintained the current federal funds rate target range at four and a quarter or 4.5%. The rate paid on bank reserve balances also stayed unchanged at 4.40% and no change to the balance sheet runoff 25 billion per month for treasuries and 35 billion per month for mortgages still stands. The description of the labor market and the inflation environment and the policy statement were edited. At first glance, the shift looked somewhat hawkish, but they were very small shifts, and when viewed in the context of keeping rates steady. Paul and his colleagues had clearly flagged their intent to keep rates steady during the intermeeting period and the revisions to the December SEP show a greater concern about stalling inflation, so it logically flows that they would drop a reference to making more progress. The press peppered Powell with questions that either he couldn't or wouldn't answer regarding hypotheticals on tariff shifts in fiscal policy or his relationship and interaction with President Trump.

The most significant comments were those in response to a question about whether discussions had begun about the plan for ending QT. Powell responded with a comment that data are consistent with abundant reserves. They're monitoring the situation based on a host of metrics, and they will make adjustments when it becomes clear that they're necessary. Previously, the expectation was that QT would end in March, but that view does not look particularly likely now at this point. Now, these expectations have been pushed back to June.

Finally, Powell was also asked about whether a March cut was on the table and he responded that they were in no hurry. Going forward, investors I think need to anticipate that this hold on rates could be for an extended period. The length of the committee's policy hold may be correlated by how long tariff uncertainty exists. This could take several months, but from my perspective, the direction of travel would be set by the details of tariff policy. As we note from yesterday, it now appears that the administration will be imposing tariffs on a larger scale. We could eventually see a path to rate hikes because of this. George, Rajeev, I'd like to know your takeaways from the FOMC on Wednesday.

George Mateyo:

Well, I don't think they did a whole lot, and that's probably by design. I don't think they wanted to wait too far deep into the waters of policymaking and let the other end of whatever it is, Pennsylvania Avenue, not quite anyway, the other end of Washington to try and figure out what happens next, I think. As you mentioned, this weekend will be an interesting weekend. I think, Cindy, with respect to tariffs, and frankly, there's a lot of wild cards that go into that, right? We don't know how other countries are going to respond. We don't know what other companies might do in response to that, and we also don't know how long they might last or are they broadly applied? Are they focused on certain goods? There's just a lot of unknowns, frankly, a lot of known unknowns, I guess, and a lot of unknown unknowns too.

I think the market's going to have to deal with some uncertainty for a while now, and the Fed probably is beholden to that, too. I think they're all frozen place for a little bit, thankfully. I think the overall economic data continues to be pretty good as we see it though. The overall backdrop is in pretty good shape as we enter this period of uncertainty, and sometimes when you have that environment, it's probably best not to do much of anything major to your portfolio, because I think you [inaudible 00:06:53] just focused on the news too much. I guess. Rajeev, we've all been talking about the Treasury auction market in terms of the overall demand for Treasuries. Have you seen anything that's changed in that space?

Rajeev Sharma:

Well, I really think that in rates moving higher, George, you actually saw a little bit of a fear in the market that rates could continue to go towards say 5% on the tenure, and that gave investors a pause. When the auctions were coming out, investors are demanding higher yields to participate in those auctions, so they weren't really doing very well. Then yields started moving lower, and I think now the auction market looks like it get more traction because investors are feeling that we're further away from 5% than we were just a few weeks ago, even though we're around four and a half percent on the tenure. But I think that the feeling in the market right now is that yields could go lower. Like Cindy said, we did not get that rate cut and no one expected the rate cut this month, but with the statement removing language about making progress towards the Fed's 2% inflation goal, that was enough to make this a hawkish statement by the Fed, in my opinion.

Fed chair Powell tried to mask that by saying that we're doing a little language cleanup, but I don't think the market really believed that. The knee-jerk reaction by the market after the FOMC meeting was that yields moved higher and the path of future rate cuts now comes into question again. We have a Fed that's always been that they're data-dependent, market expectations are data-dependent and inflation seems to be front and center. The next Fed meeting we have is now going to be in March, so it does give the market a little bit of a breather, and it gives us some time to get more data points. I think that the Fed's preferred measure of an underlying inflation that came out today, the Core Personal Consumption Index, it remained pretty muted in December. Again, further rate of cut expectations move to about two rate cuts this year.

But there was, before the Fed meeting, I think the market was really anticipating a one in third chance the Fed would cut March. That's pretty much off the table right now. The Treasury market is still pricing the expectations that Fed rate cuts will happen in June, but I really don't see anything in the data right now that suggests that the Fed would be in any hurry to cut rates. Your point towards auctions, when these auctions come out, I think the market is really trying to figure out whether rates are going to go lower from where they are now or whether they're going to go higher from where they're now. There's been a lot of expectations to extend, duration, participate in 10 year auctions, 20 year auctions, 30 year auctions. But I think a lot of investors right now want to stay short or at least neutral towards duration.

We still subscribe to the fact that the Fed is in no hurry to cut rates. It's likely to be a second half of the year rate cut story if it even comes through. But I really think that the GDP report that came out, it impacted Fed fund futures. It cast down on whether we get any rate cuts at all for 2025, and as Cindy mentioned, the tariffs in Canada and Mexico, that will definitely throw some fear of inflation back into play. With that fear, you can see the rate cut expectations start to diminish.

George Mateyo:

What was really interesting I think this week with respect to the Fed was the fact that the news itself was buried beneath the crease as they call it, right? If you open up the newspaper, there's a top story of the day and then the bottom.

Stephen Hoedt:

What's the newspaper, George?

George Mateyo:

What's the newspaper, Steve? Well, it's this whole thing that once in a while we used to find our news from as opposed to our phone. But that's a good question and we'll talk about that. We'll talk about disruption and innovation in a second because I think that's a good segue, Steve. I'm sure you didn't mean it that way, but it's a good segue.

Anyway, I think it was interesting to see that the Fed news was on most, I guess, news feeds, we'll say Steve, further down the page or further down on your phone, depending on what you're looking at to get your news. The Fed, there's a lot of headlines regarding the tech sector this week. This time last week, we were starting to hear something about this thing called DeepSeek, and then it really morphed over the weekend.

It really took on a life its own. Again, to Steve, and I'll kick it over to you for a second, we have this moment in artificial intelligence where there's a lot of innovation happening, [inaudible 00:11:08] disruption. Maybe we can just talk about that and what you saw this week unfold with respect to what happened in technology.

Stephen Hoedt:

Yeah, well, just to look at the market last Friday, the close on the S&P 500 was 6,101, and today I stare at my Bloomberg screen at 10:15 in the morning as we're recording this. The S&P 500 is at 6,107. You would think-

George Mateyo:

Progress.

