Key Wealth Matters Podcasts

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, November 8th, 2024. I'm Brian Pietrangelo and welcome to the podcast.

And as we head into the weekend, just a reminder for everybody that Monday we celebrate Veterans Day. So if you have an opportunity, please take the time to honor and/or acknowledge a veteran and tell them how much we appreciate everything that they do and did. In terms of historical context, Veterans Day was first observed on November 11th, 1919, as Armistice Day in honor of the first anniversary of the end of World War I, which officially ended on the 11th hour of the 11th day of the 11th month in 1918. In 1926, Congress called for an annual observance of the anniversary, and by 1938, it was an official federal holiday. A few decades later, in 1954, president Dwight D. Eisenhower officially changed the name of the holiday from Armistice Day to Veterans Day, as it is currently known.

And as a final note, some might not know the difference between Veterans Day and Memorial Day. So to clear it up, Veterans Day is honoring all those who have served in the military and Memorial Day honors all of those who died in military service. So from all of us here, and me personally, I would like to thank all of those who served and died, but today for Veterans Day, all of those who have served in the military or are currently serving, as freedom is not free as we protect our great country in the United States of America.

And with that, I would like to introduce our panel of investing experts here to share their insight on this week's market activity and much, much more. George Mateyo, 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 each week. 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 key updates for you plus much, much more.

First, the overall Institute for Supply and Management, Purchasing Manager's Indices for both manufacturing and services came out and manufacturing continues to show a declining or contracting economic activity measurement. It's not only been going down, but it's been going down for roughly almost 23 out of the last 24 months consecutively and certainly almost for the last four years. On the services side, just opposite, it continues to be in an expansionary mode, not only for October, but it's the highest reading since July of 2022. And economic activity on the services side has expanded for the 50th time in the past 53 months or much more than over four years.

And second, initial weekly unemployment claims were stable for the week ending November 2nd, coming in at roughly 221,000, which is again mildly unchanged from the prior week. And third, the Bureau of Labor Statistics released their productivity measure for the third quarter of 2024 and the preliminary read was that labor productivity increased 2.2% in the third quarter. So good news there as the economy continues to remain resilient through productivity.

In addition, two other gigantic updates for the week. First with the Federal Open Market Committee meeting yesterday and deciding to cut rates by 25 basis points. We'll certainly get our panels take on the FOMC meeting and what it means for investors and also of course the presidential election. So we will start with that, in terms of talking to our panel, on what we think it might mean for the overall measurement in the United States, the economy, the markets, and everything else. So with that, let's toss it to George to get his first reaction and his comments on what's going on with the overall election and President Trump.

George Mateyo:

Brian, I think as far as the election's concerned, I guess there's three key takeaways at the high level and then we can get into economic and market implications. But the first one, I would say, is that the outcome is known, which is kind of good. I think if we actually look back a week or so ago, it wasn't a lock that we would actually be sitting here today knowing what the outcome was. And the outcome, as I said, was pretty clear cut. We've now avoided a couple of weeks of delay and disruption, and that's probably a good thing. And that's probably one of the reasons why the market had responded favorably the way it did after the news was known.

I think the second location that we can talk about this too, is that there does seem to be a bit of a red wave that has built. Now, it's clear that the House is not fully decided yet, but based on some of the sources we listen to and read and some of the betting markets and so forth, it seems like the House will be retained by the Republicans, maybe a slim majority, but still, nevertheless, the house will stay in Republican control. We know of course, that the White House has also been flipped over to the Republicans and the Senate did too by a pretty convincing margin. So again, there too, I think that's kind of a clear known-unknown where, again, a week ago we didn't know how that would actually play out. So, the configuration of Congress and the federal government has also been set.

And then the third location I think that people need to know is that the political cycles, in my view, have shortened quite a bit. I mean, it was typically in the past, and I can remember cycles in the past, that you'd actually see a party in power for 6, 8, 10 years in some cases. And now it seems like every two years or so that sentiment has shifted. So, what does that mean two years from now? Who knows. But definitely, I think, the anti-incumbent vote was definitely a thing that really took place this past election cycle. And so, if anything else, if people feel a big sense of despair, maybe we'll wait two years and have to re-underwrite this whole thesis again. But nonetheless, again, I think again, the outcomes are known. Disruption and delay have been avoided. Our red wave has kind of been built, which has some implications. So we'll talk about it in a second. And again, I think the political cycles have shortened.

In terms of the economy itself, I think it is fair to say that one thing that President-elect Trump has talked a lot about is tax cuts. And we've often talked about this very thing on this podcast too, noting that some tax cuts that were actually put forth in 2017 are set to expire at the end of the next year, and those are probably going to be extended with a fairly high degree of certainty. So, I think we can bake that into our outlook pretty clearly. What's less known is the other thing that President Trump has talked about, which is additional tax cuts. And I think there's a point that that might be become a debt situation that we have to deal with, and maybe there's going to be some limitations for those things as well.

But obviously, I think that's a good backdrop for growth nonetheless, if we're talking about tax cuts, which it does stimulate it for the economy, there are some questions about what that means for the deficit situation. Now, if we look at where we are today, the overall, I guess, deficit is roughly $2 trillion. When Trump took office back in 2017, we were half a trillion dollars. I was looking at the deficit situation that is roughly four times larger than it was then. But nonetheless, I think the market's kind of responded favorably to some certainty that's been put back into place. The market's responding to maybe some growth initiatives and also deregulation, which is one thing that President can probably do pretty easily in terms of making life easier for certain industries and certain companies. So, Steve, if you think about this through your lens in the equity market, what was your read through and how did the markets respond based on your expectations of a new administration?

Stephen Hoedt:

Yeah, George. Well, it's certainly been an interesting week. And to your point about the uncertainty lifting, that was something that we had talked a lot about heading into the election, that irrespective of the outcome the market was likely to resolve to the upside, and that's what we saw. Now, we saw the market react more favorably toward things that worked under the prior Trump administration. Namely, we saw a massive outperformance of small caps on Wednesday relative to large caps and other asset classes. And that goes directly to the underlying premise that small cap companies have more leverage to the domestic US economy than their large cap peers, which are more global in reach. So, that makes sense based on the new state of play.

When we think about the more longer term outlook, I think that the market is pricing in a couple of different things. First, the policies that are likely going to come out of a Trump administration are going to be viewed as pro-growth and also inflationary. And that results in a high nominal GDP growth environment and that typically is bullish for earnings growth for the S&P 500 period. And we will see how that plays out, but when you're talking about deregulation, extension of tax cuts or possibly more tax cuts and then tariffs, that's what the prescription is, right? It's higher growth along with higher inflation, so that's higher nominal GDP. So, we'll see how things go. And what's kind of struck me over the last week too though, is that the move in the market has been all driven by multiple expansions. So, as I sit here staring at my Bloomberg screen this morning, the market multiples up to 22 and a half times and earnings numbers, actually over the last week and a half or so, have actually come off a little bit.

So, it's going to be interesting to see if we can start to see the earnings numbers push their way back up to the upside, because I really do think even though we're talking about the probability of a fairly strong growth-driven rally into year-end, we've talked an awful lot in these podcasts before about how the market's upside is likely truncated based on the multiple that we're starting at from today. And at 22 and a half times, I mean, what are we going to do? Go to 24? Okay, great, but how much better does it get? Because I've seen a lot of people pushing for year-end targets now that are 5, 600 points above where we're at on the S&P 500 today, and I just think that that might be a bridge too far.

George Mateyo:

Yeah, that's a great point, Steve. And again, looking back at where we were when Trump first took office in late 2016, early 2017, the PE multiple at the time was around 16 times earnings. So, we're again about a third hire just on the valuation of the overall market itself. You're right to also point out that tariffs are going to introduce an element of uncertainty and we talk about, or we've seen anyway, I've read headlines that suggest that the president-elect is talking about tariffs as much as 60% on Chinese imports, six zero. And he has also talked about across the board tariffs and just about every other country upwards of 20%. And I think that's your point about inflation certainly beating through if that were to come to fruition.

My view right now is that we have got to take the president-elect seriously, but maybe not literally. So again, a lot could actually change between what somebody says once they're trying to get elected versus what they actually say and do once they are elected. So again, there's a lot of caveats and a lot of uncertainty, but I think it is fair to say, Rajeev, if I think about your role and what's happened with the bond market. Clearly the bond market had woken up this week and said that, "Gee, maybe inflation really is something to think about again." How do make sense of this and what's your read through in terms of what the administration changes might mean for the bond market?

Rajeev Sharma:

Well, as Steve said, the equity market may be cheering the election results, but the immediate reaction by the bond market was to show some warning signs. We saw that through treasury yields, which moved higher across the board. And this is a result, exactly what you're saying there, George, about the new administration and their fiscal policy that may lead to higher debts and deficits for the bond market. Right now, the Trump trade really is a bear steepening trade and that reflects in higher deficit spending and that risk of a rise in inflation and that trade is a bet that long-term interest rates would rise at a faster pace than short-term interest rates. That trade has been the trade to be on for the last two months leading up to the election. And now bond investors are rethinking how likely inflation will continue to decline given a fiscal policy that projects tax cuts and tariffs. And tax cuts and tariffs, they can stoke inflation.

So, if inflation starts to climb higher, the pace and the number of rate cuts come into question. You cannot keep cutting rates if inflation starts to move higher. So, post election there has been somewhat of a recalibration of a rate cut expectations. Before the election the markets believe we would have about six more 25 basis point rate cuts by the end of 2025. Those estimates are down to three. In fact, some investors are saying that we may only have one more rate cut. So, there's a lot of flux in the market right now about how the pace of rate cuts are going to be. There's also some fear that if inflation goes up, would the Fed have to eventually hike rates? So, this has now come into question again. And we see that in the two-year Treasury note yield, which is the most sensitive to Fed policy. The two-year Treasury note yield has surged almost 50 basis points in one month. But finally, short sellers of treasuries have started to take profits. Monday is a holiday for the bond market, and you do see some investors starting to take profits today.

So, with two days of yield surging higher, we did see some relief in the bond market with investors finding opportunities to step back in. Even breakeven inflation rates are falling back to where they were before the election and treasuries have begun recovering some of the ground that they lost. The 10-year Treasury note yield is now back to levels seen before the election, down almost 10 basis points on the week. What the bond market really has to do, and what the Fed has to do now, is not only be data dependent, but now they have to start thinking about being fiscal policy dependent, tariffs causing inflation, and so does fiscal stimulus. So, the question really is, will the new administration really be able to push through those unilateral tariff increases that you've mentioned, George, and how free spending fiscal policy would eventually be?

Brian Pietrangelo:

Hey, speaking of the Fed, let's not forget that there was an FOMC meeting yesterday and J. Powell had a pretty good press conference. So Cindy, what's the recap? What do you want to tell us in terms of your interpretation of the Fed? What'd they do, what'd they say, and where are we headed?

