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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, March 8th, 2024, I'm Brian Pietrangelo and welcome to the podcast. Coming up this weekend, don't forget to move your clocks forward for daylight savings time. This event we do twice a year, and this one we move forward in the anticipation of spring and the resetting of the clock. I'd like to introduce our panel of investing experts here to share their insights on this week's market activity and more. George Mateyo, chief investment officer. Steve Hoedt, head of equities, and Jim Kerrigan, senior fixed income portfolio manager. And 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 economic and market news, we've got a lot of information to share with you in particular five items today. There's a lot going on we'll try and give you a crisp summary of each of them. First earlier in the week, the Institute for Supply Management came out with their services PMI or Purchasing Manager's Index, which was registering 52.8% in the month of February. Now this was about 0.8 percentage points lower than January's reading. And look at this number from a specific standpoint that the service economy drives a lot of the economy and it has been doing extraordinarily well for roughly the last four years it has been in expansionary mode. So we look at this number, not that we want to panic, we just want to make sure that the economy continues to roll forward as we anticipate. And we'll look at this number going forward month over month.
Second, the JOLTS report came out for January, 2024, the job openings and labor turnover survey report. We look at this report specifically to see the pulse of the hiring in the employment sector across the nation and basically it was unchanged from December, 2023. So we'll look at that as a good sign status quo that the number isn't going down and employers are still looking for new talent. And third, the Fed released its Beige Book report, which comes in advance of the Fed meeting in March about roughly a week and a half to two weeks before every Fed meeting the beige book comes out. And the overall economic activity in the report showed that activity increased slightly since January with eight out of the 12 districts reporting slight to modest growth in activity, three others reporting no change and one district reporting slight softening.
Consumer spending inch down in recent weeks and employment rose at a slight to modest pace in most districts. Overall labor market tightness ease further with nearly all districts highlighting some improvement in labor activity and availability and employee retention. And fourth, just this morning that Beige Book report leads nicely into the employment situation report from the Bureau of Labor statistic for February where the new non-farm payrolls increased by 275,000 in February and the unemployment rate increased to 3.9%. Now that number from January was a pretty positive number of 353,000 and ended up being revised downward. Again, reminding everybody that the reports come out as a preliminary read and then get revised. The unemployment number did take up two tenths of a percent to 3.9% from the previous month at 3.7%. So we'll talk to our panel about that.
And finally, earlier this week, Jay Powell gave his Semi-Annual Monetary Policy Report to Congress where he talked about the strength of the economy and the overall possibility of rate cuts in the upcoming years. So we'll get our panels take on that as well in terms of some significant updates in the environment for overall Fed policy. So George, let's turn to you for your thoughts on the economic data this week and what it means for the investors and the Fed. Do you think like daylight savings time, the economy will spring forward or will fall back?
George Mateyo:
Well, I'm not sure if daylight savings is still a thing. I mean, I thought we were fading away from that, Brian, but I think we are springing forward I guess to use your metaphor. I think we could probably all point to a lot of data this week and today's employment report was nothing short of confusing, frankly. There are a lot of cross currents there and frankly, I think you could take away whatever you wanted to from today's report. The overall number was strong at 275,000 jobs added, but then the forecast were revised lower, not the forecast. The actual results for the prior months were revised lower and pretty significantly. So we came into the report today thinking we would see a pretty good report, but maybe a little bit of a slowdown from the prior two months. And we got the exact opposite in the sense that today's report was higher than the prior months after revisions, which is some tortured math to say the least.
But net, net I think it's fair to say that the overall, the state of the labor market is strong. I guess to use a phrase we heard last night. It's probably not too strong that it would probably knock the Fed off its course. And I think probably there were some fears a few weeks ago that suggest the Fed might actually have to consider tightening again and raising rates. And I think that's off the table based on some of the underlying components. So if we look at what's happened, I think it's fair to say that aside from the revisions I talked about suggesting that maybe the strength we saw a few months ago, it wasn't quite as strong, but still good. We also saw the unemployment rate take up and actually now it's moved up about 50 basis points, which is not a lot relatively speaking, but I think that might cause some of the Fed to think that maybe things are slowing down enough that they might consider maybe putting May back on the table in terms of a cut.