Stephen Hoedt:

Yeah, you would think that nothing happened this week, right? When we came in on Monday morning with this DeepSeek News over the weekend, it was total panic in the tech space. We saw NVIDIA, which is arguably the most important stock to the market, not necessarily from a market cap perspective, but if you look at the percentage of returns that has contributed to the S&P 500 over the last couple of years, it is a significant chunk of the S&P 500's total returns. That stock was down 17% on Monday, so we had a huge gap down, but literally every day the rest of the week we've climbed higher.

To the point that on a chart basis, you would be hard-pressed to think that anything happened. I find it very interesting that the market has been so resilient in the face of this news, which on the face of it on Monday morning caused people to start the process of reevaluating whether or not US technology shares really deserve the premium that they've been trading at in the market if a small startup in China can do something that the quote, unquote, hyperscalers have been trying to do and spending literally tens of billions of dollars to do so, right? I think we got some information as the week progressed that said maybe the things weren't as much as they seem on the face of it from the DeepSeek news, I know the US government's investigating whether they got NVIDIA chips through Singapore, it looks like they were actually running the high-end chips and they got transshipped into China through third parties using shell companies and other stuff.

That's fresh news this morning. I would tell you that when you look at the news that came out of Microsoft and Meta after the close on Wednesday, I think it was incredibly important for them to basically say all systems go on their planned spend on AI. If they had come out and said... For example, Meta had said 60 to 65 billion prior to this, if they had said, "Okay, we're going to reevaluate our spend based on this news," I think it would've been game over for the AI thematic in the market. I think people would've been thinking that there was something really big happening in terms of a sea change. It doesn't look that way today. I think that we definitely have seen change in terms of maybe a wake-up call for the tech companies and maybe also a wake-up call for tech investors to be a little bit more discerning about what they're paying for.

To be honest, anytime that you've got a dominant narrative in the market and there's a premium valuation assigned to that narrative, any change in that narrative can result in a massive move in price. I think that's what we saw on Monday. It wouldn't surprise me that over time we continue to see this because as you get innovation and news dribbling into the market, whether it's from China, Europe, God knows where, it's going to impact things. Because again, when you have a dominant narrative theme and a premium ascribed to that, changes to that narrative have larger impacts than what people might expect.

George Mateyo:

Yeah, I think we're all, on this call anyway, old enough to recall what happened the last time we saw this level of excitement around technology and the infrastructure build that went with it. I think one thing that you're referencing, Steve, is important for people to recognize is that when you have a new technology, some type of breakthrough innovation, usually companies come to the market, they seize that opportunity or they try to, anyway, capital flies in the market pretty quickly. Then lo and behold, the investor communities you pointed out, gets wind of that and ultimately they bid up valuations to the point of maybe a bubble. I don't think we're in a bubble right now, but I think that the conditions are a little bit ripe for one, if we're not careful.

But economically speaking, or fundamentally speaking, we saw the overall notion that when you have this massive build-out infrastructure, usually that leads to malinvestment, meaning people are spending money on things that they really aren't going to get a return on profit back. We have to be aware of that. I think it is important note that some of these big tech companies are still spending pretty aggressively, but we have to be mindful that they might actually see, we haven't seen the big killer app yet either. We haven't really seen what people use AI for. I think we have to be vigilant about that as well, don't you think?

Stephen Hoedt:

That's the one thing that concerns me the most is that we're 18 months into this now, maybe even a little more than that, and we have yet to see the true killer app emerge. I can't believe that the killer app is a chatbot on your phone, right? The killer app has to be an application of that. I think part of what we saw in terms of the market discerning winners and losers from this new information was the performance of software stocks relative to semiconductors, right? Semiconductors all along this have been viewed as the key enabler. NVIDIA has been the poster child for it, but there've been a lot of other semiconductor stocks that have also benefited, Broadcom, Marvell technologies, these are other names in the market. But I would tell you, if you look at what happened on Monday and what's persisted this week is you've seen a small and mid-cap software names outperforming the market on a relative basis.

Essentially, what that's telling you is that if we were in a world before where these hyperscalers had to spend tens of billions of dollars be able to put AI into their products, if you get a massive decrease in the amount of money that's necessary to put an AI product into the market or an AI-enabled product, it opens the door for massive amounts of innovation by much smaller companies. When we think about what that means, you've got all kinds of small and mid-cap software companies that could embed things in here and be able to sell to their markets and have their clients have enhanced productivity from this, theoretically. Again, we don't know what the killer app is. I doubt that it's a chatbot app, but at some point the innovation seems like it's going to continue and we will get to a point where we see something that's going to enhance productivity for the end users, the adopters, as we call them, right, George?

George Mateyo:

Yeah, that's right, Steve. I think if people want to take a look at the list of sectors that we think are probably more adopters versus enablers, we're happy to send them along because I do think the market, as you pointed out, is starting to get bifurcated. Maybe investors are becoming a bit more discerning rather than just owning a handful of stocks on one sector. I think that's the key message here. I think we have to acknowledge that people are going to be more discerning going forward. I think, again, we are in this transition at some point from the enablement phase of artificial intelligence to the adoption phase, and that usually takes a while, but once it takes hold, it is very broad-based and many sectors of the economy should benefit from that over a long period of time. The other thing I think we've been pointing out over this discussion on AI for the last, I call it 18 months or so, is that I think in some ways people overestimate the benefits of a new technology in the short term, but they underestimate the benefits on the long term.

That's a quote, I think, that that's loosely attributed to Bill Gates of the co-founder of Microsoft, but I think it's pretty accurate. I think that's been played out over time where I think people get overexcited in the near term and they recognize maybe the potential too early, but then they underestimate the long-term benefit over the long run. Again, I think for us, as investors need to recognize that we think we are going through this period, we talked about at the beginning of this call, that maybe more uncertainty, not less is going to be the narrative going forward. With that comes this notion of maybe higher volatility. In our view, we think it's important to really revisit exposures, look at single stock concentration risks. Maybe you have a certain stock in your portfolio that might be an outside position.

You look at certain sector performance. Again, there, too, over the last few years, there's been a bit of wide dispersion amongst growth sectors versus value sectors. Again, we're not trying to disavow ourselves and try to say you don't want to own technology, but at some point you want to rebalance your portfolio potentially at the margin. The same thing overall. We've been overweight US markets relative to the international markets, and I think at some point maybe that reverts a little bit, but again, we want to be mindful of how we position our portfolios there, too. But that said, it's just important to really look at your exposure right now as you think about this transition that we're starting to undergo right now.

Brian Pietrangelo:

Well, thanks for the conversation today, George, Rajeev, Steve and Cindy, 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. Reach out to your relationship manager, portfolio strategist or financial advisor for more information, and we'll catch up within next week to see how the world and the markets have changed and provide those keys to help you navigate your financial journey.

Speaker 6:

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 News Plus, 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. Key Bank Institutional advisors and Key Private Client are marketing names for Key Bank National Association or Key Bank and certain affiliates such as Key Investment Services, LLC or KIS, and Key Corp Insurance Agency, USA Inc., or KIA. The Key Wealth Institute is comprised of financial professionals representing Key Bank 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 it may not necessarily represent the views of Key Bank 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. Key Bank 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 Key Bank. 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.