Cindy Honcharenko:

Thanks, Brian. The Fed did cut the federal funds rate by 25 basis points. The new target range is four and a half to four and three quarters. They also cut by 25 basis points, the interest on reserves to 4.65, a 4.65, that was a 4.90 previously. The pace of balance sheet runoff was unchanged at 25 billion per month for treasuries and 35 billion per month for mortgages. As far as the policy statement, aside from the change in rates, there were some minor changes to the statement. One being the assessment of the labor market was changed from, "Job gains have slowed," to, "Since earlier in the year labor market conditions have generally eased." The second, the statement that they had, "Gained greater confidence that inflation is moving sustainably toward 2%," was deleted from the description of the balance of risks. And third, they swapped a mention about progress on inflation and the balance of risk for, "Support of its goals," which I think that was the reason for them cutting 25 basis points yesterday.

I think there's two ways to look at this. Either the committee now has less confidence about achieving the inflation goal and they're more worried about the labor market, or this is purely meant, as Rajeev mentioned, to put data dependence in a broader scope. And I believe it's the latter. The press conference, Powell's opening statement reiterated the committee's commitment to achieve both sides of the dual mandate. He said that the policy is well positioned to deal with the risk we face. At the onset of the Q&A he was asked about the outcome of the election and whether it had any impact on their near term outlook for policy. As expected, he noted that the Fed does not guess, speculate or assume anything about fiscal policy until it becomes law. When he was asked whether he still supported the details of the September summary of economic projections in light of the recent economic data, he was pressed about the possibility of any sort of move in December, and he flat out refused to answer the question. He said he would not rule out or rule in a December cut at this point.

And finally, from the press conference, he was asked about the changes in the statement. He affirmed that this was an adjustment away from the forward guidance about what conditions would be necessary to begin removing restriction. And now the more open-ended guidance is meant to recalibrate expectations surrounding the path towards a more neutral stance. Going forward, my best guess is that a rate cut's still more probable than not at the December 18th meeting, and Powell characterized the December meeting as being live during the press conference, but did make it clear that a skip is possible depending on the incoming data. I think the incoming economic data will need to line up more firmly to support a December skip. But the political backdrop, which includes potential for a more inflationary mix of policy, might lower that bar.

Brian Pietrangelo:

So Cindy, I thought the most notable statement that Powell made was that, with reference to interest rate cuts, "We are on the right path, but we don't yet know the right pace." So George, would you have any other thoughts on that and specifically with regard to the questions from the press on independence?

George Mateyo:

Well, I think it was fair to say that Powell knew that question was coming, right? I mean, he had to anticipate the fact that someone would ask him, given how the president-elect is one who wants to see more growth and probably therefore wants to see lower interest rates, it would probably be in some kind of position to compromise. And we've seen that in the past. Actually, it's not really lost on me that if you look back in history, there were times in the past where the president was not so delicate, I guess, about trying to engineer some economic scenario based on his own preference. And it's both Republican and Democrat, so we're not taking sides here. But you go back to the Truman administration, for example, Truman was one that actually was jawboning the Fed a lot. Nixon did it years later, of course. So, I don't think there should be anything that the Federal Reserve wouldn't know was coming.

But I think what Cindy said earlier about the fact that the Fed is not going to guess, they're not going to speculate, they're not going to assume, those things are things that we should probably put forth in our methodology too, where we don't want to speculate, certainly. We don't want to assume something before it needs to be really calculated and really understood. And so, I guess, our best guess right now in terms of how we think about the year ahead is one of balance, right? We want to be balanced towards risk. We still think the US markets are probably poised for some up performance, but as Steve noted, valuations are pretty full right now. Same thing, I think, Rajeev would say on the credit markets where spreads are pretty tight. So overall, I think being down towards risk and really being mindful around your long-term goals and objectives are things that are going to really be important for us as we go forward.

Brian Pietrangelo:

Well, thanks for the robust conversation today, George, Steve, Rajeev 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. So, reach out to your relationship manager, portfolio strategist or financial advisor for more information, and we'll catch up in the 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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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, November 1, 2024. I'm Brian Pietrangelo, and welcome to the podcast. Well, we certainly hope that everyone had a safe and happy Halloween yesterday. It's always fun and interesting to see the cool costumes when you're passing out candy, but be careful that you don't have that excess amount of candy left over that you'll be eating for the next 3 to 4 weeks.

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In addition, today is sometimes celebrated as All Saints Day, and tomorrow is sometimes celebrated as All Souls Day, where many individuals take the time to celebrate and honor those that have passed away. So it's somewhat fitting that we take a pause to talk about 2 legends in the Cleveland community in the sports world that recently passed away in the past few weeks. 1st, we had Danny Coughlin, which was a legend in the sportscasting world and covered a lot of high school sports in addition to the pro sports in the Cleveland area. So, again, we, we our condolences go out to Danny Colligan's family and everybody that knew him. And second, just this past week, Jimmy Donovan, who was also a sportscaster and newscaster in the Cleveland area, was also legendary, had a tremendous following and fan base, also was the voice of the Browns and other Cleveland sports teams.

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And it's just a tragedy. Jimmy went too soon, was not able to beat cancer, and therefore, we take time to say, again, our condolences to the Donovan family. What a great pair of individuals to help our community and give us the update when we always look forward. But Jimmy, Danny, great people. 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.

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Steve Haidt, head of equities, Rajeev Sharma, head of fixed income, and Joe Valcos, national tax director. 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 each week. 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 market and economic news, we have a tremendous amount of information to share with you. We've got roughly 6 different updates, which is more than any other period we've had when we've been running the podcast.

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So we're gonna give you updates in each one of these areas. But before we do, we are also gonna bring in Joe Velkos, our national tax director, here at the end of the podcast to give an overview and update of the presidential candidate's tax policies. Now, of course, we've got the election coming up next Tuesday, right around the corner, and so it's really advantageous to share with some of our listeners what's happening in the potential proposals of each of the candidates. And then certainly sometime soon after November 5th, we'll find out who the actual winner is and then come back and have Joe give an update on those policies as well at some point in time after November 5th so that everyone has an idea of where the tax policy might in fact go. We'll also talk with Steve about some earnings reports that came out this week and how they might be affecting the overall markets.

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And finally, as opening remarks, don't forget to turn back the clocks this weekend as daylight savings time does end between Saturday Sunday this weekend. So let's turn back to our conversation and update on the 6 different areas of economic data that was released this particular week so you have a pretty good idea that there's a lot going on and what each of them might mean for implications for the Federal Reserves meeting next week as well and the overall economy going forward. 1st, from the Bureau of Labor Statistics, we have the job openings report, which showed the number of job openings posted by employers had declined from August at 7,800,000 down to 7,400,000 in September. Again, we watch this indicator to see if it's an upward or downward trend of employers willing to hire individuals and thus having job postings out there. And second, also from the BLS, we got the employment cost index report that comes out on a quarterly basis.

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So for the quarter ending September, we actually saw a decrease in overall wages and salaries from June of 2024 at a 4.2% annualized rate to September of 2024 at a 3.9% annualized rate. So the massive increase in wages that we had seen coming out of the pandemic has begun to normalize and get closer to annual historical trends with a little bit of a decrease in this most recent prior quarter back to 3.9% year over year. And 3rd, according to the Department of Labor, the weekly initial unemployment claims for the week ending October 26th fell to 216,000, down 12,000 from the prior week and down 26,000 from 2 weeks ago, but even more importantly, down from its recent peak a couple weeks ago at 260,000, which had spiked due to, some of the possibilities of hurricane related unemployment claims as well as some of the point port strikes. So good news to see that this number has receded and back to 216,000 as a nice stable state of the overall employment market as it is measured by initial unemployment claim. 4th, this week, we had the Bureau of Economic Analysis release the first or what is known as the advance estimate for 3rd quarter real GDP for the United States economy, and it came in at 2.8% annualized for, again, the Q3 of 2024, which was slightly less than estimates or expectations, still slightly lower than the Q2 at 3%, but above the Q1 this year at 1.6%.

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So, again, is this an indicator that the economy is beginning to slow with some of the after effects of the overall Fed rate increases that have been in play for a couple years now, or is this just an overall slowing in the economy related to other factors? We'll dive into that with our panel today, but that's a pretty key number for us to take a look at. And 5th, just yesterday, we received the Fed's preferred measure of inflation, which is also known as personal consumption expenditures or PCE measure of inflation, and the news came in a little bit hot. Specifically, when we look at PCE inflation excluding the volatile food and energy components, which is the Fed's preferred measure, we see the 3rd consecutive month, July, August, and September, where the number did not come down and held constant at 2.7% year over year for the past 3 months. And, actually, the past 4 out of 5 months going all the way back to May, the only exception was June when it dropped to 2.6%.

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So 4 out of 5 consecutive and 3 consecutive reads at 2.7% does not go in the right direction. Most people were looking for that inflation rate to decline and get closer to the Fed's target of 2%. That being said, this is one of the 2 critical reports this week will felt the Fed will take into consideration next month when they meet here on November 7th in terms of their next Federal Open Market Committee meeting. And our final or 6th data point for the week is the employment situation from the Bureau of Labor Statistics, which gives us the new nonfarm payrolls and the unemployment rate for the month of October, which is the second most critical item for the Fed to consider when they meet next week because we're always talking about the Fed's dual mandate of maximum employment and price stability, otherwise known as managing inflation.

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<v George Mateyo>So let's take a look at

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<v Brian Pietrangelo>the report from the Bureau of Labor Statistics today known as the employment situation just at 8:30 earlier this morning, and it has two components. New nonfarm payrolls created in the month of October were only a low 12,000. Now this compares to 254,000 from last month. There are some distortions in numbers relative to hurricanes and port strikes, but September August were also revised down by 112,000. So even though numbers are somewhat distorted, this may give the Fed some fuel to consider their rate cutting policy as they go forward next week and into the end of the year in December.

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Also within that report, the unemployment rate for September stayed at 4.1%. And, again, some of that is a little bit distorted because the employment rate comes from the household survey, and the new nonfarm payrolls comes from the establishment survey. So 2 different surveys give us 2 different results. Nonetheless, we take a look probably at the new nonfarm payroll as being the more important number for the fed. So that's a ton of information this morning for this week alone with 2 powerhouse reports back on Thursday Friday this morning.

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So we will turn to Rajeev to digest all this information for us, give an update on what this might mean for Fed policy, the bond market, and everything else going on in the economy. Rajeev?

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<v Rajeev Sharma>Well, Brian, the, markets and particularly the bond market, you know, had to contend with that slew of economic data that you mentioned. And, to deal with this, the market's really trying to shape its expectations of future rate cuts. Let's start with the PCE inflation data. That's Fed's preferred measure of inflation. That was the biggest monthly gain that we saw since April.

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But you would think that the market participants would pull back rate cut expectations for next week's FOMC meeting, but that was not the case. The market felt that the number was close enough to the Fed's target inflation goal of 2%. I know we've talked about being, steady at 2.7% for quite a while now, but, you know, as long as we didn't see this big uptick, the market was pretty much okay with, with that inflation report. And that's pretty much guaranteeing a, 25 basis point rate cut for next week. Right now, the odds of that 25 basis point rate cut for next week stand around 98%.

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So you can just assume it's a 100%. Then we got the jobs data that, on the surface, seemed like a shock report with only 12,000 jobs being added. That's the lightest number that we've seen since December 2020. But the market is taking that report with a grain of salt as well, pointing to the numbers being a noisy report. It's a report that was affected by hurricanes and strikes.