I think that's a bit too soon, but that might start to creeping into the narrative as we go forward. I think it's a long way away and other things would probably be notable is the sense that wages have risen a little bit, but they're not getting out of control. So people are finding work, people are hiring, but what wages themselves are not spiraling out of control suggesting that inflation is getting out of hand again. So I guess if I could take away maybe one message from this, it's probably don't just do something sit there, and I don't think we could probably be too wrong with that in the sense that despite all these cross currents maintaining a risk portfolio that's balanced towards risk in general, I think has been rewarded this year. And I think that's the case going forward.
So it doesn't change my thinking too much one way the other. The market's been pretty well around that. We've had some testimony from the Fed this week as well that suggests that they're getting closer to thinking about maybe cutting rates. But Jim, if you look through the tea leaves in terms of what the market's been saying, what are you gleaming with what the Fed's thinking as they go forward in the next few weeks and are posed to meet later this month?
James Kerrigan:
Thanks, George. Yeah. So Fed Chair Powell spent a good amount of time in the spotlight this week and provided us with lots of headlines and quotes. My big takeaway from this week's comments is that the Fed is not far from having the confidence to start dialing back their level of their current restrictive policy. We've been commenting for a while now. That's our belief. We'd see rate cuts coming in the second half of '24. And this week's comments from Powell and even this morning's non-farm payroll numbers really are focusing in on the June meeting for the first potential rate cut, taking away the probability of cuts in two weeks in the March meeting or at the May meeting. So this really falls in line with our thinking. We've seen a dramatic change in the market expectations for rate cuts in 2024. When you look back to late December and early January, the market was calling for seven cuts throughout 2024. And then over the last few months, really the last two months markets have gravitated to be now in line with the Fed.
Both the market and the Fed are looking for three rate cuts, which is roughly 75 basis points for the full year of 2024. Well, it feels like we're getting more specific timing from the Fed. They're clear to point out that it'll likely be appropriate to cut interest rates at some point this year, but while also reiterating that they're still data dependent. We still have a good amount of economic data to be released between now and the June meeting, which includes the summary of economic projections that we'll see in two weeks. If those numbers aren't pointing towards inflation moving to 2%, then there is that chance we could see cuts pushed later in 2024. But keep in mind that Chair Powell and the Fed, they don't want to a policy error and cut too soon. So if we see cuts pushed back and really move to two or less cuts in 2024, we can really expect to see some volatility in the market.
So switching over to the market side, the US Treasury yield curve has seen some volatility over the last week directly to the comments of the Fed and the numbers released this morning. We saw prices rally bringing yields down across the curve this week with the largest change in the 10-year space. Those yields were down about 10 basis points. While yields are lower this week when we zoom out a little bit, yields are still higher than when we started 2024 by about 20 basis points when we look at the long end of the curve. So even though we are seeing some moves in the treasury curve, things on the credit side are really staying in check. We've seen record levels of issuance in the investment grade bond market over the last two months, and it's been met with robust investor demand, which is working to keep credit spreads in line.
One of the interesting things is that as of the end of last week, just over 50% of the new issues that have come in '24 have been A rated. This is in contrast to recent years where we saw new issuance much more heavily weighted in the triple B space. What this tells us is the market's demanding higher quality credit, which interestingly, this is following along with our house view for investment grade credit from the last year or so. We focus on higher quality liquid issues. So that's all I've got for today.
George Mateyo:
Super Jim, thanks very much. Steve, I'll turn it over to you. And it's not lost in me that there is this thing called the wealth effect where the Fed will probably be sensitive towards higher household accumulation of wealth, and the stock market is a great indicator for that I think to some extent. We've got some stocks that are just soaring and every day they seem to be going up three or 4%. We've got high profile company we've talked about before that's up 100% this year alone. So what are you thinking about the market? Is it getting a little bit too exuberant? Do you think we're doing for a pullback or is it going to keep going?