Brian Pietrangelo:

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, January 24th 2025. I'm Brian Pietrangelo, and welcome to the podcast.

As you may have noticed, across most of America we've been in a cold snap, and as a result I caught a little bit of a cold myself. So sorry for the scratchy voice this morning, we'll get through it. We've got a great presentation for our audience with our normal guest speakers.

I'd 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. Steve Hoedt, head of equities. And Rajeev Sharma, head of fixed income.

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 activity, the economic release calendar was extraordinarily light this week. So we only have a few data points to share with you, one being the initial unemployment claims that came out for the week ending January 18, at 223,000, which remained stable. These claims numbers have been in a corridor between 200,000 and 250,000 for roughly the last 12 to 15 months, and that's a good sign that the overall employment market continues to remain resilient. Second, we've got the upcoming Federal Open Market Committee, or FOMC, meeting next week, which is always a two-day meeting ending on a Wednesday. So we'll have our panel talk about what that might have in terms of implications for the markets and the economy.

With that, let's move right to Steve to get his thoughts on the overall stock market activity, what earnings for Q4 of 2024 might be looking at, and other observations that Steve normally shares with us. Steve?

Stephen Hoedt:

Well Brian, it definitely wasn't a very busy week on the economic front. But sometimes interesting things happen in the market no matter what, and this was one of those weeks where we've had a lot of positive sentiment in the market since early November regarding the change in administration, and obviously we got the change completed on Monday. And we had had a bit of a pullback in the markets in late December, and I've been kind of looking for some signs that we were going to see the bull reassert itself, and we got a couple of those this week. One of the things that I watch is the 20-day highs within the S&P 500 Index, and typically when that gets above 50% of the stocks in the S&P 500 making a 20-day-high... And we look at 20 day, because 20 days is effectively one month of trading activity. That sends an all-clear sign for the market that things are looking good. And a couple days ago we hit over 50% of the S&P 500 trading at a new one-month high, so to me that was a significant event. As late as December, we had been below 5% of the market trading at one-month highs, so quite the reversal there in less than a month worth of trading activity. So a pretty impressive surge in what we call breadth, market participation, during this week in particular.

The other thing that really caught my attention was the fact that volatility has dropped like a rock, and that is really important. When you see volatility falling, typically stocks are rising. Because, for a whole host of reasons, we have gotten down below 15 on the CBOE Volatility Index this week. As late as just a couple of weeks ago, we were still pushing close to 20. So the fact that we've come in over five handles on the volatility index is really impressive, and we've not gotten back to the lows that we saw late last year or in the early part of 2024 when we were trading down around 12. And I have no idea if we're going to get down that low or not, but simply the fact that the market, the volatility has come off the boil as the market has seen this expansion in breadth, starts to tell us that things are looking pretty good.

And then as we get into the earnings season, the earnings for the large-cap banks are the first ones to go typically, and those earnings numbers have come in pretty good across the board. We've said for quite a while that we believe that the banks in particular benefit from this change in regulatory environment that we got with the switch in administration. I mean it seems to us that there's some leadership asserting itself in these more cyclical portions of the market now, which is also a pretty bullish factor as we had into the first quarter. So that's a trifecta where you've got new leadership emerging, you've got participation broadening and volatility falling, and all those things are bullish for us, for our view.

George Mateyo:

So in terms of the bullish setup, Steve, you've been recently making a few portfolio moves and getting positioned for this year. Can you just walk us through at a high level of some of the things you've been doing with respect to the portfolios that [inaudible 00:05:55] manage?

Stephen Hoedt:

Yeah. Well first, George, to the point about cyclical exposure, we've continued to add a little bit to our cyclical exposure there. Again, we really do like the banks. We think that is a clear area where we want to be over-weighted within the market. And then we've made some changes to some of our positioning within the mega-cap names within the S&P 500. In the healthcare sector, we see some things going on there where we don't feel like some of the bigger names in the benchmark need to be owned anymore, or at the weights that they are, and we think that there are opportunities within medical technology companies and things like that that are better.

And then again, over in some of the AI exposure, I think that we're kind of nuanced with that. Because obviously we do have the semiconductor exposure in our portfolios and we think that semis remain the clear "arms dealer" for the AI revolution. And we want that exposure, but we think it's very... It's also expensive. And when we look at some of the other ancillary plays in the tech space, things that make connectors and stuff like that, if you look at where those stocks are trading valuation wise, we think that they're a bit out of whack with where they should be. So we've actually had a couple of standing positions in the portfolio that we've exited, where we've held those things for multiple years prior to even the AI exposure, and we just felt like we needed to make some adjustments there.

And then finally, elsewhere within some of the mega-caps, we think it's time to have a more nuanced approach regarding things like social media exposure and things like that, where we see a changing landscape with the new administration and we just think that you need to have a little bit more nuance in terms of how you handle the mega-caps that have the social media exposure in their portfolio. So quite a bit of activity in our start to the new year.

George Mateyo:

So in terms of the administration, one thing I guess to Rajeev I'll turn it over to you, one thing the administration has been talking about now is getting interest rates down. I mean there's almost this declaration or maybe kind of a decree that interest rates across the globe should be lower according to the new president. How do you process that? Do you think the Fed is really paying attention to that? What's your thoughts on that bold assertion?

Rajeev Sharma:

Well, it's a really good question. Definitely got a lot of headlines, George, with President Trump saying he wants rates to be lower. He wants to make a phone call with Jerome Powell and talk about rates. The Fed's independence I think is going to be something, the narrative that's going to continue out of the Fed, that we are going to look at our dual mandate. We're data dependent, we will continue to look at our data before making any rate cut moves. And I think what's important here is that there's going to be a lot of jawboning that we're going to have to be ready for in the markets. And I think the bond market didn't really react... At least the bond market did not, I know the stock market did, like those comments about lower rates. The bond market kind of really took with a grain of salt that, "Okay, this is just the beginning of a lot of narrative that's going to come out, a lot of back and forth that's going to come out".

The bond market itself really was doing well after the CPI numbers came out last week, and the bond market kind of breathed a sigh of relief. And then the market breathed another sigh of relief this week when the inauguration of Donald Trump happened on Monday, and that's because as President Trump was making all these executive orders and giving public statements, he did not announce anything regarding tariff increases on day one of his presidency. And traders are viewing tariffs now more as a negotiating tactic, even if tariffs were discussed for Canada and Mexico to start February 1st, yields did move lower right after the inauguration of Donald Trump. If we look at where the current rate cut expectations are, they haven't really moved based on comments from Donald Trump yesterday about the rates being lower going forward, he wants rates to be lowered. Market didn't really move on that.