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And and it's also the markets really focused on that unemployment rate that's stuck to a 4.1%. So the market is holding firm on their, expectations for 25 basis point rate cut next week, and about a total of 3 rate cuts by March of next year. Now if you look at bond yields, we did see a knee jerk reaction after the jobs report came out. The 10 year yields fell about 6 basis points to 4.22%. And they're hovering around 4 a quarter percent right now.

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The range on the 10 year treasury note yield should remain pretty tight, between 4.2 and 4.34 percent right now. If you look at the 2 year bond yield, we did see that the 2 year bond yield, which is most sensitive to monetary policy, did fall, from 4.2 to 4.11% on the release of the jobs report. Bonds are going to look over this and and not really do much, until, we get through next week's presidential election on Tuesday and then Thursday's FOMC meeting. However, looking into next year, the Fed's terminal rate expectations have added an extra 25 basis point rate cut at some point. So the terminal rate has fallen from 3.73% to 3.57% now.

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Another impact to the market has been the quarterly refunding announcement, that we also saw this week, where the US Treasury trimmed its estimate for federal borrowing for the current quarter. It now estimates 546,000,000,000 in net borrowing for October through December, down from 565,000,000,000 I noted back in July. This is really due to a bigger cash stockpile that we see, that that is on hand for the treasury at the end of September. And the impact of this will be felt on how much the, the treasury keeps adding to these debt sales. We've seen a lot of auctions.

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We've seen a lot of supply from the Fed come into the market. It's provided upward pressure on yields. We can anticipate that to continue into next year. So I think you're gonna have a a market where we're gonna see these treasury supplies come to market, but you're gonna see that investors are are going to demand higher yields to participate in these auctions. And I think that's gonna be a big point as far as upward pressure on yields.

00:12:35.055 --> 00:13:11.445

So, again, Brian, we we really have to get through all the economic data that we saw this week has not really created much of an impact on the bond market, but what it has done is it's it's shaping the expectations for future rate cuts. The market is adding another 25 basis points of rate cuts for next for next year. If we do happen to see another jobs report that we like we saw today, which is not anticipated, but if we do, you're gonna start seeing a lot of market participants start saying, hey. Should we have 50 basis points of rate cuts at the next meeting? I don't at the, December meeting, I don't think, we should anticipate that.

00:13:11.445 --> 00:13:22.300

I think the Fed's gonna stay steady. They're gonna go over 25 basis points next, month and and probably another 25 basis points in December. We end the year with an additional 50 basis points of break ins.

00:13:23.080 --> 00:13:37.015

<v Brian Pietrangelo>Yeah, Rajeev. It's difficult when we talk about the dual mandate for the fed, and this focus has shifted. It used to be on inflation till it came down, then it was on the jobs market if it continues to remain stable. Now we've got some instability there, and inflation is going in the wrong direction. So a real dilemma for the fed.

00:13:37.015 --> 00:13:39.435

Any any final thoughts on the direction they might take?

00:13:39.735 --> 00:14:09.365

<v Rajeev Sharma>I think the fed, kinda put themselves in a in a in a corner by doing this, 50 basis point rate cut, back in September. And, you know, if they would have done 25 basis points in September, they would have the optionality right now. By doing 50 basis points, many people are questioning, was that too aggressive based on the inflation report that we're seeing, the jobs numbers that we're seeing? Perhaps they, went a little too far, a little too quick in the beginning. The Fed certainly does not want to, signal a policy error.

00:14:09.665 --> 00:14:43.875

If they pause next month, which is not expected, but if they do, that's gonna signal a policy error by the Fed. They've really put themselves in a corner now, and and they'd like to create a cadence of rate cuts with every meeting being a 25 base per rate cut, stick on the, cutting cycle that they put themselves on. Any change to that is gonna really reflect on how the economy is doing. When the Fed did 50 basis points in September, their biggest fear was they didn't want the market to feel that they were behind the gun. They didn't want the market to feel like things were so bad in the economy that they were forced to do 50 basis points.

00:14:44.430 --> 00:14:50.450

With inflation, the jobs are number that are coming out. The market's starting to question that that were things a little worse than expected.

00:14:51.790 --> 00:15:00.315

<v Brian Pietrangelo>Great. Thanks, Rajeev. So let's turn to you, Steve, on equity side of the equation. I know it was a pretty busy week with some earnings and also right in the middle of q three. What are your thoughts on what happened this week?

00:15:00.315 --> 00:15:02.175

Maybe some of your reaction to the markets.

00:15:02.715 --> 00:15:35.475

<v Steve Hoedt>Yeah. You know? So, Brian, I I think that I would I would describe this kind of as a a choose your own adventure kind of market for this week, especially when it comes down to the economic data. You know, I I'm looking at my Bloomberg screen right now, and the thing that jumps out at me, not so much the reaction that the bond market had to the data that you and Rajeev were discussing in terms of the nonfarm payrolls report, which I think everybody expected to be weak. The the the real question to me is, like, what what economy do we have right now?

00:15:35.475 --> 00:15:56.335

Because ISM Manufacturing came in at 46a half, so that's well below 50. Just came out prior to us recording this podcast. The thing that jumped out to me in that report, though, was the prices paid came in at 54.8 versus 50 for expectations. That's the kind of a forward looking inflation indicator. Right?

00:15:56.635 --> 00:16:38.950

So, you know, it so if if the the ISM survey is expecting inflation to run hotter than expected and manufacturing is weaker than expected, you know, the Fed's really in a box. Like, how do you how do they thread the needle and give the market or give the economy what what it needs in terms of where rates go? How how do you how do you even consider cutting 50 basis points when you've got inflation coming in up or in forward looking inflation indicators coming in above expectations? But how do you not consider cutting when you've got manufacturing sitting where it is and where you've got, the employment situation possibly being weaker than what people expected. So a re really, really tough place for them.

00:16:39.650 --> 00:17:16.435

I had no change in expectations in terms of the the the the forward looking, 25 basis point next meeting. But, man, I'm I'm happy that I'm not a Fed governor as we run-in between now and to to year end. I I I think it's kind of a thankless job right now. As for the markets, you know, the market's really been focused on the fact that 5 of the Mag 7 reported earnings this week. In general, the earnings numbers were good enough, and, you know, we did see the the some some of them sell off a little bit yesterday on on a couple of the companies having a little bit weaker, idiosyncratic things going on.

00:17:16.435 --> 00:17:35.830

Apple, in particular, had was was a little bit disappointing, and so was Microsoft. But, you know, the other ones, came came through pretty well. So, you know, in terms of the impact of forward looking earnings numbers, they didn't really move much this week. So so not not much to see here. They were good enough.

00:17:36.530 --> 00:18:16.715

And the market really right now at this point looks looks prime in in our view on the launch pad for the for the move into the year end once we get past the uncertainty next week, of the of the election. The the market really historically does well once you get past the uncertainty. It doesn't care whether the blue team or the red team wins. It just wants somebody to win, and and it wants to know what the outcome is. Because once the market has the uncertainty lift, the historically, irrespective of what the result is, the the the run-in through November to to year end is historically pretty good after the election.

00:18:16.715 --> 00:18:29.230

So, I'll I'll be watching next week, Brian, looking for a conclusion to the election season more so than a specific outcome. Back to you.

00:18:29.530 --> 00:18:54.670

<v Brian Pietrangelo>Well said, Steve, and, thanks always for your context. We appreciate it. And I know we're gonna go a little bit longer than our normal weekly schedule for the podcast today, and the reason for it is we've got an extra special guest joining us today given the time the concept of the election next week. So Joe Valcos, our national director of tax policy, is gonna give us a quick update in terms of what we might think in terms of proposals, what they might mean for investors, and then have a good conversation. So Joe, welcome.

00:18:55.130 --> 00:19:11.635

Thanks for joining us today, and let's start out with the first question. Give our audience members really a context of how legislative tax policy works and what the process actually sounds like, and then we'll go into the actual proposals from the 2 candidates and then end with what's going on from an overall investor perspective. Joe?

00:19:11.775 --> 00:19:25.695

<v George Mateyo>Yeah. Thanks, Brian. Quite good to be here. So it's certainly a good place to begin. You know, it's important to start off right from the beginning that a proposal that's currently being discussed on a campaign trail doesn't necessarily guarantee it becomes law.

00:19:25.935 --> 00:19:56.485

There's quite a journey as you can imagine going for a proposal for it to become a law. So all tax legislation originates in the house of representatives in the ways and means committee. The committee receives recommendations from a variety of sources, including the president, the IRS, as well as other professional organizations, and then a formal proposal is written. Then the real journey begins. The full house then works together, which may be easier said than done at this point, and presents a tax bill to the senate for review and approval.

00:19:56.785 --> 00:20:12.160

The senate has a similar process. Their finance committee works with the full senate to approve their version of the bill of the bill. From there, the house and senate worked together, Brian, to create a compromised tax bill to present to the president more signature.

00:20:13.820 --> 00:20:19.440

<v Brian Pietrangelo>Great. So let's dig in. What are the differences and maybe highlights of the Harris proposals and the Trump proposals?

00:20:19.955 --> 00:20:40.150

<v George Mateyo>Yeah. As you can imagine, there's quite a bit of proposals out there right now. Let me highlight a few of them. You know, consistent with the Democratic National platform, vice president Harris's proposals are intended to meet 2 objectives. 1, reduce the tax burden for working and middle class families, and 2, to pay for this, increase taxes for corporations and wealthy individuals.

00:20:41.010 --> 00:21:16.330

The vice president is hoping to reduce tax burden by committing to couples with incomes below $450,000. They will not pay more in new taxes. And this is in response to the expiring 2017 Tax Cuts and Jobs Act. She's also looking to exclude tips from income tax, expanding the child tax credit up to $6,000 and providing up to $25,000 of tax credit to first time homebuyers. She's also looking to expand the deduction for start up costs from $5,000 to 50,000 for enterprising small business owners.

00:21:16.765 --> 00:21:59.680

Now to pay for these proposals, the vice president's looking to increase the top marginal rate to 39.6%. Currently, it sits at 37%, and this is for couples making more than 450,000. And again, this threshold represents a top 1% earners. Increase the long term capital gain rate from 20% to 28% for those making more than $1,000,000 of income and something new, impose a 25% minimum tax income, including unrealized gains for those with wealth greater than a $100,000,000. And on the corporate side, she's looking to increase the top US corporate tax rate from 21% to 28%.

00:22:00.620 --> 00:22:58.800

Now, Brian, on the other side of the aisle, former president Trump has made it clear that the centerpiece of his economic plan is to make his 2017 tax cuts provisions permanent. Making permanent includes, you know, maintaining the top individual rate at 37%, maintaining the 20% capital gain and qualified dividends rate, and then also maintaining the estate and gift tax exemption, which is currently at about $13,600,000. Now he's also floated a few new proposals. 1st, the blanket exemption from taxation for tip income, overtime pay, as well as Social Security benefits, reinstating the unlimited itemized deduction for state and local taxes paid, which is currently capped at $10,000, lowering the current corporate tax rate to 20%, and even lowering it to 15% for companies that make their products in the US. And then Trump is also focused on tariffs.