Stephen Hoedt:
Well, George you know I'm the wealth effect. I mean the numbers are pretty incredible. If you just go back to October of 2023 when the market bottom, since then, we've added over $10 trillion of market cap to the S&P 500. For context, the US economy in terms of GDP is 28 trillion. So I mean those numbers are pretty remarkable. When you look at the market, I think a lot of people have been wondering what could happen to this rally if we started to see some of the magnificent seven names start to come off the boil a bit. And actually we've seen that lately. Three them so far, year to date have negative returns. They aren't so magnificent in 2024, and yet the S&P 500 is still up 8%. So that tells us that there's still some pretty strong stories at work in the market.
And we've also started to see some broadening out here lately. Industrials year to date are up 8%. We've seen consistent buying and performance in those stocks for the last nine weeks or so. Healthcare is also up 8% year to date. There's some mega themes in there, GLP-1, others. One of my colleagues wrote on that in the key question article this week for our take on GLP-1. So we have seen some broadening there. Small cap clearly is not participating. So I think that people who expected it to lift all boats are not in a good place. But we clearly have seen some improvement in the market. And then to the question about is it a bubble? Should we be looking for a significant pullback here? Think about it this way. I mean, there's been a lot of comparisons between this current market and in the market that we saw in 2000, especially because it's been largely a tech driven rally.
And when you look at the median PE for the largest 10 stocks in the S&P 500 today it's 29, and in 2000 it was 47. So you're in a different place. But think about it this way too. When you go back and you look at 2019, since then the mega seven stocks have had a 28% annualized return. When you look at that, 27% of that annualized return is attributable to earnings growth. 20% of that is sales growth, 7% is margin expansion. Only 1% of that return is from multiple expansion. So basically the growth that we've seen in the mag seven stocks over the last five years is entirely justified by the earnings growth that they've put forth. So this is a totally different market situation than what we had in 2000. I don't think that we should be looking for a massive amount of a pullback. I mean, I don't see a bubble here. What I see is I see a concentrated market, but I see a concentrated market because the companies that have garnered that concentration deserve it.
Brian Pietrangelo:
Well, thanks Steve for that update on the equity markets. And we've got another higher profile topic for this week only because there was some information that came out of super Tuesday as well as President Biden's State of the Union Address last night. So George, did you pick any interesting items out of either of those two updates? And I know we try to stay nonpolitical here, but what do you think it might mean for the investment community or the economic community as we talk about this level of politics?
George Mateyo:
Well, you're right Brian in the sense that we would like to remain as apolitical as possible. But I do think that it's fair to say that the two nominees of the two parties has been pretty much set now. When you think the stage is set, we pretty much know who's going to be on the ticket. We don't know who's going to be maybe the vice president on one side of the ticket, which could be fairly interesting and maybe somewhat market moving. I don't think it's going to be that big of a deal. Usually vice presidents don't really shape policy too much, although there probably would be a bit more importance this time given the age of the two candidates. But that being said, I think it is fair to say that it seems like Trump will be the nominee for the Republicans. Biden, of course, for the Democrats.
And I think as I can look through this, I think the big thing investors should probably be mindful of this is the fact that the overall fiscal support, the support from the federal government has been pretty responsible and pretty remarkable rather in the sense that it's been a big driver I think of the overall economic resilience story that we've talked about really for the last few years. And I think it is fair to say that one thing that investors would probably want to think about is whether or not that fiscal stimulus would be removed if either candidate gets elected. And I don't see that happening in the near term, frankly. I mean, I think both platforms suggest that there may be some opposition changes in terms of where spending comes from and where it's going, but I think overall spending is still poised to go up.
Now, one side of the aisle would probably prefer making some tax that's permanent. Others would probably prefer to raise taxes at the top rate. So there's a big debate about maybe how tax cuts are and tax cuts are administered. But I think overall spending is probably going to be pretty robust going forward. Now, there is still some risk that maybe at some point the market revolts against that theme, and that would probably be the forcing mechanism for either side of the aisle to try and maybe get some religion about spending. But for now, Brian, I don't see that calculus changing. So I think it's still somewhat supportive. I think there's going to be, frankly, probably more volatility in the months ahead as there usually is in election year. We haven't seen the historical pattern play out so far, but I still suggest that maybe things will be a bit more choppy as we get through the summer, and that's something to watch as we think about the year unfolding from here.
Brian Pietrangelo:
Well, thanks for the conversation today, George, Steven, Jim, 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.
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