The market right now is really calling for the first-rate cut to be on June 18th. FOMC made it about a 90% probability by the market right now that we get that first-rate cut on June 18th. I personally think that's a little aggressive. There's a 50/50 chance of a first 25 base point rate cut coming as soon as May 7th. I think that's very aggressive. The market odds right now are that we at least get one rate cut this year, and about a 62% probability that we get two. So things have changed a lot. I think these probabilities have not really changed based on statements from Donald Trump, I think these probabilities have really changed based on the data. So you get that inflation report that pretty much comes in line with expectations, that was enough for the market to feel like, "Okay, we can finally get back on track for an easing cycle".

There were actually, before that CPI number came out, there were people actually thinking that perhaps we'd get a rate hike this year. So some of that has been dashed after those inflation reports. I really feel like the market's going to continue to look at data going forward, any kind of noise. It's interesting to see the bond market kind of sifting away from noise that's in the market. They're going purely on data. Now the probabilities of rate cut expectations are obviously going to change over time. I mean as I said, two weeks ago the market was fearing that we're going to get a rate hike in 2025, or a best one rate cut in October. So data dependency continues to be the theme of the market.

Now if you look at the yield curve, more recently we've been seeing a bear steepening where longer treasury yields have moved higher at a faster pace than front end yields. There is the Fed meeting next week. The impact and anticipation of that meeting is pretty minimal. Nobody believes that there's going to be a rate cut next week, so I don't think it's going to have too much of an impact on the market. But what it is doing is there's going to be a press conference that I think a lot of people are going to be interested in seeing any cues from Fed chair of Powell on the potential of tariffs. And I think Fed chair Powell is going to have to answer the question when somebody in the audience is going to ask that President Trump calling for lower rates in front of the audience of the World Economic Forum in Davos, Switzerland. He's going to have to get that question, Fed chair Powell's going to have to answer that question, and I anticipate the answer: that we are independent and we're going to be looking at the data, we're going to be sticking to our dual mandate, and I think that's going to provide some ease to the market.

But the bond market has remained pretty stable if you look at it. The 10 Year is trading around 4.6%, which is not much different than we were last week. There's been some toned down threats on tariffs that have been well received by the bond market, reduced concerns over inflation. Again, no one is expecting the Fed to take any action next week, but rate swaps right now, again, favor two rate cuts for 2025. But the week-over-week print is one thing, if you dig deeper the 10 Year did fall as low as 4.5% on Trump's first day. And if you remember just about two weeks before that, people were calling for 5, 5.5% on the 10 Year. So this is how quickly markets can change. We did get to 4.7% on Thursday for the 10 Year, but in a week that lacked major economic data, and then you also have the blackout period where you can't have any Fed members coming out and talking to the press, there was stability this week in the market and I think that's been very well received.

George Mateyo:

Well I think it's interesting you pointed out some data dependency, and I think the Fed does have a little bit of reputation damage control to do I guess in the sense that when they talked about the fact that the income administration wouldn't be influencing their policy too much at one meeting, and the following meeting when they talked about changing their dot plots, we talked about changing their projections for this year. Some people acknowledge that the specter of policy change would actually cause them to actually change their forecast. So they were a little bit more political than they had been I think at that last meeting, and I think that cost them a little bit of credibility, but we'll see. Maybe not irreparable harm, but I think [inaudible 00:14:11] mindful that. And on the data side, the thing that I took away from this week is the fact that some of the underlying trends in the labor market are so good, to be clear, they're still quite strong, but at the margin they soften ever so much. So I think we have to just be mindful that pay attention to that to see if that really turns into a bigger trend.

But yeah, for sure. It seems like the front and center show, of course, is on the other side of Pennsylvania Avenue and what's happening down the street from the Fed building. And of course this is a pretty busy week. You have to give the administration some credit for being organized to really roll out this many new orders in a short period of time with a lot of implications that are probably still unknown. I mean there's going to be probably a lot of things that are going to go through the court process, things that Congress will have to sort out. So the ongoing kind of prevailing theme that the new administration has [inaudible 00:14:59] around the idea is that they want to come and break things and we'll do the consequences later. Well, they're kind of doing that to some extent.

The markets, to your point Steve and Rajeev, have kind taken that in stride, which is certainly the good news. And my guess is that's going to continue a while longer, but we still think that the fundamentals are going to be more important than what happens in the near term. Things like inflation, things like interest rates and what that means for the deficit situation, and also the earnings picture are probably going to be more important I think over the long run. Of course, a lot of noise we'll have to process through over a couple months. We've seen some interesting news with respect to immigration. We've seen of course some things around entry rate policy that you talked about, Rajeev. Even we didn't talk about the fact is that Trump has also trying to get oil prices lower, and he went to OPEC where he's kind of talking to OPEC to try and get them down too. At the same time, he's calling on Russia to end the war in Ukraine. So he's got a full policy agenda in front of them.

I think on the tariff side that you mentioned, Rajeev, I think that is probably the one thing the market's going to be focused on mostly going forward. And to some extent, while I'm not an expert in that matter, it seems to me that there is really not a unified stance just yet on that issue. In other words, there's more I guess alignment around certain other policy measures and certain other policy initiatives that we might see come forth later this year such as taxes, the immigration issue I mentioned and so forth. There's pretty strong alignment around that issue, but I think tariffs still strike me as one of those areas where they're still trying to figure out what their central point of view should be, if there is one. And we've seen, for example just this morning, some kind of softening tone around China. I still think that China's going to be in the crosshairs, but I think that was kind of interesting to see maybe a bit of some softening rhetoric on Chinese tariffs issue, but that might be temporary. We'll see.

And then I think the other thing in terms of policy, it was curious to me, there was some data out this week that didn't get as much attention, but I think it deserves mention. Is that there was some data from I think it's University of Michigan that puts together a survey that asks people, "How do think inflation is going to be a year from now?" And so it's a sentiment indicator, and they actually kind of slice it up by a political party this time, which I thought was interesting. And they went back a year ago, and it looked like roughly the Democrats thought that inflation would be around 2% 12 months hence, and Republicans thought inflation would be 4%. Well now that's completely flipped. So I think the Republicans now think that inflation is going to be 2% or lower, and Democrats now think that inflation is going to be 4% or higher. So inflation might be just kind a political phenomenon as opposed to monetary, but we'll see.

So I guess it's going to be kind of an interesting year, as you said, for some time. And our best guess is that it's going to be full of some fits and starts. Our best advice is just to really kind of buckle in, be diversified, and be disciplined, and hopefully that will be the winning trade at the end of the year.

Brian Pietrangelo:

Well thanks for the conversation today George, Steve and Rajeev, 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.

Speaker 5:

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 12th 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 it 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, and 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.

Brian Pietrangelo:

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, January 17th 2025. I'm Brian Pietrangelo, and welcome to the podcast. As we head into the weekend, we are reminded of MLK Day on Monday, which is an observation of the significant work and progress that Reverend Martin Luther King Jr. made during his lifetime, and what tremendous opportunity it has been for all of us to consider his works and his acts as a part of society today.