00:22:58.800 --> 00:23:13.345

He's looking to impose a universal baseline tariff of 20% on all foreign made goods and a 60% tariff on all imports from China. So, Brian, as you could see, there's quite a difference in approach between the two candidates.

00:23:14.445 --> 00:23:19.505

<v Brian Pietrangelo>Great summary, Joe. Any final thoughts that you might wanna consider for our listeners that would be very helpful for them?

00:23:19.805 --> 00:23:35.680

<v George Mateyo>Yeah. You know what? Despite despite the uncertainty, the reality is little changes from a planning point of view. You know, the best advice is always, you know, work with your advisers to model different scenarios. You know, the key is to help to try to anticipate any impacts from future law changes.

00:23:35.900 --> 00:23:40.160

And really, in short, be prepared to act when the proposals become policy.

00:23:41.315 --> 00:24:03.690

<v Brian Pietrangelo>Great. So I hope to find out next, Tuesday or shortly thereafter who the winner might be, and we'd like to probably have you back, Joe, at some point in time in the future to give a little bit further of details once we know the candidate that has been selected and what their tax policy might be going forward. So thanks again, Joe. Well, thanks for the conversation today. Steve, Rajeev, and Joe, we appreciate your insights, and thanks to our listeners for joining us today.

00:24:03.690 --> 00:24:29.270

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 adviser 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.

00:24:30.930 --> 00:25:41.075

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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, October 25th, 2024. I'm Brian Pietrangelo and welcome to the podcast. As you may have noticed on the calendar, next week is Halloween, on Thursday, October 31st and yet many people celebrate this weekend to get a head start on the overall holiday. According to the National Retail Federation, consumers will spend about $11.6 billion on Halloween in 2024, down slightly from 2023 at 12.2 billion. However, the big increase came post-2020 when the average was around 8 or 9 million, and now we're up above 10 approaching 11.6 billion again for the estimate for 2024. And what are the top Halloween costumes for children this year in 2024? Number one coming in at Spider-Man. Number two, ghost. And number three, princess. For children, so hopefully they have a lot of fun as the parents continue to walk around and help their kids consume and get that Halloween candy.

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. Steph 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 each week. 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 key updates for you, beginning with the Beige Book report that came out earlier in the week, which is the Federal Open Market Committee's preview on what's happening in the economy for the upcoming Federal Open Market Committee meeting on November 7th. Again, the Beige Book comes out about two weeks in advance, and so here are the updates for the report. Overall economic activity was not changed that much in nearly across all 12 districts since the September report, although two districts did report modest growth. Most districts reported declining manufacturing activity. Reports on consumer spending were mixed and some districts did note shift in the composition of purchases mostly towards less expensive alternatives. In addition, the path of mortgage rates kept some buyers on the sidelines and the lack of affordable housing remained a persistent problem in many communities. And finally, the short-lived dock workers strike caused only minor temporary disruptions in the overall economy, so good news there.

Second, we've got the initial unemployment claims report that came in for the week ending October 19th, which was 227,000, which receded from the previous week ending October 12th. So a decline of 15,000 from the prior week was good news given that we've had volatility in this data point given some of the hurricanes that we had in Florida and the disruption in employment there. So good news is that we did see a pullback going back down to 227,000.

And finally, according to the National Association of Realtors, existing home sales declined a bit in September by roughly 1% coming down to 3.84 million in September. Also, year over year sales came down 3.5% from the previous year in September of 2023. And this is the constant issue that we've been talking about for some time now, given that the Fed did raise interest rates from 2022, which corresponded to rising mortgage rates, and again, locking up some of the inventory in overall existing home sales because people aren't necessarily willing to switch and sell their existing home, give up their 3% or so mortgage and get a 6% or so mortgage. So again, we continue to watch the overall housing market for reads into what's happening.

In addition, we typically cover what's happening in the overall earnings market after quarter end. So the first few weeks of October typically give us a read into what's happening in the overall third quarter earnings market. So we will begin our podcast today with Steph and I would be remiss if I didn't use the pun of whether we're going to see tricks or treats here in the overall third quarter earnings season, Steph, so what are your thoughts?

Stephen Hoedt:

Well, Brian, it's definitely been a tricky earnings season more so than a treat earnings season. If you were asking me, I mean if you take a look, what's crazy is that if you look at the S&P 500, over 12% of the S&P 500 docs over the last quarter moved more than 10% on earnings day. And to me, that is the true definition of a tricky market. And it doesn't matter whether it's up or down, it's just the fact that we've had these huge plus or minus 10% moves. It's created a situation where it's very, very difficult for portfolio managers to navigate. So that would be my first takeaway. When I think about earnings season in general, what we've had is we've had a continuation of the earnings numbers being good enough. So far we've continued to see the S&P 500 index aggregate earnings line moving slightly up into the right. Multiples this week have come back in a tiny bit after actually cresting above 22 within the last week to week and a half. We're just under 22 today, so still hanging out in the same neighborhood as the earnings line goes higher.

That has given the S&P 500 enough of a kick to continue to have us hold in the neighborhood of 5850 just south of 6,000. And we've kind of looked at that 6,000 as a big round number magnet for a little while. It's funny, we were, as a team, down in Cleveland this week, and I had an opportunity to sit down and spend some time with our equity trading desk. And the feedback that I got from them was really interesting, and that our head trader, who's been a trader for us for a very, very long time, she made the comment that she's never seen trading conditions like this as quiet as this outside of a holiday trading period in her entire career. And I would say the same thing, that for an earnings season and for a typical market period, we would be seeing a lot more volume right now than we are. And I think that's contributing to these outsized moves because market conditions are really thin and people really don't seem to be wanting to put major capital to work ahead of the election. It's like we want to get that out of the way before people really want to come in and commit to the positioning for the run into the end of the year, which we still anticipate is going to be pretty favorable.

Brian Pietrangelo:

George, we've got a light economic calendar this week, but a heavy one next week. What are your thoughts? What are you seeing that's of interest to you?

George Mateyo:

Well, I'll pick up on the theme that Steph talked about, Brian, which is everybody I think is a little bit frozen at the moment. I had a similar interaction with a group of people that suggest that business conditions are good, they're slowing a little bit, but everybody is really just trending in place a little bit, trying to figure out what might happen in the next, I don't know, 12 or so days. There was a report out this week that does deserve a little tension. It's mostly anecdotal information, so it's hard to get really too focused on it and really kind of hang your head on it in terms of a forecast. But the Fed puts out this report called the Beige Book. Not to say that is boring, like beige might be suggested, but I think it is kind of full of anecdotes that are kind of useful.

And one of our research providers that we pay attention to actually does some interesting analysis to kind of look at some of the key terms that were included in that Beige Book report. Of note in terms of read through to the economy, the term layoffs was only referenced five times, but all of that was a reflection of the fact that there were a lack of layoffs. So really don't see, again, the job market weakening too much. The term slowing or slowdown did actually have a significant number of mentions, but again, it was more of a slowdown than anything nefarious. And more specifically, the word recession did not appear in the report at all. And maybe if you look back, say a year ago this time, there were probably about more than a dozen mentions of the word recession. So we're clearly not in a recession. Things are slowing a little bit as a takeaway. Wage didn't seem to be mentioned a whole lot either.

But the big term I think that kind of caught, and maybe not people by surprise, but I think deserves mention, is the fact that the term election was mentioned over 15 times or so, which is up significantly from the prior reading, which is only about 5 times. So again, there's maybe a three times lift, if you will, or 3X delta between this report and the last report when they talked about the election. So again, we're not really seeing anything that people don't really know in the fact that the elections are kind of front and center in terms of people's minds in the near term. As we've suggested in the past, there might be some volatility in around the election and maybe even through the election knowing that maybe we won't know the outcome the night of the election on November 5th.

So I think we have to be prepared for that. Certainly the equity market is kind of prone to some volatility. We would suggest that people watch the VIX Index. We've talked about that from time to time as well. It's historically been a pretty good barometer in terms of maybe when you should add some exposure. Right now the VIX is roughly around 18 or 19 or so I think last time I checked. But typically if it spikes above 20 or into the 30s or mid 30s or so, while that might feel a little bit uncomfortable, that might be a time to consider nibbling a little bit and adding some exposure towards risk assets in general. So that being said, I think it is also something we suggested that people pay attention to the bond market. We've seen a lot of volatility there too.

And Rajeev, if I think about what you've seen in the past few weeks, it's been really interesting for me to see the bond market actually the bond yields take up in the phase of the Fed cutting. So since the Fed cut rates back in September, I think long-term yields are up something like 40, 50 basis points. What do you make of that? Is that something driven by the election or is it something else that's happening inside the bond market more specifically?

Rajeev Sharma:

Well, George, I believe the bond market right now appears to be spooked if you want to use the Halloween analogy. The issue really is that the Fed may not ease as much as anticipated back at the end of September. There's still a 95% probability that the Fed does cut 25 basis points next month, but the probabilities of the pace and the magnitude of cuts next year are starting to come a little more into focus by market participants. The Fed has penciled in four rate cuts next year in their last summer of economic projections, while the market at the end of September began to believe that we would get six rate cuts next year. Those lofty expectations are now coming down. And with that, the volatility in the bond market is going up.

Right now we've seen an upward pressure on yields predominantly in the front end, which is most sensitive to monetary policy. So we've seen yields move higher, as you mentioned, 40 to 50 basis points since where we were at the end of September, and the yield curve is actually flattened. So now we have talked about the VIX Index. If you look at the MOVE Index, which tracks volatility in the bond market through implied volatility of one month, treasury options option prices anticipate that treasury yields across all maturities will move about 18 basis points higher immediately after the election. Now, we've seen moves like that in 2022 and 2023 when the Fed was hiking rates, but it's unusual for the MOVE Index to anticipate kinds of moves. And you can see those kinds of moves when things happen, but the MOVE Index is actually anticipating them.

In the 2016 election, we did see a 37 basis point daily swing in the 10-year treasury note yield, and that was the biggest in the decade. So if you look at the bond market, there is a lot of uncertainty there. There's some uneasiness there. It has a lot to do with not just the election, but actual Fed policy. Where we go from here, does the Fed continue on their rate cutting campaign? Do some of the policies that we've been hearing on the election trails, some of those policies add inflation into the mix, which would cause the Fed to maybe not cut as much as anticipated. All of this is causing uneasiness in the bond market right now.

But if you look at credit spreads, you don't see any uneasiness at all. I mean, I think investment grade spreads had hit the tightest range that they've been in since 2021. And what we're seeing right now is maybe we widened a basis point this week, there's really no alarm bells that are going on in credit spreads right now. I think right now as investors, we should continue to focus on the MOVE Index. We should continue to focus on the yield curve. But I also don't think we should lose focus of where credit spreads are. We are extremely tight right now. Many would argue that is there any value in these types of spread levels for credit spreads where they are right now, but there's such an incredible demand for corporate bonds right now that spreads could actually go tighter. And if we see a slowdown in supply and anticipation of the election, you could see spreads go even tighter right now.

So it's been a very interesting bond market where you've got certain sectors that are doing extremely well and other sectors that are extremely uneasy right now where we are in the cycle.

Stephen Hoedt:

Rajeev, it blew my mind. I was just looking at a chart, BBB spreads have not been this tight since 1998.

Rajeev Sharma:

That's correct. That's correct. And BBB's are 50% of the bond market. So you can just see the indication of how much money and demand is still going into BBB's right now. You see the inflows into investment grade funds have not slowed down one bit the entire year.

Brian Pietrangelo:

[inaudible 00:13:58] final thoughts as we go into next week where we'll have a heavy economic report, we'll get third quarter GDP, we'll get consumer spending, we'll get PCE inflation, and we'll also get the jobs report, all that fueling the fire for not only the election the following week, but the Fed Reserve meeting on November 7th. Any final thoughts?

George Mateyo:

Well, of all those reports you mentioned, Brian, I think the jobs report is going to be the one that's really going to get the market's attention the most. I think we talked about the fact that GDP is an interesting indicator, but it's somewhat lagging. And probably more importantly, we've actually kind of seen continued revisions higher in the past few weeks or so coming into this print on GDP. So I suspect it'll be probably be a decent report, but again, it'll probably be backward looking, so we won't really be able to glean too much from that.

The big number though, again, is going to be the job number. And we've also talked about the fact that there's probably going to be some sloppiness around the number itself, given the fact that there's a few hurricanes going on that are having an impact on the economy. There's certainly labor strikes and other issues like that that could distort things too. And even more recently, the Fed has kind of thrown their hands up of it saying, hey, this could be a pretty soft number given the fact that there's a lot of these exogenous shocks and some other things too, that they themselves are having a hard time forecasting.

So I think we're going to have to probably, again, prepare ourselves probably for a bit of volatility as we try to really discern the noise from the news and vice versa. And of course, I think the bigger near-term event, of course, is the election and what that might mean. And I think, again, we've tried to suggest that that might be a thing to contend with. But if I look actually the one year following election, more specifically, if I go back 40 years, for example, every year except for one after the election in the last four years has been positive. And in some cases it's been profoundly positive. Now the one exception is the year 2000 where we were unwinding essentially the tech wreck and the tech valuation bubble that kind of preceded that election. So maybe that's something to note as well.

But I think overall, if people can be disciplined and be patient a little bit, and as I suggest maybe if things really become on sale a little bit, putting some capital work in the face of some volatility might be prudent as well.

Brian Pietrangelo:

Well, thank you for the conversation today, George, Stephen, 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:

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 Key Corp Insurance Agency USA Inc, or KIA.

The Key Wealth Institute is comprised of financial professionals representing KeyBank and certain affiliates such as KIS and KIA. Any opinions, projections or recommendations contained herein are subject to change without notice, are those of the individual authors and may not necessarily represent the views of KeyBank, or any of its subsidiaries or affiliates. This material presented is for informational purposes only and is not intended to be an offer, recommendation or solicitation to purchase or sell any security or product or to employ a specific investment strategy.

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The summaries, prices, quotes, and or statistics contained herein have been obtained from sources believed to be reliable but are not necessarily complete and cannot be guaranteed. They are provided for informational purposes only and are not intended to replace any confirmations or statements. Past performance does not guarantee future results. 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.

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This content is copyrighted by KeyCorp 2024.

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, October 18th, 2024. I'm Brian Pietrangelo, and welcome to the podcast. If you are a Major League Baseball fan, you certainly got a treat last night in the competition between the New York Yankees and the Cleveland Guardians. Key Bank has a significant presence in both New York and in Cleveland, so we figured there's probably a lot of listeners out there that might've watched the game. The Guardians won that game in dramatic fashion, but the Yankees are still up in the series, so we'll still see where the rest of this particular competition goes for the remainder of the week.

With that, I would like to introduce our panel of investing experts some might call them major-leaguers in their own right here to share their insights on this week's market activity and more. George Mateyo, Chief Investment Officer, Stephen 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 each week. 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 key updates for you first starting with the initial unemployment claims for the week ending, October 12th came in at 241,000. Now this is important because the prior week ending October 5th claims had jumped a significant amount all the way up to 260,000. Certainly some of that data in the previous week's spike were related to hurricane claims for unemployment, and so it's good news to see that that has receded back to a little bit around the 240,000 mark, but with the expectation that Milton will also have some of the same challenges that Helene did, we might see the spike again for the second week next week when the data comes out.

And second, overall retail sales for the United States were released yesterday and came in at $714 billion, which was a month-over-month increase of 0.4%, which was higher than the previous month in August at 0.1%. So the consumer continues to drive results that might be a little bit stronger than expected, and we'll have to talk to George about what this might mean for the overall economy.

And third, industrial production across the US was also released yesterday and came in for September at a negative 0.3% following August's read of positive 0.3%, and that goes back also to July of negative 0.6%. So for four consecutive months we've had the vacillation of up, down, up, down. So we'll take a look at that on the manufacturing side of the equation to complement what's happening in retail sales as a little bit of a mixed story in overall economic news and some seasonality.

We'll also talk about third quarter earnings with Steve and take a look at what happened with the ECB, European Central Bank with Rajeev as we round out our conversation with our panel today. So let's start with George with his reaction to some of the economic data and his overall thoughts and pitch it this way in terms of, will the Fed continue to throw maybe a curveball into their overall thinking of what the recent data means for the overall economy including retail sales, the recent CPI report and other strong reports that we continue to get or will they continue with their cutter? George?

George Mateyo:

Well, in terms of the pitch, Brian, I think it's going to be a slider. I think it's not going to be a curve or a cutter. I think the Fed's going to slide one in before the end of the year, whether it's November or December, I'm not quite sure based on the latest economic data, but I do think the Fed is still predisposition to try and cut rates a little bit further really simply because they want to normalize policy right? They've done a lot to take inflation down by cutting rates aggressively in 2022 and 2023 and now things are probably giving them some degree of room to start cutting rates again. We've talked about just building a normalized policy and that's actually a pretty good backdrop for risk assets and [inaudible 00:04:23] we've talked about on these calls, but you're right that have asked the question in the sense that the Fed probably is rethinking some of its speed or the velocity of those cuts to use another baseball term.

And I think it's probably fair to say that what we've seen in the past few days and weeks or so is that the economy is doing quite well, and so there is probably some second guessing that maybe 50 basis points last meeting wasn't needed. I don't think that's really worth rehashing, frankly. I mean, I think they probably could have cut once before that, and so maybe again, we're just splitting the hairs here as [inaudible 00:04:55] they did too much or if they made a mistake, but I think it is probably irrefutable that the economy is still growing quite well and fairly resilient. You mentioned some of the consumer numbers and retail sales were pretty strong. CPI was a little bit hotter than expected, but still not really quite in the elevated range, and we do see prices coming down in many parts of the economy and the world, so I think there is still some elements of inflation cooling.

It's not cooling to the extent that the Fed can be cutting aggressively as we talked about. And also as we've talked about, the Fed's not going to be cutting aggressively until we see a significant deterioration in the labor market and we haven't seen that. Jobless claims you mentioned is something we've watched to try to get a near-term indicator and where things are headed with the labor market and they've actually come down this past week despite the fact that the hurricane maybe has kind of swayed these numbers back and forth and maybe pushed them up a little bit last week as we talked about this time a week ago. So overall, I think the Fed's probably going to be likely to suggest that yes, we need to do more, but I think they're also have to acknowledge that the economy's still in a pretty good place right now. Rajeev, as you think about this as we go ahead into next month's meeting, what are you processing right now as relates to the Fed and the economy itself?

Rajeev Sharma:

Well, you're right George. We've seen a lot of movement when it comes to the pace of rate cuts going forward by the Fed. The attention is squarely on the November FOMC meeting right now. The odds of a 50 basis point rate cut for that meeting we're dashed after we got that blockbuster jobs number two weeks ago. Then we got the CPI data that pointed towards stubborn inflation, and then we got claims data that was higher than expected. So the market is looking at each and every single piece of economic data to try and figure out what the Fed is going to do next. Eventually we got to a point where the market expected a 25 basis point rate cut for next month, and then the retail sales numbers came out and all of a sudden again, those expectations started to erode. We started thinking, are we really going to get a rate cut next month or not?

Yields across the curve jumped higher. The retail sales number beat across the board. Again, the bets started to get pared back as far as what the Fed is going to do next month. However, now that the rate-cutting cycle has started, it's hard for me to imagine that the Fed will pause. That's the last thing the Fed really wants to do, is to start a rate-cutting cycle or even when they start a rate-hiking cycle, they want keep some kind of momentum going and they don't want to feel like they had a policy error by doing a pause. One jobs report does not stop the Fed from cutting. However, the market expectations will continue to fluctuate on every single piece of data. Currently, swap traders are putting in a 92% chance that we'll have a 25 basis point rate cut next month. The yield curve reflects this constant shift in market expectations.

The yield curve has been steepening since July where front-end yields were moving lower at a faster rate than longer-term rates. However, as the market started recalibrating the pace and magnitude of future rate cuts, we saw the curve flatten this week. We saw the front-end rates move higher and faster than long-term rates, and the steepening trade proved to be the pain trade this week. So it's going to be very interesting to see where investors start to add duration. Do they start going further out the curve or not? We did see the ten-year Treasury yield move above 4%, and 4%'s a very important point. It's a psychological level right now where investors typically view that as a value and they start to invest when they see treasuries on the ten-year go above 4%. It's an entry point, and we did see investors take part in the latest $39 billion auction that we saw where yields were actually 40 basis points higher than they were at the last time we had a ten-year auction, which is back in August.

So I think all of these moving parts are going to consistently have a shift in the yield curve, consistently have a shift in the expectations of what the Fed does next month and going forward. Right now, the Fed has already said they're going to talk about 100 basis points of rate cuts next year. Do we even get that? Does that change? I think all of this is in shift right now.

What would keep the yields higher for longer are those Treasury auctions that we're seeing, the supply that's coming to market. Another thing we have to think about is geopolitical risk and also the elections obviously that are coming forward as well in November. So there's going to be a lot of movement in the yield curve. There's going to be a lot of shifts in volatility across the bond markets, but right now, I think being neutral to duration has been the way to go and looking at high quality assets and liquid assets is very important as well. Nothing is pointing towards an economic downturn if you look at credit spreads, but we have to be prepared if that does happen, and right now you are not getting paid enough to take credit risk further down their rating spectrum. So you want high quality names, you want liquid names, and you want to insulate yourself from any economic downturn.

George Mateyo:

Rajeev, do you think the Fed is right to keep this data dependency policy? I'm not sure if it's even a policy. They kind of signal that they want to be data dependent. Of course, there're always going to be data driven right? They want to have data influence their decisions as opposed to relying on some other indicators or just relying on their intuition. But do you think we're kind of in the situation where they've become too focused on just short-term data maybe?

Rajeev Sharma:

I really do think that's true, George, because they have a dual mandate. They want price stability, they want full employment, but when they keep shifting the narrative that, "Okay, inflation seems to be under control now let's focus on labor," the market takes each and every cue by the Fed, and that's where you see the volatility in the market. We had claims data last week and we also had a CPI report come out last week, and the market has to juggle these two things. The CPI came out a little hotter than expected. Claims came out higher than expected or lower than expected. So the market at that point has to really decide where's the Fed's head at? And this has added volatility to the market. This whole question of data dependency, every single report that comes out, whether it's PPI or whether it's manufacturing information, retail sales, it really does move the market and those expectations. So this dependency on data that the Fed has kind of propagated out there in their narrative, I think it really does cause more volatility in the market.