In addition, we've got the inauguration of President Trump, Trump 2.0, and we bring that up because we continue to talk about a lot of the economically related concepts from the new administration or potential for it. In addition, I hope all of you across the country are taking care of yourselves during this bitterly cold winter that we're having right now in a couple different spots across the country. I was in Chicago this past week and it was single digits, and so we look at that to warm up from the thaw, somewhat similar to our look at inflation, whether it will begin to warm up from the thaw as well.

And 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, Steve Hoedt, head of equities, and Rajeev Sharma, head of fixed income. 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, there were three key economic releases that we're going to cover for you this morning. First, let's begin with the Fed's Beige Book, which comes out two weeks in advance of the next federal open market committee meeting, which is on the 29th of this month. A few of the main points of the report were as follows, economic activity increased slightly to moderately across the 12 Federal Reserve districts. Consumer spending moved up moderately with most of the districts reporting strong holiday sales that exceeded expectations. Manufacturing decreased slightly on net and a few of the districts said that manufacturers were stockpiling inventories in anticipation of higher tariffs. And employment ticked up on balance with half the districts reporting slight increase and half reporting no change at all. And second, retail sales for the month of December 2024 came out on Thursday of this week at a 0.4% increase over the prior month, which was slightly lower than expectations, but the past two months for November and October were actually revised upwards.

So net-net was a pretty strong report in terms of the report in general and the report for holiday sales. And finally, the biggest news of the week, which was most important for us to report, came out on Wednesday, which was the consumer price index measure of inflation. And that is one that is obviously closely watched in this report. We saw that month-over-month inflation came in for the month of December up 0.4% for all items, but up only 0.2% for core excluding food and energy. That translates on a year-over-year basis for all items being up in December at a 2.9% rate and core excluding food and energy came up at a 3.2% rate.

Now what this means for our audience is that even though the all items did increase, the core items decreased by one-tenth of 1%, so headed in the right direction in terms of easing for the overall challenge we have had with sticky inflation. We'll have to see if this continues the next month, but for at least the moment, it was a nice reprieve. As a result of the data, the stock market did jump on that particular day, so good news there.

So let's turn to George for his first take on the economic data and specifically on inflation to see if there is a winter thaw in the overall inflation and it's going to get a little bit better or we can continue to be in a little bit of a deep freeze here. George.

George Mateyo:

Well, it sure is cold outside, at least where I'm sitting right now, Brian, and I guess it is poised to get even colder. I don't think inflation is going to get colder because I can see a frigid levels of inflation for quite some time. We do see some moderation and we did see some evidence of that this past week and that's certainly welcome news. I still think that there's still some underlying pressures regarding just general inflation expectations, meaning that most consumers, they don't think about inflation the way that economists do. I mean, economists like to measure inflation on a year-to-year basis and all kinds of... They've got probably 20 different statistics at least to measure that. But I think most consumers recognize inflation when they purchase the good that they purchase every week or every month, and they see the price of that real time and react to that accordingly.

So I still think that the overall sentiment or maybe the psyche around inflation is still a little bit too high and that's going to stay with it for a while. The good news though, I guess we kind of mentioned this briefly the prior week is that wages are actually rising a little bit faster than inflation. So people generally speaking are actually seeing decent pricing power with respect to what's happening with their pocketbook. So at the margin I think it's probably suffice to say inflation is cooling, it's moderating, but at the same time we've also seen wages pick up a little bit, which provides a bit of a cushion for consumers too. Whether or not the overall notion around frigid temperatures translates into higher heating prices is another issue. And that could be a bit of a headwind. Natural gas prices up quite a bit in the past few weeks or so. So we'll have to pay attention to that.

But I think the other news of this week has to do with the overall consumer spending and retail sales are now kind of behind us for the holiday shopping season and looks like by all accounts, the season was a pretty good one. Some retailers have actually been boosting their numbers and also others suggest that the consumers are still spending at a pretty healthy pace overall, which again is pretty good news for the economy itself.

I guess it's fair to say, Steve, as we think about the first half of the year, it's been kind of a choppy start. We've had a couple of good days, a couple of soft days, earnings are coming out. So what's your read through the first few days of the stock market's performance in 2025?

Stephen Hoedt:

Well, it's been an interesting start as you said, George, because we started off on the weak side carrying over from the back end of December, which wasn't great. And then it almost feels like things turned on a dime in the middle of this week when we got slightly less than expected inflation figures. And I'm skeptical that this will hold for very long, but let the market do what it's going to do. And you combine that with the same time the news about this ceasefire in the Middle East, which kind of... You put that together with the better than expected CPI data and it kind of was a recipe to get people to go back risk-on a bit relative to where we had been over the prior couple of weeks. So that was your backdrop. And then you had the banks come out with really solid earnings numbers to kick off earnings season, which started this week.

And so you put all those things together and it's been a pretty positive week this week and it's been a definite change in tenor from where we were over the last two, three weeks. I still think the market has some work to do here as we head into the back end of the month, but it's really nice to see this week that you've got small caps and mid-caps outperforming the S&P 500. So that kind of goes to that broadening strength thing.

And I think underlying all of this is this idea that... The consensus is it continues to expect economic growth in the 2% area. And if you look across the type of results that we're seeing and other things from corporate America and things like this, what you get is this idea that the 2025 economic numbers just like last year and just like the year before that are likely going to be revised higher as we move through the course of the year. And when you get that kind of a scenario, eventually that equity market responds to it. Now, we've said for a while that we think earnings are a bit higher than what they should be, and that's going to contribute to some back and forth in the first half of the year. But if economic projections need to go higher over the course of the year, that's a favorable backdrop for stocks.

George Mateyo:

Well, against that backdrop, as we think about other things that are taking place this year, of course, is the new administration that's coming on board and that'll take hold next week. And I would think that right out the gates, Rajeev, we'll probably start to see some indication of what the new administration has up their sleeve. And I think it's an interesting testimony this week. There was a lot of, frankly, a lot of testimony that was probably more entertaining than anything else. But I think we got some key indications from what the Treasury Secretary or the incoming Treasury Secretary is likely to do. And one thing that struck me was the fact that he's pretty serious about tariffs. He's also serious about taxes, which could probably be a bit positive. But as you think about the testimony you heard this week, what was your take on that?

Rajeev Sharma:

So George, yeah, I mean you're absolutely right. I mean, Secretary designate Scott Bessent confirmation hearing did happen this week and he did talk about tariffs and taxes. Bessent and other economic team advisors have been discussing a more gradual approach to tariffs, increasing them by 2 to 5% per month. And I think the real focus here was the bond market looked at that and said, okay, this may be a bid to avoid inflation. The bond market was very receptive to the comments that were made. In fact, bonds were riding a three day of bullishness after this week's lower than forecast for CPI. You had dovish comments from Fed Governor Waller, and then you had the Treasury Secretary nominee, Scott Bessent steering for the Senate Finance Committee. Bessent really focused on narrowing the deficit through reduced spending and also did not say a single word about the maturity structure of the Treasury debt, which I think again is very important for the bond rally that we're seeing.