George Mateyo:

So Steve, switching to you and speaking of data, we've had a little bit of data so far on the earnings season. I don't think we've seen anything conclusive yet to think about a direction and change or a change in direction perhaps, but what's your early read on earnings so far and what do you make of the rise in equity prices this week?

Stephen Hoedt:

So far so good with earnings season, George. We've had a handful of reports, namely major banks and a couple of others that are notable, and what we've seen is that the numbers have been good enough and we've got the forward 12 month earnings forecast for the S&P 500 at yet another all time high as we exit this week. I'm staring at my Bloomberg screen right now and it's over $265 per share for the S&P 500. So far so good. Also interesting is that earnings multiples, as the companies have reported, have held in there too, right around 22. We've not seen earnings multiples compress at all the last couple times that we've gone through earnings season, namely back in March and April, we saw earnings compression as both March and April and then June, July we saw earnings compression as the earnings line went up. We're not having that this time, at least not yet.

So it'll be interesting to see if that holds up as we go through the balance of the earnings season. What we see this week was again, the market continuing to power its way higher. I mentioned last week that we ran counter to the normal seasonal in September, and here we are in what's supposed to be kind of a choppy period as we head into the teeth of the pre-election kind of time period. And historically that's kind of been a period of time where the market chops and yet here again, we're continuing to power higher. It's almost getting to the point where I'm starting to think that the market's pulling forward gains that we would normally see post-election into this pre-election period. I don't really know what to make of it. But that's the working forecast that I've had was that you would see a really positive response just to getting clarity on what the power structure is going to look like in DC post the election, and then you would rally in November and December.

I mean, man, if we rally now from where we're likely going to be through the end of the year, you're talking low 6,000s on the S&P 500, not just another 150 points on the market. So we'll see. That's a pretty optimistic view. A couple of things that did catch my eye this week though, in particular volatility. So within the last week or so, we did see both the VIX and the MOVE index, which is the VIX is the volatility measure for equity markets, the MOVE index is the volatility measure for the bond markets go within... those things are calculated on a 30 day rolling basis. So election came into the figures for both of those indices. And the interesting thing is if you look at the bond market, the bond market's telling you that you're going to have one of the largest one day moves ever in treasuries as a reaction to the election.

The VIX was briefly over 20 as we annualized into that period, and now we have dropped a little bit this week, but it's not normal to see the VIX turning over 20 when you're at new highs for the market. That's something to keep our eyes on, but clearly the market thinks that there's going to be volatility in reaction to the election results, whatever they may be. So irrespective of the fact that we are at all time highs with the S&P 500, that is something that I still am looking at as a little bit of cause for near term concern, just the fact that the bond market is projecting such a large move. And I'm curious as to what Rajeev's thinking about what the MOVE index is saying about bond market reaction to the election.

Rajeev Sharma:

Yeah, I mean, it's a very good point, Steve. I think that the market really does feel that unlike many other markets where uncertainty goes away and all of a sudden everything's fine after the election, the fact that we've gone so far in anticipating what the Fed's going to do, the yields have dropped a little further than they expected. I think the bond market really does feel that yields have maybe gone too far, and we need to kind of temper that a little bit. Along with that also is credit spreads. I mean, we are at the tight since 2021 in credit spreads, which is really, really hard to imagine that we got to this point. So I think the market's looking for a pullback in any way, and I think the election is the catalyst for that pullback for the bond market.

Brian Pietrangelo:

Well, speaking of election terminology and everything else, when I'm on the road a lot meeting with clients, and I know all of you are as well, we oftentimes get asked the question, "Where should we invest our money? If the Democrats win or the Republicans win and the presidency and all this kind of good stuff, what sectors should we put our money?" George, what do you want to tell our audience in terms of historical trends and where they should be thinking about investing in terms of elections?

George Mateyo:

Well, in terms of elections, I think this year, as Steve pointed out, is somewhat behaving differently than past election years in the sense that typically the market does languish a little bit at the beginning of the year and then it rallies into the summer. We then consolidate some of those gains around Labor Day to mid-October, and that hasn't happened this year. The market's actually been much stronger than a typical election year, and as Steve rightly pointed out, we've been thinking that maybe this year because it's cyclical so it's different in the past, we might have a letdown come the election itself. We'll see. I don't want to get too precise about it because that's more of a short-term call. And I think in terms of the political calls you talked about, I think history has shown that the obvious political calls are usually wrong, meaning that typically when people think that there's going to be one sector that does extraordinarily well or poorly under one administration or another, it's usually the exact opposite.

And we've seen that probably happen time and time again where people think there's going to be an obvious sector rotation away from one sector to another based on somebody's tax proposal or some economic proposal that one candidate makes. It's often different that once a candidate gets elected, what she or he does once they're in office is usually different from what they say on the campaign trail. So we think we don't want people to get too hung up on trying to make a policy bet ahead of time, and we really don't want people to actually have their long-term investment views derailed by their political views. And I know it's hard to separate those two in a day of media and 24/7 news coverage and so forth, and frankly, a lot of sensationalism. But I think if people can be patient, if they can be diversified and really focus on long-term, I think they'll be better off over the long-term if they maintain their patience and discipline over the long run.

Brian Pietrangelo:

As usual, thanks for the conversation today, George, Steve, 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:

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 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 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 decisions.

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. The summaries, prices, quotes, and or statistics contained herein have been obtained from sources believed to be reliable but are not necessarily complete and cannot be guaranteed. They are provided for informational purposes only and are not intended to replace any confirmations or statements.

Past performance does not guarantee future results. 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. Investing involves risk including potential of principal amount invested. There is no guarantee that investment objectives will be achieved. Past performance does not guarantee future results. Asset allocation and diversification do not guarantee returns or protect against losses. Investment and insurance products and services are not FDIC insured, not bank guaranteed, may lose value, not a deposit, and not insured by any federal or state government agency. This content is copyrighted by KeyCorp 2024.

Speaker 1 (00:01):

Welcome to the Key Wealth Matters weekly podcast where we casually ramble on about important topics including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to open doors in the world of investing. Today is Friday, October 11th, 2024. I'm Brian Peter Angelo, and welcome to the podcast. As you may have noticed, we were off last week due to a scheduling conflict. So thanks to everybody for rejoining us for this week's podcast. And before we dive in today's topics for our podcast today, I would like to simply share our thoughts with all of those in Florida, including key colleagues, family and friends, and other folks that you might know down there. Really going through a tremendously difficult time with the hurricane and both hurricanes actually in the last couple weeks, but certainly the most recent one here this week. I know there's been a lot of damage, a lot of people being displaced and a lot of people are really taking an emotional toll right now.

(00:58):

So wanted to just say good luck to all of you and our sympathies are with you in terms of recovering and getting back to normal. 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 Ha, head of Equities and Rajeev Sharma, head of fixed Income. As a reminder, a lot of great content is available on key.com/wealth Insights, including updates from our Wealth Institute on many different subjects and especially our key Questions article series addressing a relevant topic for investors each week. 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 updates for you plus one additional update that came in the form of last week's report given that we were off last week for the podcast.

(01:52):

So first, let's start with last week's update that came in on Friday, which was the all important employment situation from the Bureau of Labor Statistics, which came out and shared a couple different updates with us, including new non-farm payrolls for the month of September. Came in at 254,000, which was well above expectations of about 150,000. So good news story there. And in addition, both prior months, July and August were revised upward by 72,000 additional jobs, which is really important because for about the last three or four months prior revisions had been downward revisions to see an upward revision is a good sign that the market continues to remain resilient. In addition, the overall unemployment rate came in at 4.1%, which again was consistent with the overall labor market staying fairly stable for the last few months. Moving on to this week, item number two is the release on Wednesday of the Federal Market Committee meeting minutes from their September 18th meeting.

(02:50):

So we'll dive into that in terms of our discussion with the panel as well as Rajeev in terms of what we're gleaning from those minutes, not anything materially different, but always interesting to hear our take. Just yesterday, on Thursday of this week, initial unemployment claims came out at 258,000. That was an increase of 33,000 over the prior week, so this is a little bit more of an actual increase than we have seen in the stability of this reading. And if you go back about a month and a half ago, the same thing happened. So we won't overreact to one week's worth of claims, but we will continue to watch that and see what it means for the, again, overall health of the labor market given the initial unemployment claims were up this week. In addition, that's the highest level at 258,000 since August 5th, 2023. So we'll again take a look at that.

(03:41):

And finally, or fourth, the inflation read from the overall CPI or consumer price index measure of inflation also came out yesterday Thursday and was a little hotter than expected with the month over month numbers being a little higher than we would've preferred at 0.2% month over month for all items and 0.3% for core, excluding food and energy, these were the same results as of the August or prior month's read. However, in order for inflation to continue coming down, we need to see those month over month numbers coming in at either 0.1% or 0.0%. So again, getting a read of 0.2 and 0.3% respectively continues to show inflation is still here. The year over year numbers ending in September, were slightly up again, core excluding food and energy came in at 3.3% year over year, which was slightly above 3.2% for the read in August. So again, both of those feed each other and we'll continue to look at inflation, get our panel's, comment on what we think this means for Fed policy. George, let's start with you and get your reaction to a lot of data in the past five business days and also what's happening in the overall economy, the Fed and everything else. George, what are your thoughts?

Speaker 2 (04:51):

Well, going back a bit, Brian, you're right to signal and remind people of the strong employment report that we got now a week ago, which really kind of blew the doors off and I think it suggested that the economy is doing just fine, thank you very much. And also the Fed therefore might not need to lower interest rates as much as what's thought. That being said, I think this week was full of some fluky data and we'll probably have to deal with that for a while now, but it didn't tell us too much more than we already didn't know. There were a little bit of wiggles and some wobbles with respect to the employment situation last week. And then more specifically this week around some near term data around jobless claims, and we often suggested that jobless claims are a pretty decent indicator to watch in terms of the overall strength of the economy and maybe some near term signals with respect to employment more specifically, the numbers jumped quite a bit this week.

(05:42):

That's kind of got certain people's attention, but I think a lot of that is just driven by break in related forces. And this disruption, if you will, will probably continue a bit further knowing that we've got another hurricane to process in terms of its economic impact that just hit this past week. More specifically, the number of the jump in the job of claims I think was largely responsible for things in North Carolina that took place. And again, this typical data series that we look towards for some near-term signals is not going to be all that reliable probably in the next few weeks if not more. So that's one thing we'll have to get used to and try to find other ways we can glean some signals in the labor market, the inflation numbers. Meanwhile, were also a little bit kind of funky. I guess this came up this week, it was a bit higher than expected and the market shrugged it off the market didn't really seem to mind that.

(06:32):

I guess if we had that same report earlier this year, the market would probably be down a percent or so I would guess. But all things being equal, the market's suggesting that the Fed is still on its course to lower interest rates, perhaps maybe not as much as once thought, and I guess it's curious review at the same time that the Fed themselves seems a bit divided. We got some key minutes out this week from the prior meeting meeting. So what did you see when you looked at that and what do you think the Fed is thinking about going forward?

Speaker 3 (06:57):

Well, George, yeah, there's quite a bit that can move the bond market right now. We did see the release of the September Fed meeting minutes, and if you read through those minutes, the tone surrounding a 50 basis point rate cut was a little contentious. Some fed members would've preferred 25 basis points rather than 50 basis points of a rate cut. That being said, the majority did go along with the 50 basis point rate cut. Almost all officials saw risk to the fed's dual mandate and specifically saw higher risks to the labor market. They also took less of a focus on inflation and they saw some of those risks have subsided. If you look for cues on quantitative tightening, most committee members simply stated that the reduction of the balance sheet can continue for some time now, but there's a lot of other factors that we have to look at here.

(07:42):

Nothing really surprising from the minutes, but because we did see Fed Chair Powell and his press conference kind of give a good idea of where the fed's head was at when those meetings happened. But now this week the Fed and the markets face some conflicting data in the form of inflation and jobless claims. CPI surprised the upside while weekly jobless claims jumped higher than expected. And even though claims data can be noisy, a bond traders have taken cues from the Fed from Fed Minutes and focused more on the jobs data. We immediately saw the front end of the yield curve rally, and what the bond market is saying is that the Fed will not be hesitant to cut rates if labor markets continue to weaken, even if inflation seems stubborn at these levels, I think the focus really is on labor. That being said, yields across the curve are still higher week over week, and that has a lot to do with the readjustment of the Fed rate cut expectations for the November FOMC meeting and also for the rest of 2024.

(08:40):

If you recall, the market had pretty much expected another 50 base points of rate cuts for the November FMC meeting, which in our opinion was pretty aggressive. Then we got last week's blockbuster jobs number that you've mentioned, George, and those market expectations quickly changed. Swap traders today are not even fully on board with 25 basis points of rate cuts for the next meeting. There's about an 85% probability right now that we see that 25 base point rate cut next month and less than 50 basis points market expectations for the remainder of 2024. That's a big reversal, and that's where we were at the end of September and post the Fed 50, we had a market that was convinced that we would see at least another 75 base points of rate cuts by the end of the year. So once again, data is dictating the market and the Fed and more emphasis is on labor data.

(09:31):

And another reason that we're seeing yields continue to move higher are the increased treasury supply that we saw this week in the market. We saw 39 billion in a 10 year treasury auction, even with 10 year treasury yields more than 40 basis points higher than they were at the last 10 year treasury auction buyers still did not step in. And I think that's a very important point because in the past we've seen that whenever the 10 year treasury yield moves to above 4%, you do see buyers step in and we didn't see that in the treasury auction. So yields will be affected by not only data, not only supply, you also have geopolitical risks and a presidential election that can include how quickly investors want to get involved at these levels that we see.

Speaker 2 (10:13):

Well, I think that's a great summary and I think we also acknowledge, I guess if we turn our attention, Steve to the equity market, the equity market seems to be taking all this stuff in stride too, and I guess we can officially say happy anniversary to the bull market that started two years ago. I think it's tomorrow actually, so we'll be closed obviously, but nonetheless, the market's up some 60 or so percent since then. I think that kind of puts that gain in a two year stretch, probably above average for sure, but typically the average bull market also lasts about four years and we're two years into that, so maybe we have more room to run at the same time. I'd also acknowledge that we talk about valuations of the market and when we started this bull market two years ago now, the market was trading roughly 15 times earnings today. I think by my math, we're close to 22 times, which is a little lofty by historical standards. But Steve, as you put all this into your blender, where do you see the market going and what do we make of this two year anniversary?

Speaker 4 (11:06):

Well, George, when I think about where we're going at least near term, one of the things that I've always learned is you've got to listen to what the market's telling you. And if you look historically, September is usually one of the worst months of the year for the market, and that goes back decades. And in fact, it's really the only month of the year that has a negative number on an annual basis. And when you look at what happened in September, the market ripped this year in September. So the market is telling you it wants to go higher. Now, between now and the election, I imagine that we're going to have some volatility as we continue to move through the period of maximum in terms of the results there. But quite honestly, once we get out of the election, I don't think the market gives a hoot who ends up on top, whether it's the blue team or the red team.

(12:08):

It just wants a team to come out on top and then we look like we should be set up for a pretty good run in to year end from the November 5th date. So essentially once you get that removal of uncertainty, the market likes to lift, and I think the market has told you based on what happened in September that the market wants to go higher here. Now to your point about valuation, valuation definitely is a bit of a gating factor on the upside here at 22 times forward earnings. And when we've gotten to those levels in the past, it's been very difficult for the market to make a lot of headway. I think this earning season, we'll see if the numbers can go higher to give us a little bit of extra oomph there and take the market multiple lower because earnings numbers go higher.

(13:00):

But I'm not looking for a step function higher in earnings here, just a slow continued slow grind. So I feel like what we're looking at is probably more of a situation where the headline indices move higher but modestly. So while we see some rotation underneath into areas of the market that have maybe lagged over the last 12 months but are starting to catch up as we see the economy doing better than what many folks had expected, I mean, we've had a raft of prominent economists here lately, throw in the towel on the recession call, and we've kind of been saying for a while that that was not going to come to happen. So I think that we're set up in a pretty decent place here to see a broadening out of the market. George.

Speaker 2 (13:57):

Yeah, that's one key thing. We've also been kind of harking on with the fact that some of the market concentration issues set up and opportunity, frankly for stocks that are probably a little less covered perhaps maybe down in the market cap area would actually represent probably better value than the overall top line magnificent seven names and so forth. And so again, it is somewhat heartening to see that plan as well. I guess as we kind of go through the next few months or so. I agree with you. I think risk assets probably have a bid to them in the sense that there is some real support with earnings. The overall economic data seems to be hanging in there pretty well too. They're prone to volatility though, so just because we start to see some of this noise around jobless claims and other things that may be distorted in the short term based on weather and so forth, it doesn't mean things could change quickly.

(14:43):

So we still think it's probably appropriate to be somewhat balanced towards risk overall. We still think it makes sense to be diversified. And more recently, I think we've started maybe thinking about thinking about actually adding positions, international markets where they've been left behind too to some extent. And maybe just maybe what's happened in China more recently suggests that there maybe a four to those markets as well. Again, we're still optimistic that the US market remains an outperformer, so that view doesn't change. But again, there too, I think we want to be diversified as much as possible knowing that things could change pretty quickly.

Speaker 1 (15:17):

Well, thank you for the conversation today, George, Steven 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 (15:49):

Key wealth, key private bank, key family wealth. Key bank institutional advisors and key private client are marketing names for KeyBank National Association or Key Bank and certain affiliates such as Key Investment Services, LLC or Kiss and Key Corp Insurance Agency, USA Inc, or KIA. The Key Wealth Institute is comprised of financial professionals representing KeyBank and certain affiliates such as KISS and KIA. Any opinions, projections or recommendations contained herein are subject to change without notice are those of the individual authors and may not necessarily represent the views of KeyBank or any of its subsidiaries or affiliates. This material presented is for informational purposes only and is not intended to be an offer recommendation or solicitation to purchase or sell any security or product or to employ a specific investment strategy. KeyBank North 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 decisions.

(17:00):

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. The summaries, prices, quotes, and or statistics contained herein have been obtained from sources believed to be reliable but are not necessarily complete and cannot be guaranteed. They are provided for informational purposes only and are not intended to replace any confirmations or statements. Past performance does not guarantee future results. Investment products, brokerage and investment advisory services are offered through KISS member Finra, SIPC, and SEC Registered Investment Advisor. Insurance products are offered through KIA. Insurance offered through KIA are underwritten by and the obligation of insurance companies that are not affiliated with KI Bank investing involves risk including potential loss of principal amount invested. There is no guarantee that investment objectives will be achieved. Past performance does not guarantee future results. Asset allocation and diversification do not guarantee returns or protect against losses. Investment and insurance products and services are not FDIC insured, not bank guaranteed may lose value, not a deposit, and not insured by any federal or state government agency. This content is copyrighted by Corp 2024.

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, September 27th, 2024. I'm Brian Pietrangelo, and welcome to the podcast. As we approach the end of the third quarter, it's always an opportunity for us to take a look at how the market is performing as well as various strategies, and we'll give you those updates here in the next couple of weeks for the third quarter. But it also brings the time of change as we move into the playoffs for the Major League baseball season. And congratulations right here to our own Cleveland Guardians in terms of their ability to make the playoffs, which they did and congratulations to them and all the other teams that will be paying in the postseason, otherwise known as the Fall Classic.

With that, I would like to introduce our panel of investing experts here to share their insights on this week's market activity and more. George Mateyo, Chief Investment Officer, Rajeev Sharma, Head of Fixed Income, and Connor Cloetingh, Senior Equity Analyst.

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 each week. 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 quick updates for you beginning first with the weekly initial unemployment claims for the week ending September 21st, came in at 218,000. Which was very consistent with prior weeks and probably the last four weeks that we've gotten in terms of stability in the labor market.

And second, also yesterday the third and final estimate for gross domestic product for the second quarter of 2024 came out and was revised but didn't change the number. So the second quarter came in at 3.0% for the third estimate, the final estimate, which was the same as the previous or second estimate.

And even though some of the underlying numbers were changed, but in a very small way, the aggregate number came in at the same, at 3.0% for the quarter. Consumer spending continued to remain strong as part of the contributor to the overall GDP, as well as imports were on the decline, which was a negative subtraction.

Interestingly enough, even though it seems like a long time ago, the Bureau of Economic Analysis actually upgraded or revised upward the first quarter of 2024's GDP estimate from 1.4% to 1.6%. Again, we're seeing underlying strength in the economy, which was a little bit better than expected.

And as we turn to our third update, just came out this morning, from also the Bureau of Economic Analysis, in terms of overall consumer spending and personal consumption expenditures along with PCE inflation, so we'll start with the expenditures, which is the actual spending on a month-over-month basis. So we saw consumer spending did slow down a little bit from July at 0.5% to August of 0.2%.

So as we talk about going into the third quarter, we'll keep our eye on the overall level of consumer spending. However, the most important part of that print in terms of inflation was overall PCE inflation, which month-over-month came in at a little bit lower rate in August than from July. Both came in at 0.1% for overall PCE and 0.1% for PCE, excluding food and energy, which we typically call core inflation, down 2.2% in July.

However, if we look at the year-over-year numbers, we see a little bit different of a mixed result. So first in August, the year-over-year number for PCE overall went down from 2.5% in July to 2.2% in August, which is headed in the right direction. However, on the other side of the coin, when we look at PCE, excluding food and energy, for August year-over-year, the number actually went up from 2.6% in July to 2.7% in August. So going slightly in the wrong direction, we'll look at this as a potential year-over-year monthly anomaly with a base effect, but we'll continue to watch this as we go into the last few months of the year to see how that is trending relative to overall PCE inflation.

So let's turn to our panel starting with Rajeev and ask the question, what do you think these two data points specifically strong numbers in relative to GDP and overall a little bit of a mixed number, but pretty good in terms of overall inflation, what does this mean for the Fed as we go into the November meeting and the December meeting later in the year? Does it allow them to continue their policy of cutting rates or are they going to have to make some type of pivot, Rajeev?