They really want to see a steady as you go approach. It's a three day bond rally that we've not seen since December of last year. The 10 year has reached 460 for the first time, and it's a resistant point that's very important. Do we stay below 460 on the 10 year? I think that's going to be very important as we go forward. But I wanted to make a few points about the CPI data that came, as Steve said, largely in line with consensus. Of course, CPI rising less than forecast in December. That was enough for the bond market to have a sigh of relief, something that we really needed for the bond market. Bonds rallied right after that report came out. We saw the 10 year fall more than 10 basis points right away, and all of a sudden market probabilities started pointing to an increased level or increased number of rate cuts for 2025, which I do believe is a knee-jerk reaction.

In my opinion, one data point is not enough for the Fed to feel really comfortable about start cutting rates again. They will need to see a string of data points before they start resuming their rate cutting campaign. What the CPI data does do is it takes some of those fears of potential rate hikes in 2025 off the table because there were some economists coming out there and saying, maybe we need a rate hike sometime this year. And that was spooking the market as well. So inflation is slowing, but it remains too high for the Fed's comfort level. You have super core inflation that's stuck above 3% for months. So why did the bonds really rally? And I think longer dated bonds were already looking pretty cheap. You had traders using CPI data as somewhat of an excuse to buy. There's still a clear risk that tariffs could be inflation stoking, but the immediate reaction of falling yields across the yield curve shows that maybe this previous rise that we saw, specifically the 10 year Treasury note yield rising 100 basis points since last September, may have been driven predominantly by fears of re-accelerating inflation.

So you've got the PPI report, you've got the CPI report this week. They alleviated some of those fears, but the reality is that the 30 year Treasury yield has failed to remain above 5%. And that tells me that there are bargain hunters out there that are willing to put money to work in the bond market at these elevated yield levels, and that's healthy for the bond market. Bond bills are back and they should help performance for the month. But again, if we turn to Fed policy, Fed futures immediately priced it about 38 basis points of rate cuts this year. So that's more than one rate cut this year. Market probabilities before the CPI report, we're looking at one rate cut for 2025 coming as late as October.

Now the market is looking at the first rate cut to be as soon as June and a 50% chance that it could be in May. These are some aggressive recalibrations of the market expectations. We continue to believe that the first rate cut of the year will be in the second half of the year as the Fed needs more data to figure out where they want to go. But one CPI report is not enough for the Fed, in my opinion, to start pushing up their rate cut expectations.

Stephen Hoedt:

Rajeev, I had a quick question for you. The Secretary designate Bessent had... I thought it was a fascinating exchange regarding the debt ceiling discussion, and he seems to be on board with the idea of doing away with it. I know that there are a lot of people who would like to see that go away. What did you think about it from a bond market perspective? If you remove that governor, potentially you could get to a place where the government could just issue debt ad infinitum, right? But the reality is that bond market would act as a check on that, I think. But what's your perspective on that? I'm curious.

Rajeev Sharma:

Yeah, my perspective there, I mean, that was very interesting. You're right, Steve, those comments about the debt ceiling were very interesting. And I think that the bond market kind of does not believe that that's possible. So it kind of did not really move on it. But I think the bond market is going to be a check and balance because if you remove the debt ceiling, you could have a lot of issues of treasuries coming out, and I think that would not be good for the bond market. You have an opportunity here where you're looking at long bonds. What could happen is you could have, with the 30 year yields, fresh off 5%. If you start really issuing a lot of debt and borrowing by the US government, you could see those yields start to move higher. But it's doubtful that Bessent would want to issue long bonds. And so I'm talking about long bonds because that's probably, if you took the debt ceiling off the table, that's probably where the Treasury would go.

Brian Pietrangelo:

Great dialogue, Rajeev and Stephen, that topic really important to a lot of Americans out there. So let's go back to George to get his closing remarks and thoughts on what's happening out there.

George Mateyo:

Well, thanks, Brian. I think later today we'll be announcing or just releasing our 2025 outlook. And I just want to say a big thank you to all of our friends in our marketing department to help put this together. So Sarah Arlen, Bethany, if you're listening, we do appreciate your support and thanks to you, Quentin, behind the scenes for manning the mic and doing such a great job all year long for us. We do appreciate your help a lot.

I guess I would just close by saying that there is going to be, I think a lot of volatility this year. We've talked a little bit about that as an ongoing theme. We've referenced that a little bit this point too, in terms of earnings expectations, as Steve mentioned, maybe being a bit too high, and then who knows exactly what the new administration is going to do with respect to policies, as Rajeev alluded to, could create some volatility as well.

So we're trying to safely balance towards risk overall. And I think it's interesting to see the correlation really between the causality and the correlations between two big asset classes like stocks and bonds move together, which provides maybe some opportunities, but also suggests that maybe a broader diversification approach makes some sense in this environment too. So we'd recommend staying invested, really kind of staying engaged, stay disciplined, but also make sure your portfolio is really fully diversified to anticipate maybe what comes next or maybe things that we'll be talking about that we don't even envision right now. So I think there could be a wide range of outcomes next year or this [inaudible 00:17:32]. And there's also the surprise for something unknown that we're not even contemplating at this point. So again, stay long, but also stay diversified.

Brian Pietrangelo:

And thanks for the conversation today, George, Stephen and Rajeev. We appreciate your perspectives. 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.

Speaker 5:

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 it 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 for any investor, and 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 of 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.

Brian Pietrangelo:

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, January 10th, 2025. I'm Brian Pietrangelo and welcome to the podcast. Thanks for joining us. This is our first podcast of 2025. We were off the past few weeks celebrating the holidays with family and friends, and I want to wish everyone out there listening to us a happy new year. I'd 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, Steve Hoedt, Head of Equities, and Rajeev Sharma, Head of Fixed Income. 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 activity, we're going to put that second, but first we're going to take you back to December of 2024 and remind you of some key economic updates that came out right before a lot of people went out for the holidays and that way it'll set the stage for our conversation here beginning in the new year. Back on December 18th, the Federal Open Market Committee did cut interest rates by 25 basis points, but it was somewhat of a confusing meeting because inflation continued to remain hot and it did question what the policy would be for the Fed to actually cut rates in 2025 where the estimate used to be something in the vicinity of four cuts and now it's been revised down to roughly only about two cuts for 2025.

In addition, in their summary of economic projections released on December 18th, for 2025 they actually did raise the real GDP estimate. They also lowered the unemployment rate, but they did keep the PCE inflation estimate higher than estimated before. The following day on December 19th, the last estimate for the quarter number three for 2024 for real GDP for the US economy came in at a 3.1% annualized rate, which was higher than the previous estimate and also higher than the second quarter. So good news there, the economy continues to remain resilient and growth continues to be driven by consumer spending. And finally, on the Friday or December 20th, the PCE or Personal Consumption Expenditures measure of inflation for November did come out and showed some moderation on a month-over-month basis. But on a year-over-year basis, it continues to remain sticky with the all items number being 2.4% annualized growth rate year-over-year, and core excluding food and energy was 2.8%.

Both of these numbers were higher than previous months and continue to remain sticky without us seeing any type of meaningful decline. So the topic of inflation that has been on the topic list for the past two to three years will continue to be on the list of discussion items for 2025. Turning specifically to this week's economic news releases, we've got three updates for you all employment and job related. First job openings under the JOLTS report from the Bureau of Labor Statistics came in at 8.1 million for November, which was up from 7.8 million in October, which again shows some strength in the employment market where employers are willing to post jobs potentially needing to expand their staff. Good for the economy, will look at the inflation, may or may not be there. Second, the weekly initial unemployment claims data came in positive meaning it was lower than previous weeks, such that the week ending January 4th was at 201,000 initial claims.

So good news there. And third, just this morning at 8:30, the Bureau of Labor Statistics also came out with the employment situation report, which gives us two key items. The first being new non-farm payrolls for the month of December came in at 256,000, which was actually a little bit better than expected and again, shows strength in the market. And then the overall unemployment rate came down just one tick to 4.1% from previously at 4.2%. Again, the big question is back to the concept, is this good news is good news or good news is bad news? The good news means that the employment market continues to remain healthy. The bad news might be does it continue to point to an inflationary dynamic for which the Federal Reserve will have to make decisions about keeping a policy higher or can they continue on the path of cutting rates at some point in time in 2025? So with that, let's begin our conversation with our panel today, starting with George to get his overall reaction to the economic data and his thoughts for the future, George.

George Mateyo:

Well, Brian, happy new year and happy new year our listeners. I think it's probably the moment in time that we need to take stock of where we are since it's been a few weeks since we were all together last. And I guess as I think about the numbers that came out this morning, I think the kind of prevailing theme is that the amazing US economy continues to amaze and we've seen really kind of remarkable set of circumstances for much of this year. And I think if you kind of think about where we were at the beginning of 2024, most people thought the economy would be growing one and a half percent or so. We thought we'd probably add about a million new jobs and based on this morning's report, we're going to probably finish out the year adding close to 2 million jobs. And at the same time, the overall backdrop for economic growth is pretty solid too.

So instead of growing that one and half percent number I mentioned earlier we're probably going to finish close to three or maybe just a bit under three, but still that's a pretty decent delta between expectations at the beginning of the accounting year. And here we are at the end of 2024 and turn the page to a new year. So the economy itself is doing quite well. I think Wall Street probably is having some indigestion with that frankly, because it seems like the Fed is not going to be in a rush to cut rates and give the market what it wants. But the economy is doing quite well and that's good for mainstream, Main Street rather. That's good for the overall economy and that'll probably continue to boost spending, which will again cause the Fed to be on hold for a little longer than anticipated. So I think overall the news is good for the economy, but maybe less good for the overall financial markets, at least in the near term.

And we've seen rates back up quite a bit. It's interesting to me, Rajeev, to see the Fed come into this period of time where they started, I think in the summer seeing a bit of a slowdown in the labor market and now we're probably seeing more strength there. So as you think about what the Fed is thinking, maybe the beginning part of this year, we can't think about too far ahead, but do you think the Fed is going to be on hold? Are they even thinking about hiking at some point? How do you make sense of what we saw this morning?

Rajeev Sharma:

Well, George, it's a lot to make sense with today's blockbuster jobs report that did come out that continues to put pressure on treasury yields. It's keeping bond investors on the sidelines that continue to look for better entry points in the treasury market. I think the Fed right now is obviously they've been pigeonholed themselves into being data dependent. They've kind of pushed the market expectations to also be data dependent. So anything we see, like a report that we saw today about the jobs number is obviously going to move the market. We already saw the 10-year treasury yield move almost 10 basis points higher, right on the report release. For context, we started the year with the 10-year treasury note yield around 4.56%. Now we're at 4.74%, so that's quite a move in just a few days and it's pretty aggressive. It's about 20 basis points that we've moved in less than two weeks.

We also are at the highest levels right on the tenure that we've seen since October 2023. So typically at this level, I would expect buyers to get excited at these levels and maybe take advantage of some of these elevated rates, but that's not happening. And it's because investors now believe that we can go even higher in the rates and many bets are right now that the tenure can get to 5% fairly easily. So as we rounded out 2024, the market already began adjusting rate cut expectations for 2025. Back in September of last year, the market had anticipated five to six rate cuts for 2025, and then we had the December FOMC meeting where the Fed signaled two rate cuts for 2025. And that was enough to once again make the market really start to not believe in exactly the path of rate cuts going forward. I think the market's really at this point right now, where they don't really feel that the Fed is in any hurry to cut rates.

In fact, many things that we may not even get the rate cuts that we feel. I mean if you look at the probabilities of what might happen right now, rate cut expectations have moved to the second half of the year. We were around maybe June or July for a 25 basis point rate cut. Now if you look at the probabilities, the first-rate cut will be in October. And what's happening right now is the market and the Fed are both completely data dependent. We have the jobs data this week. We've got inflation data next week. Both of these reports will be heavily scrutinized by the Fed and the market. Add to that, the fears of inflation stoking fiscal policy that we still don't have full color on. As the year develops, we're going to get more color on fiscal policy and I think you could expect more volatility in the bottom market.

And then you have a bunch of Fed speakers that came out this week on the tape and also the FOMC minutes that were released from a December FOMC meeting. And if you read through those minutes and you read the narrative and you hear the narrative from the Fed speakers, many Fed members are sticking to one common theme, that you need to be cautious and careful to your approach in the upcoming quarters. You had Fed Reserve Bank of Philadelphia President Patrick Harker came out, he said the Fed is on track to cut rates this year, but the timing is all data dependent. He pointed out that it's taking longer than expected to bring inflation down to the 2% target, and he reiterated that the Fed is not going to act in haste. And you saw a similar narrative from Fed Reserve Bank of Boston President Susan Collins, who also said slower rate cuts for 2025.

So you add all that together, you add the data that we saw today in the jobs number, and you don't really see a picture where you're going to have this consistent path of rate cuts. And to add to all that, we also had treasury auctions this week. You had $58 billion of a three-year treasury, now, you had 39 billion of a 10 year, you had 22 billion of a 30 year. None of these auctions did very well. Maybe the 30 year did okay, but again, it's showing you that investors are not really particularly comfortable in jumping in at these levels where they think rates can go even higher from where we're right now.