Rajeev Sharma:

You're right, Brian, we got the GDP numbers, but that really didn't move the market too much. But today's personal income and spending data that we got was very important, and that's in the form of the August PCE numbers.

Today's PCE report is important not only because PCE data is the Fed's preferred measure of inflation, it also is the first inflation report that we've received since the Fed's jumbo rate cut that we saw earlier this month. The data showed that the headline rate for August fell to 2.2% on the year, while core PCE was in line at 2.7%. With the monthly core PCE numbers coming below estimates, the data did what it was supposed to do, and that is to validate the Fed's decision to start its rate cutting cycle with an aggressive 50 basis point rate cut.

The data keeps the Fed on track for future rate cuts because it shows that inflation continues to move towards the Fed's target of 2%. It also opens the door for another 50 basis points of rate cuts by the end of the year. The soft reading on core PCE inflation takes away some of the concern that the market had after the GDP report that perhaps inflation will start to creep back up into the market.

So with this report, you can see that consumer spending is likely to slow down even as income growth remains robust, with inflation numbers supporting a continued disinflationary trend, the Fed and the markets will now squarely focus on the upcoming jobs data and that will set the tone for future rate cuts by the Fed.

If we look at market probabilities right now are 50/50 odds for another 50 base points of rate cuts at the November FOMC meeting. But what's more important is that after today's PCE report, the market is anticipating another 75 base points of rate cuts by the Fed by the end of the year.

In my view, that is pretty aggressive. The Fed came out, they said possibly 50 basis points of rate cuts in their last FOMC meeting by the end of 2024. The market took that and actually went further and went for 75 basis points of probabilities now. And it's going to lead to continued disconnect between market and Fed expectations that adds volatility to the market.

If we look at the reaction of the yield curve, we see pronounced moves lower in the yields in the front end of the yield curve. The front end is most sensitive to Fed policy and since the last FOMC meeting, we have seen the front end yields move lower at a faster clip than longer maturities, such as the ten-year Treasury yield.

This has caused some steepening in the yield curve, a continued steepening that we've seen since the GDP report, and we've really been seeing about six sessions really of a continued steepening of the yield curve where we saw the front ends move lower at a faster clip than the longer end maturities of the yield curve.

If you look at the two-year Treasury yield, that's moving towards the recent low of 3.5%, but I want to point out the ten-year Treasury yield, which is starting to move lower now after that PCE report, and that's because the ten-year had been showing concerns that inflation could begin to rise.

Today's report puts that concern at ease and you see the immediate reaction on the ten-year Treasury yield, which has moved lower. If you really want to see what the market thinks about inflation, the state of the economy, just look at that ten-year Treasury yield, and if you start seeing it move lower, the market's not as concerned about the slowing of the economy, it's not as concerned about the state of inflation. The market seems pretty good about that as far as the latest PCE report, but if we start seeing that ten-year start to climb higher, that means the market concern that inflation's going to uptick, it's starting to set back into the market again.

So the market continues to deal with not only this data that we continue to see coming out, but also auctions that we've seen in the form of Treasury auctions. And we saw two very noteworthy auctions this week that was a five-year Treasury note, and the seven-year Treasury note. Investors demanded concessions on both of them and they got those concessions.

So investor sentiment right now in the market is buy on the dip, and we should see that more as we go forward. Every time we've seen some kind of pullback in yields, investors have stepped in and caused some support there, and we should see that continuing all the way up to the next jobs data that we see next week. But I really do feel that the market's very well contained right now. The market's looking at this that the Fed's doing the right thing, the Fed is on their path to continuing rate cuts, and we should anticipate that that should not slow down in any way unless we see some kind of data come out that shows that the Fed has made a policy error.

But so far so good. So the Fed should be very happy with the numbers that they're seeing in the market for inflation, and the Fed should really be squarely focused on jobs data.

George Mateyo:

Well, Rajeev, I was going to chime in for a second and before I kind of give my little spin on things, maybe you could help our readers and listeners understand the term concessions. You made the point that when people, or the US government really came to market, and I think the supply was pretty large, you could tell me probably the amount, but when you talk about concessions, what does that mean? Does that usually mean that the buyers actually demand more in terms of what they're willing to pay for or how do we think about that in terms of the overall bond market itself?

Rajeev Sharma:

That's a very good question, George. When you see the five-year for instance, we had $70 billion of five-year treasury notes coming in on auction, and we've already seen after the last FOMC meeting that yields have moved lower. So for investors to get excited about taking part in that five-year auction, they need to see concessions in the form of the yield should be higher than where the market's trading.

So when these auctions come at a level, those yields should be higher than what the market is currently trading at a five-year. So any kind of concession, they're not going to buy a treasury auction if it's going to be at the same level right before the auction. They need to see at least two or three basis points of upside with the five-year treasury note to take part in that auction. Otherwise, they're not going to do it, especially with the moves that we've seen with yields moving extremely lower in the last several months, we're going to see investors start to demand more to take part in these auctions.

They're going to want at least two to three basis points higher in yield than where the current five-year is trading and they're getting those auctions, they're getting those concessions. These deals are coming with at least two to three basis points above where a five-year and seven-year were trading this week.

George Mateyo:

Well, thanks for calling that out. I just wanted to mention that a little bit because we're kind of dealing with a situation where government debt in general is pretty high around the world right now, and that's one thing that we have to be cognizant of, I think to that could probably provide some challenges if we're not careful.

And I think at the same time, what you're seeing in the bottom market is reflective of that, Thankfully, I think, the full faith and credit of the US government is still alive and well, and that's really good to see. But the other situation that people are probably thinking about this week is China, and that's a good situation to remind people that when debts get to levels that are unsustainable and you look at that maybe relative to overall income in the economy, that can lead to some painful economic outcomes.

And we've seen that play out this week. And we've seen it play out for quite some time, frankly. But usually when debt is high, it eats into spending and hurts growth in other ways, and that usually either results in maybe some deflation because consumers are pulling back on their spending, or governments actually have to put more students to work and that could lead to inflation.

So it's a really tricky thing to figure out. And of course a debt problem is compounded by the fact that you don't really know exactly how much you need to reduce debt until you're really in it. So it is one of these things that you just don't know it's going to play out until you really get involved in it.

And China's economy, of course has been especially opaque over the past couple of years. Furthermore, I think China's also been in the situation where they've been reluctant to do a lot in the past couple years or so. Their market has been crawling around for the past couple of years at a low trend growth rate for them. And they've been focused on probably worrying about more hazards and people taking on too much debt.

So the government recently has been pretty low to try and do things. This past week however, that changed a little bit. I think it really caught the market by surprise. It caught me by surprise to be quite candid. And they did a lot, they put forth a number of different measures on the banking side where they cut interest rates across the board in a pretty notable way. They also lowered borrowing rates for mortgages and so forth. And I've even heard things that they're literally passing out cash to people on the street who are dealing with poverty. So they're really trying to get very aggressive here, which is I think a pretty big shift.

So it's one of these things I think that we've seen the overall market in China bounce, I think the stock market is up something like 10% this week. It's still down, I think roughly 25 or so percent from where it was a few years ago. So we're still in a long-term bear market in China, and we've been underweight emerging markets for quite some time, but this has got our attention.

And one thing that we're going to be talking about probably a lot in the weeks ahead is how do we think about emerging market position going forward? I do think it probably throws out, or maybe at least de-emphasizes the narrative that China is uninvestable. That was one thing that people were talking about the past couple years, and maybe this gets people to think about China again and thinking about diversification in terms of emerging markets and international markets too.

But I do think that the overall situation in China is not yet fixed, so we want to be clear about that. We don't think this is... maybe it's turned the corner a little bit, but they still have probably more work to do. So I think for me, and if I think of you Connor, and thinking about the equity market here back home, I'm sure there's probably some ripple effects that you're watching as well. What was your take about China's situation this week and what do you see in the US more specifically?

Connor Cloetingh:

Thanks, George. So with all the China stimulus news we saw this week, I think the initial equity market reaction was squarely focused on what companies, one, have exposure to China at a greater rate than the average US company, and two, the commodities that are consumed by China, given that it's the largest consumer of commodities and energy in the world. And so the initial market reaction was material stocks moved markedly higher, so industrial metals were the primary beneficiary of that move this week.

And then more across sectors, companies that may be selling to China more than their peers, we saw them tick up a little bit higher. So materials moving higher. It shows that investors believe that commodity prices may have bottomed and will move higher, but then I think to your point, it's what are the knock-on effects? If investors think earnings are going to move higher for materials companies, that means prices are moving higher for materials, which would go against this deflationary kind of cycle that we think we're moving into or had things. So those are what we saw from that equity part.

George Mateyo:

I guess other thing I would note that people need to pay attention to is the fact that the US market is still trading roughly around 21 or so times earnings, which by historical measures is still pretty pricey. Of course, we had periods of time in our history where it was much higher than that, but the average I think is probably close to 17 or 18 times. So we're a good bit above the long-term average.

China's stock market, you could tell me Connor, but I think it's turning around 10 times earnings or so. So it's about half that in terms of the valuation. And that's one thing that we could probably see that... I wouldn't see that gap close anytime soon, but it could narrow a little bit in the margin. So I guess if we think about where we are as we head into the last few weeks and months of the year, I think for us it's really important to really remain diversified, and we've talked about that many times, but it does get overlooked, especially when you see markets continue to melt up, as we've seen the past couple of weeks or so.

It only seems like it's a one-way direction higher, but I do think diversification will continue to play out. I do think we're probably due for probably a bit of some volatility coming back in the market. Maybe it's election driven, maybe it's something else, but it's been a pretty calm market for the past couple months as well.

So in our perspective, I think it's really important to emphasize quality, emphasize really being selective in terms of where you put your capital to work. We also do think that cash is probably going to be a little less attractive in class going forward, and that's why Rajeev and his team focus on high quality fixed income as well. That's really probably a good substitute probably for some of these excess cash reserves once yields start to come down a little bit.

Brian Pietrangelo:

And thanks for the conversation today, George, Rajeev, and Connor. 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:

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 KISS, 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 KISS and KIA.

Any opinions, projections or recommendations contained herein are subject to change without notice are those of the individual authors and may not necessarily represent the views of KeyBank or any of its subsidiaries or affiliates.

This material presented is for informational purposes only and is not intended to be an offer, recommendation, or solicitation to purchase, or sell any security, or product, or to employ a specific investment strategy. KeyBank North 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 decisions.

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. The summaries, prices, quotes, and/or statistics contained herein have been obtained from sources believed to be reliable but are not necessarily complete and cannot be guaranteed. They are provided for informational purposes only and are not intended to replace any confirmations or statements.

Past performance does not guarantee future results. Investment products, brokerage and investment advisory services are offered through KISS 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.

Investing involves risk, including potential loss of principal amount invested. There is no guarantee that investment objectives will be achieved. Past performance does not guarantee future results. Asset allocation and diversification do not guarantee returns or protect against losses. Investment and insurance products and services are not FDIC-insured, not Bank-guaranteed, may lose value, not a deposit, and not insured by any federal or state government agency. This content is copyrighted by KeyCorp, 2024.