George Mateyo:

Well, Rajeev, I thought it was interesting. Biden alluded to the fact that the Fed actually did have a meeting since we last spoke, and one thing that was kind curious to me was that they felt the need it seemed to talk about what might happen next. And it's kind of a reversal in the sense that in the prior meeting they made a comment that they don't want to speculate. They don't want to front run essentially policy when things are just at the proposal stage, meaning that at some point people are starting to think about, well, what the administration might do in Washington with respect to tariffs. And so when they met, what was it, maybe November, they said, "We're not going to go down that path and wade into the conjecture mode and guess as what might happen." But they kind of reversed course though, didn't they? I mean, I think in December they said, well, there's a few people that said we shouldn't be anticipating more inflation because of tariffs and other things. How do you make sense of that development, that change of tone?

Rajeev Sharma:

I think it's very interesting and if you see the press conference of [inaudible 00:11:34] the last meeting that we had for the FMC, he tried his best to avoid conversations of how about Fed rate cutting philosophy without knowing exactly what the fiscal policy is going to be, but it's very hard to ignore it. Everything you're hearing about fiscal policy leads down a road that could cause inflation to move higher. We still haven't seen the inflation picture get to the point where the Fed is very happy about it. It's trended lower, but it hasn't got to their 2% target. They haven't talked about changing the goalpost either about where their target's going to be. So I think right now the Fed, even though they'll continue to say we're data dependent, they have to be also fiscal policy dependent. And putting that hand in hand, I think anything you hear from the new administration that comes into office that even suggests that inflation could spike, the Fed cannot ignore it, and their narrative's going to reflect that.

George Mateyo:

Steve, we've got our algo coming out next week and we talk a lot about the political, I guess, issues of the day, if you want to call it that. We've talked about the fact that de-relation seems to be coming, which is certainly market friendly. Immigration is kind of a question mark in terms of what it might mean for the economy, but certainly I think the bigger focus, at least in the New York City and the tariffs as I mentioned and Rajeev talked about too, the Fed seems to be focused on that as well. We got a lot of news this week with respect to what might happen in Canada, one of our largest trading partners. What do you make of that and what do you think that the overall situation for tariffs means for the market as we think about starting the year, on an interesting note we'll say at the very least?

Stephen Hoedt:

Yeah, no doubt about the interesting note, George. I mean, when you think about the tariff situation, the impact has already kind of started to happen even without the new administration being officially in office yet because the government of Canada has effectively fallen with the announcement that Trudeau will resign and there's going to be a replacement there. At the end of the day, that's just selecting who's going to run in the next election in Canada, which will likely occur at some point in May. With all the indications being that there's going to be a swing to the right north of the border. Very similar and a populist tone to what we've experienced here in the US. The one thing that it's very clear, aside from the fact that Canada wants to remain Canada and doesn't want to become the 51st state, is that the Canadians will use their energy markets. And the fact that the energy markets are very closely tied together with the US is a way to defend themselves against whatever the incoming administration tries to do.

I live here in Southeast Michigan, and when you come across the border from Ohio and drive to downtown Detroit, you see one of the largest refineries in the Midwest. And that refinery, all the crude oil that goes into that refinery comes from Canada. So when you think about the jobs impact in states like Michigan and others from potentially having a export tax or some kind of tariff put on by the Canadians in retaliatory fashion, on energy exports, in order to defend themselves against say a broad tariff from the United States, you can see very quickly how the economic impacts can kind of cascade. So my belief is that we'll end up seeing some type of a deal between these two countries come together fairly quickly because you're looking at literally the largest trading relationship in the world. It's somewhere between 850 and 900 billion worth of trade goes between these two countries.

Much of it comes across the Ambassador Bridge on the way to the auto companies here in Southeast Michigan. So I truly do not think that you're going to see this persist all that long. But the one thing that's very clear to me, George, is that whether it's Canada or whether it's France or Germany or other places, there are a lot of dominoes that have been falling as a result of political upheaval in many Western countries. And the thing that signals to me is that equity market investor is that we're in an environment where there's a lot more maybe uncertainty than what people had anticipated say six months ago. And when you're staring at an equity market that has significant valuation premiums in it, we think we've argued all along that maybe the valuation premium needed to come down as uncertainty ratcheted up. And it's very clear to me that we've certainly seen uncertainty ratchet up here, and the equity market has not had a great start to this year through the first five trading days.

That's kind of foreshadowed by the fact that Santa Claus didn't make his normal appearance at the corner of Broad and Wall. And when you don't see a Santa Claus rally, that's the market sending you a signal that there's something going on and you need to pay attention to it. So from our perspective, I think we came in with our outlook for 2025 saying that we thought that the first half of 2025 was likely going to be more difficult as we saw the market react to maybe a set of expectations that were too high in terms of earnings. And I definitely think that when you combine that with the fact that uncertainty seems to be ratcheting higher, we've got a recipe for...

I don't want to say that we're going to have to have a correction, but at the end of the day, it's going to be a difficult first half followed by likely a better second half. Because we do see earnings growth at eight to 10% this year, but the consensus right now is still at 15. So you've got a whole bunch of things to try to deal with, and that doesn't even get into the fiscal and the interest rates backing up to 5% and things like that. So it's just a much more difficult market for equities right now than what I think people probably expected a couple months ago.

Brian Pietrangelo:

Hey, Steve, one final question to close the podcast. Any thoughts on maybe what happened in 2024 sector performance as it leads to 2025 bread than anything going on with the Magnificent Seven that's on your mind?

Stephen Hoedt:

I would tell you, Brian, that the Magnificent Seven really caught a bid toward the end of the year, and that caught my attention from the perspective of the market's operating differently than it did when all of us on this call were in our formative years in the market. And that is that when things start to tilt defensive, you used to buy healthcare and consumer staples and utilities and things like that because those were what helped you sleep at night. Now what you see is that when the market starts to go into a period of increased uncertainty, people gravitate toward what they view is the defensive growth names of the Mag Seven. So we've seen the Mag Seven names outperform as the market has had this period of indigestion over the last two, three weeks. And I don't know that I want to say that that's going to continue, but I would tell you that it's certainly has caught my attention because you can see the change in tenor underneath the market.

Now, we still believe that as you go through the course of the year that you want to have a pro-cyclical bias. We see things like the regulatory policy changes benefiting banks. We think that the reshoring kind of things that benefits industrials here, energy and materials are pro-cyclical. And we think that eventually the Chinese will go more all in on their stimulative policies, all that kind of stuff. It argues for pro-cyclical tilt, and that should result in increased breadth in the market, broader participation eventually, and some rotation away from the Mag Seven. But as long as we have this kind of defensive nature where there's a high degree of uncertainty, we expect that you're going to see people gravitate toward those new would be blankets, for lack of a better way of describing them, of the Magnificent Seven names in the tech sector. So more of the same kind of.

Brian Pietrangelo:

Well, thanks for the conversation today, George, Stephen Rajeev, we appreciate your insights and as we start the new year, I'd also like to take time to thank our internal partners for helping us to produce our podcast, including Sarah Faye, Arlen Gray, Quentin Jenkins, Aaron Bechtel, and Zelko Sennin. 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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